Comparative Analysis of Corporative Bank and Private Bank in Terms of Customer Satisfaction

Comparative Analysis of Corporative Bank and Private Bank in Terms of Customer Satisfaction

Nowadays competitive economy banking sectors has been facing forceful challenges in regarding both customer base and performance. Giving customer satisfaction is highly significant function of service industry in today’s economic environment. Service quality is the excellent strategy and also play a key role in service sector in general and banking sector in particular to satisfy the customer’s need. The main objective of the research is to examine the customer satisfaction level between HDFC and corporative bank and also to find the benefits of customer satisfaction for the bank. There are two source of data – primary data and secondary data. The primary data is collected from questionnaire and secondary data is collected by previous researcher and Internet. There is statistical too, which is used in this study is percentage analysis and gap analysis. From this study the conclusion is that the customer satisfaction level of private bank (HDFC) is high than cooperative bank. Private bank is more polite and friendly to customer than cooperative bank and also private bank take more care in collection of personal information than cooperative bank. Employees are more capable in private bank to solve complaint adequately.

Introduction

History of Banking in India

In India banking system has been created in 18th century. The first bank is the general Bank of India which is opened in 1786 and the second is Bank of Hindustan; both of these banks are not in existence. The oldest bank in presence in India is the State bank of India, which created in the bank of Calcutta in 1806, which without interval became the Bank of Bengal this was one of the three presidency banks, the other are Bank of Bombay and the British East India Company. These banks merged in 1925 to form Imperial bank of India, which after India’s independence, became the State Bank of India.

Classification of Banks in India

In India banks are basically classified as scheduled and non-scheduled banks. Scheduled banks are further classified as commercial banks and cooperative banks. Commercial banks are also further classified as public sector banks, private sector banks, foreign banks and Regional Rural Bank (RRB). And, cooperative banks are classified as urban and rural.

Cooperative Banks

Cooperatives banks are listed under the Cooperative Societies Act, 1912 and controlled by the Reserve Bank of India under the Banking Regulation Act, 1949 and Banking Laws Act, 1965. All cooperatives stick with the principles of ‘one member, one vote’ and ‘no profit, no loss’. Basically, they are formed by a voluntary group of people with the aim of satisfying their economic, social and cultural needs in a joint venture.

HDFC Bank (Private Banks)

Private banks states that banks, whose majority of stake is held by individuals and corporations. HDFC Bank is an India banking and financial service company. It has its headquarters in Mumbai Maharashtra. It has almost 104,154 permanent employees. HDFC Bank is India’s largest private sector lender by assets bank. It ranked 60th in 2019 Brand Top 100 Most valuable Global brands. In 1994 HDFC Bank was incorporated, with its registered office in Mumbai, Maharashtra. Its first corporate office and a full-service branch were installed by the Union Finance Minister, Manmohan Singh.

Customers

A customer is an individual that buying another company’s goods or services. Most businesses compete with other companies to invite customers, either by advertising their products or by giving products at lower prices, in an effect to expand their customer.

Customer Satisfaction

Customer satisfaction shows fulfillment that customers develop from doing business with a firm. In other words, it shows that how happy the customers are with their transaction and also with overall experience with the company.

Objective

  1. Examine the customer satisfaction level between HDFC and Corporative Bank.
  2. Benefits of customer satisfaction for the Bank.

Literature Review

A review of previous studies shown that studies that examined the customer satisfaction between the co-operative bank in Indian, N. A. Kavitha and Muthumeenakshi says that co-operative bank are commonly formed by persons fitting to the same local or professional community or having a common interest and providing a wide range of banking and financial services like loans, deposits, banking accounts, etc. to the members. The banks were leading many studied to understand how product and service met or exceed customer prospects for the development of performance or quality of service. This study shows the positive attitude toward the service of bank and the behavior of employees for translation services. But related to other private and public banks, co-operative banks are little poorer in the acceptance of technology and modern tools. Slowly the co-operative banks are using more modern technology for facing competition from other banks and also for improving their services in qualitative manner.

A review of previous studies shown that studied that examined the customer satisfaction between the Private bank (HDFC Bank) in India. Rupesh Singh says that, after doing research for relative study of customer satisfaction for HDFC bank and state bank of India we came recognize different requirements of consumers, their respected suggestions, and responses to the different questions. With this data we can say that customer satisfaction level of most respondents is high for SBI and HDFC banks which is provided by survey. SBI and HDFC provider good service for the customers like ATM, NET banking, location advantages etc.

Research Methodology

It describes the source of data, sampling size, study area, sampling method, and testing of questionnaire. This study needs data to be collected from primary source and secondary source. The primary data is collected from questioners and the secondary data is collected from the various earlier research paper and Internet. Primary data was collected from questionnaires; secondary data was collected from different research paper and Internet.

Response of Study

Demographic Representation

  1. Gender: Male – 26.9%; Female – 73.1%.
  2. Age: 18-25 year – 92.3%; 26-30 year – 7.7%; 31-40 year – 0%; Above 40 – 0%.
  3. Profession: Govt. Employee – 0%; Private Employee – 30.8%; Business – 3.8%; Self Employee – 0%; Student – 61.5%; Housewife
  4. Monthly Income: Upto 10,000 – 57.9%; 10,000-20,000 – 31.6%; 20,000-30,000 – 5.3%; 30,000-40,000 – 5.3%; Above 40,000 – 0%.

Cooperative Bank Vs Private Bank (HDFC Bank)

According to the survey of this question, experience management team it is found that more people are satisfied in private bank than cooperative bank. The ratio of cooperative bank and private bank is 44.4% and 52%.

According to the survey of this question, care in collection of personal information it was found that more people are satisfied in private bank than corporative bank, the ratio between corporative and private bank is 52% and 68%.

According to the survey of this question, customer friendly environment at bank, it was found that more people are satisfied in private bank than corporative bank, the ratio between corporative and private bank is 52% and 67%.

According to the survey of this question, employees are capable of solving complaint adequately, it is found that more people are satisfied in private bank than cooperative bank. The ratio between cooperative bank and private bank is 52% and 76%.

According to the survey of this question, customer feedback service, it is found that more people are satisfied in private bank than cooperative bank. The ratio between cooperative bank and private bank is 41% and 68%.

According to the survey of this question, there is the provision of financial advices, more people say yes in private bank than cooperative bank. The ratio between cooperative bank and private bank is 62% and 65%.

According to the survey, more people are satisfied with overall service in private bank than cooperative bank. The ratio between cooperative bank and private bank is 66% and 72%.

Gap Analysis

With the help of gap analysis, we find that more care in collection of personal information is taken in private bank that is 68% than cooperative bank that is 52% out of 100%. Private bank has more customer friendly environment at bank than cooperative bank the ratio of cooperative bank and private bank is 52%and 67%. Employees more are capable of solving complaint adequately in private bank than cooperative bank the ratio is 52% and 76%. Customer feedback service is more adequate in private bank than cooperative bank the ratio is 41% and 68%.

Findings

According to the survey for employee of bank have the knowledge to answer customer question both bank customers are satisfied with the employees of bank. Private bank has more polite and friendly staff then cooperative bank. Private bank employees are always willing to help you than cooperative bank. Private bank employees have more experience management team than cooperative bank. Private bank employees are more capable in taking care in collection of personal information than cooperative bank. Private bank has more customer friendly environment than cooperative bank. Private bank employees are more capable of solving complaint adequately then cooperative bank. Customer feedback services is more adequately in private bank than cooperative bank. In private bank there is better provision of financial advices than cooperative bank. In both banks customers are satisfied with the overall service but in private bank customers are more satisfied than cooperative bank.

Conclusion

After directing research for relative study of customer satisfactions in cooperative bank and private bank I derived to know that there are different requirements of consumer and different reactions toward different questions. With the survey I can say that customer satisfaction level of private bank (HDFC) is high than cooperative bank. Private bank is more polite and friendly to customer than cooperative bank and also private bank take more care in collection of personal information than cooperative bank. Employees are more capable in private bank to solve complaint adequately. So, private bank provides more customer satisfaction than cooperative bank.

Limitation of the Study

  • The sample was collected from Nagpur city only if we take different city may be the result will be different.
  • The sample size was 60 only if we take more samples may be the result will be different.

References

  1. Dr.E.Hari Prasad, 2017 (Associate Professor) Service quality and customers satisfaction in HDFC bank, Pacific Business Review International Volume 9 issue 11, May 2017.
  2. N.A. Kavitha and Muthumeenaskshi, 2016 A study of Customer Satisfaction and Perception towards the service of co-operative Banks, Published in International Journal of Engineering Technology, Management.
  3. Rupesh Singh, SBI and HDFC “Comparative Study of customer’s Satisfaction towards HDFC bank and State Bank of India”.
  4. https://www.google.com/search?q=researchgate+link&oq=link+of+resear&aqs=chrome.4.69i57j0l5.15929j0j7&sourceid=chrome&ie=UTF-8
  5. https://www.google.com/search?q=investopedia&oq=inves&aqs=chrome.5.69i57j0l5.44817j0j9&sourceid=chrome&ie=UTF-8

Money Saving Ways: An Essay

Money Saving Ways: An Essay

Money saving is a habit, a process where we learn to be realistic. It is the most significant start of being practical. One can start save money only she or he has built up a mind set to face the reality or have any idea about currency importance value. Ways can be thousands of saving money.

Money saving ways varies on age mentality and maturity. In a word only way of saving is to curtailed expense and stop unnecessary buying’s for curiosity. The best way of save money is the mind set of saving.

It is a habit starts from childhood sometimes. Kids save money in piggy bank, and also from pocket money by not buying chocolates daily or hiding moneys secretly. It was a simple word, but in deeper, the kid is resisting his wish and trying to be realistic. Some very common things I always do for saving are, I hide money in books, jars or somewhere beyond my sight to resisted myself from curiosity buying’s.

A mature option is to open a bank fixed deposit account, which is motivated for saving by giving a high rate of interest. Most of the banks give 9% to 12% interest against FDR accounts.

Investing on companies by holdings share. It gives equity as well. Though investing on share is high in risk and not a humble option for saving but profitable sometimes. To reduce risk preferable share can be chosen as option.

For risk free option, ‘debenture’ is the best option. It is out of risk, gives security and a nominal rate of interest as well. Another reason why debenture investment is better than shareholding as saving is, the amount of debenture value is returnable. So, if investing can be down on debentures, it is increasing profit and counting as a contribution in a company also.

Giving loan to any trustable person is another way. Though it may cause any moral hazard but still in the option list. Till the loan is being repaid we can assume that our money is safe secured.

Parents are also sometimes an option of savings. They keep us reminding to be accountable on expense. I’ve a personal experience on that, my sister has no habit of saving, my mother used to encourage her by save some from her pocket money. She didn’t use to give the whole amount rather save some to her and at two months end my mother showed her this is how saving works.

Money saving is a task of matures. Difficult, challenging but all it need is a strong mindset and this mental stability is the best way of saving.

Analysis of the Effects of Working Capital Management on the Efficiency of Zimbabwean and Turkish Commercial Banks

Analysis of the Effects of Working Capital Management on the Efficiency of Zimbabwean and Turkish Commercial Banks

Abstract

Management of working capital entails the management of the components of current assets and current liabilities. Prior evidence has also endeavored to established the relationship that exists between working capital and the efficiency of companies. Therefore, this research study examined the effects of working capital management on commercial banks’ efficiency for two different countries. For this study, Zimbabwean and Turkish commercial banks were selected. The research study was carried out by utilizing audited financial statements of a sample of 10 Zimbabwean and 10 Turkish commercial banks for the period of 2009 to 2017. The efficiency was measured by looking at performance in terms of return on equity (ROE), and return on asset as another dependent variable in terms of profitability. The working capital was determined by looking at the components Current ratio, Liquidity Coverage ratio and Total Cash ratio, which were all used as independent working capital variables. Furthermore, bank size as measured by logarithm of sales and financial leverage were used as control variables. The data was studied using SPSS (version 20.0), estimation equation by both correlation analysis and pooled panel data regression models of cross-sectional and time series data were also employed for the analysis. The study further notes that Turkish banks performed better than the Zimbabwean ones with regards to liquidity coverage as they try to adhere to the Basel III reforms implemented by the Basel Committee on Banking Supervision (BCBS).

Keywords: working capital management, efficiency

1. Introduction

It is quite fundamental to be able to have an effective working capital policy for the sustainability and success of any type of business firm. It’s significant to create an optimal balance between the assets which comprise working capital with regards to risk, liquidity and profitability of the firms. Time spent by the finance managers managing the working capital components is much more than the time spent on other financial issues. The significance of working capital ascends out of the formation of the optimal balance between the assets that enable the sustainability of the business operations, in place of time which is spent by financial managers.

The optimal balance on working capital entails reducing the needs of working capital and growing the potential sales. An effective working capital management policy is aided by the increment in the free cash flow which achieves a growth potential of the business firm as much as possible. This would surge the firm value of the company and also have a positive effect on the income of the shareholders. Conventionally, the recent trend has been to increase efficiency in working capital management even though finance managers get focused on long-term capital budgets and capital structure decisions (Ganesan, 2007; Lamberson, 1995).

There isn’t a precise application of the efficiency of working capital. It could differ from sector to sector dependent upon the year. It is thus nearly impossible to establish the ratio of working capital components within the assets correspondingly for each company. It could be an indication for the working capital to be different between the firms when it is considered that the sector has its own exclusive features and economy changes from year to year. Some research studies have also been able to prove this (Filbeck & Krueger, 2005; Lamberson, 1995; Maxwell et al. 1998).

Preceding research studies have examined the working capital elements of firms in different sectors in the same country. Nevertheless; the aim of this study was to contrast whether these components, that differ depending upon sectors and years, also have the same differences in the same sector but in different countries, or not. Hence, working capital elements of commercial banks operating in two different countries were assessed. Zimbabwean and Turkish commercial banks were chosen for the study.

The following section presents literature summary and method will be mentioned afterwards. Fourth section will present the findings and the last section will be the conclusion.

2. Literature Review

Academic studies which have been carried out on working capital management can be categorized

into four different groups. First category is the cross-sectoral examination of working capital components. Second category is the investigation of the effects of working capital policies on the risks and income levels of business firms. Third category is on the analysis of the effects of working capital management on profitability. And finally, the fourth group is the determination of the indicators of working capital. While all these studies seem indistinguishable, they hold different characteristics of working capital.

The first studies on working capital indirectly examined working capital (Gupta, 1969; Gupta & Huefner, 1972; Gombola & Ketz, 1983). The common features of these studies were that they put forth the averages of cross-sectoral financial ratios. Accordingly, activity ratios, liquidity and profitability of the companies differ depending upon the sectors. Reserch studies that have directly investigated the efficiency of working capital management through financial ratios depending on the sector, have also put forward alike results (Filbeck & Krueger, 2005; Maxwell et al. 1998; Weinraub & Visscher, 1998; Hawawini et al., 1986). As a result, ratios that put forth the efficiency of working capital management also differ depending upon the sectors, just as the other ratios.

The second category of studies have evaluated the effects of working capital policies on the risks and income of the business firms. In these studies (Gardner et al. 1986; Weinraub & Visscher, 1998), it was seen that companies which favor aggressive working capital policies are more profitable but at the same time risky. Whereas companies which favor conservative policies experience a favor aggressive working capital incur losses money, contrary to these research studies. lower level of income but are less risky. Nevertheless; Nazir & Afza (2009) state that companies which

Third category of studies tried to establish how working capital components increase the performance and profitability of the business firms when they are well managed. Shin and Soenen (1998), Deloof (2003), Lazaridis & Tryfonidis (2006), Ugurlu et al. (2014), Mathuva (2009) and Dursun & Ayrıçay (2012) suggested that there is a statistically significant association between working capital management and these factors. According to these research studies, managers must sell off their inventories and collect their receivables as soon as possible should they want to increase their performance and profitability.

Fourth category of the studies investigated the indicators of the requirements of efficient working capital management. Factors that affect the requirements of working capital were determined as financial leverage (Öztürk & Demirgüneş, 2008; Chiou et al., 2006; Akinlo, 2012; Vijayalakshmi & Bansal, 2013), company size (Nazir & Afza, 2009; Mansoori & Muhammad, 2012; Akinlo, 2012) as well as return on assets (Öztürk & Demirgüneş, 2008; Ugurlu et al., 2014; Abbadi & Abbadi, 2013; Archavli, et al., 2012; Doğan & Elitaş, 2014).

3. Methodology

3.1 Research Design

This study intended to both discover and explain the effects that shifting management attention has on the efficiency of working capital and how companies continually work with WCM. There was a starting point from theoretical sources in order to understand what kind of empirical findings that were needed to answer the aim of the study. Hence, the research was both deductive and inductive. Collins et al (2007), identified three types so research designs; exploratory, descriptive and explanatory (Casual). Exploratory research is a research which is conducted to get a better comprehension of issues under studied. Collins et al specified that exploratory research is a significant tool for establishing what is going on, seek new concepts, and to evaluate and question phenomenon. An exploratory research may contain the use of many methods- interviews, observations, documentations etc, (ibid). Descriptive research attempts to describe the characteristic of population or phenomenon. Its objectives are to give out precise information of a person, event or situation (Yin, 2003). Explanatory research is utilized to identify cause-effect relationship amongst variables. A research work that seeks to bring out the relationship between two or more variables is also known as explanatory research (Yin et al, 2003). Such studies accentuate on explaining relationship. As the research objective of the study was to determine the relationship between working capital management and efficiency of commercial banks, the research assumed the explanatory research method.

3.2 Research Hypotheses

For a better appreciation of the impact of the components of working capital on Return on Equity (ROE)and on the Return on Assets (ROA), the following hypotheses were designed.

  • There is a significant relationship between the CUR and the banks’ ROE.
  • There is a significant relationship between LCR and the banks’ ROE.
  • There is a significant relationship between TCR and the banks’ ROE.
  • There is a significant relationship between CUR and the banks’ ROA.
  • There is a significant relationship between LCR and the banks’ ROA.
  • There is a significant relationship between TCR and the banks’ ROA.

3.3 Model Specifications

As mentioned earlier, the effects of working capital management on banks’ efficiency was estimated by using comparable quantitative models of Raheman and Nasr, (2007), Panigrahi, Anita Sharma (2013). The general formula used for the model was:

= + +

= + +

Source: Panigrahi, Anita Sharma (2013)

Where;

ROEit and ROAit = Return on Equity, and Return on Asset of the banks i at time t; i = 1, 2, 3…, 20 banks respectively.

β0 = the intercept of equation

βi = Coefficient of Xit variables

Xit = the different independent variables for working capital management of firm i at time t.

t = Time from 1, 2…, 9 years

є = error term

4. Findings

In order to establish the significant differences between Zimbabwean and Turkish commercial banks, the independent t-test was conducted. Prior to the t-test, descriptive statistics-mean, minimum, maximum and std. dev. Values were calculated. Table 1 and Table 2 show the descriptive statistics of 10 Turkish commercial banks and 10 Zimbabwean commercial banks, respectively for nine years from the period of 2009-2017.

Table 1: Descriptive Analysis – Turkish Banks

Variable

Obs.

Minimum

Maximum

Mean

Std. Deviation

ROE

90

-0.4

30.4

12.904

6.06849

ROA

90

1.02

2.9

1.7543

0.37488

CUR

90

0.1

1.3

1.0347

0.12572

LCR

90

0.21

0.67

0.4022

0.10634

TCR

90

0.85

1.25

1.1007

0.10679

LEV

90

0.1023

0.3552

0.213898

0.0560818

SIZE

90

5.0461

11.9511

8.340537

1.3548919

Valid N (listwise)

90

Source: Research Findings

Table 2: Descriptive Analysis – Zimbabwean Banks

Variable

Obs.

Minimum

Maximum

Mean

Std. Deviation

ROE

90

-7.2

28

12.9601

5.99733

ROA

90

-2.68

2.98

1.2779

1.03085

CUR

90

0.87

1.71

1.0474

0.10535

LCR

90

0.32

42

1.001

4.61322

TCR

90

1.25

1.0931

0.15965

LEV

90

0.1132

0.2971

0.201707

0.0411494

SIZE

90

5.6245

9.23

7.62818

0.8077211

Valid N (listwise)

90

Source: Research Findings

4.1 Regression Results

Firstly, a test was carried out to determine which model was more appropriate to estimate the regressions, as mentioned before. The researcher started by using the Pooled OLS model to run the regressions and analyze the F Statistic test. The Hausman test was thereafter performed to examine if those effects are regarded to be random or fixed. Lastly, the null hypothesis of the test was rejected, demonstrating that the unobservable individual effects are regarded to be fixed and, therefore, the best model was the FE. After all these tests it was then possible to carry out the multiple regression analysis with a robust sample and the adequate model.

4.2 Multiple Regression Analysis: Linear Relationship

There exists wide empirical evidence about a linear relationship between working capital management and efficiency, indicating that a decrease on the components of the working capital will have a positive effect on firms’ efficiency (Deloof, 2003; Lazaridis & Tryfonidis, 2006; García-Teruel & Martínez-Solano, 2007).

Table 3.7: Model Testing Results on Dependent Variable ROE

Parameter

Model 1

Model 2

Model 3

Model 4

R2

0.647

0.139

0.056

0.06

Adjusted R2

0.64

0.12

0.035

0.039

Regression F

83.23

7.316

2.687

2.873

Significance

0.000**

0.000**

0.049**

0.039*

Constant

21.972(0.000)**

3.287(0.001)**

7.063 (0.000)**

7.040 (0.000)**

CUR

4.346(0.000)**

-14.973 (0.000)**

LCR

-9.124(0.000)**

2.836 (0.005)**

TCR

-0.379 (0.705)

2.199 (0.030)*

LEV

2.465(0.015)

0.556 (0.579)

-0.092 (0.927)

0.109 (0.913)

SIZE

-4.776(0.000)***

-1.285 (0.201)

-2.539 (0.012)

-2.701 (0.008)**

Source: Research Findings

Results of Model 1. This model included CUR as independent variable along with two control variables and tested the hypothesis that there is no significant relationship between CUR and ROE. The regression F-value at 83.23 evidence that it is highly significant, and thus we cannot reject hypothesis H1. It can be concluded that CUR is a significant factor in predicting the banks’ ROE. The adjusted coefficient of determination in this model indicates that 64% of the variation in the ROE is explained by variations in CUR. Furthermore, the model identifies appositive relationship between CUR and banks’ performance (ROE).

Results of Model 2. There is a significant relationship between LCR and ROE. Similar to Model 1, the same variables are used, except CUR which has been replaced with LR. The estimated result for adjusted R2 at 0.120 and regression F at 7.316 shows the Model 2 is statistically significant, the hypothesis H2 is thus accepted. The regression results depict that there is a significant negative relationship between LCR and ROE.

Results of Model 3 In order to test the effect of TCR on the banks’ ROE, model 3 was constructed. The structured hypothesis that there is a significant relationship between TCR and ROE was tested through this model. The estimates of the model showed that the coefficient of TCR is negative with -0.379, but it was not statistically significant from zero. Hence, the hypothesis H3 was rejected and can be concluded that TCR is not a significant factor that should be considered in increasing banks’ ROE.

Table 3.8: Model Testing Results on Dependent Variable ROA

Parameter

Model 5

Model 6

Model 7

Model 8

R2

0.527

0.139

0.056

0.18

Adjusted R2

0.032

0.12

0.035

0.09

Regression F

59.13

7.316

2.687

3.875

Significance

0.048**

0.207**

0.649**

0.039*

Constant

18.562(0.000)**

6.385(0.001)**

9.983 (0.000)**

8.240 (0.000)**

CUR

-15.116(0.000)**

-14.973 (0.000)**

LCR

14.273(0.207)**

-3.421698

2.836 (0.005)

TCR

-10.512 (0.197)**

2.199 (0.030)

LEV

2.465(0.015)

0.556 (0.579)

-0.092 (0.927)

0.109 (0.913)*

SIZE

-4.776(0.000)***

-1.285 (0.201)

-2.539 (0.012)

-2.701 (0.008)**

Source: Research Findings

In Table 3.8 the dependent variable tested was ROA. Model 5 tested CUR as an independent variable along with the other two other control variables. This model revealed that there is a negative relationship between CUR and ROA; it means that a decrease in CUR will also lead to an increase in the ROA. At the significance level of 0.048< 0.05, it is statistically significant. The weight of evidence, therefore suggested acceptance of the hypothesis H4 and confirming that there was a significant relation between CUR and ROA of commercial banks under study.

As shown in the table, Model 6 tested the relationship between LCR, as an independent variable with the other two control variables, and ROA. It revealed a positive relation between LCR and ROA, which means that an increase in LCR will also lead to an increase in the ROA. At the significance level of 0.207< 0.05, it was statistically insignificant. The weight of evidence, therefore suggested rejecting the H5 hypothesis. This implies that change in LR does not have an impact on the ROA of the commercial banks under study.

Model 7 was constructed in order to test the impact of a change in TCR on ROA. As shown in the table, the coefficient of TCR stood at -10.512. This indicated that TCR has negative relationship with ROA implying that a decrease in TCR will also lead to an increase in the ROA. At the significance level of 0.649< 0.05, it is statistically insignificant. The weight of evidence, therefore recommended rejecting the hypothesis H6. The R2, the coefficient of multiple determinations shows the extent to which the independent variables impact the dependent variable. The (model snapshot) revealed that coefficient of multiple determinations (R2) is 0.056. Thus 5.6 % of the variations in the dependent variable are clarified by the independent variables of the model. It also showed that the selected independent variables were not the major determinants factor of return on assets (ROA) of the commercial banks.

5. Conclusion

Working capital management has a key role in the decisions of financial management of any company. The objective of working capital management is to establish an optimal balance between the elements which constitute working capital. The financial success of a business firm will be enabled through the increase in the firm value. One of the most crucial issues which increases firm value is an efficient and profitable working capital management. Firm success is closely associated with the efficient management of all the components of working capital.

In emerging countries like Turkey, the development of the banking sector plays a key role in the development of the country’s economy. Banks need to solve the financing problem, which is one of the most fundamental problems to survive in markets based on competition. Also, banks need to become greater in their efficiency by effectively managing their working capital in order to reduce the need for external financing due to scarce resources. In this context, this research’s aim was to reveal the tradeoff between WCM and the commercial banks efficiency by using the data of the banks listed on BIST Industry Index in Turkey as well as the ZSE in Harare, Zimbabwe.

In this research study, working capital elements of 10 Zimbabwean commercial banks and 10 Turkish commercial banks listed in İstanbul Stock Exchange all of which have operated 2009 and 2017 have been compared. In accordance with the results, Turkish companies seem to have enjoyed increasing and better ROA better than the Zimbabwean banks. It can be said that Turkish banks have a more efficient management mentality with regards to profitability. However; in terms of CUR, Zimbabwean banks have a slightly much more efficient management mentality than Turkish banks. This implies that Zimbabwean banks have a slight advantage in terms of being able to meet their short-term obligations as they fall due than Turkish companies.

Furthermore; Turkish banks have been able to maintain the LR on satisfactory levels much better than the Zimbabwean banks. After the 2008 global financial crisis, Turkish banks have religiously adhered to Base III reforms finalized by the Basel Committee on Banking Supervision in January 2013. So, they follow a more efficient policy than Zimbabwean banks in terms of liquidity coverage.

When we consider that Turkish companies have much more cash and equivalent assets within their total assets on average than Zimbabwean banks, it shows that Turkish companies attribute much more importance to liquidity, nonetheless. It enables flexibility to Turkish banks in case of any negative cases to make their short-term debt payments.

Return on Assets, as mentioned earlier, of Turkish banks are much more than Zimbabwean banks on average. Return on equity of the banks in both countries didn’t seem to differ notably on average. However; this study did not analyze whether the profitability of the banks arises out of working capital or not. A different analysis is necessary for this. In this study, the average differences between the profitability of the companies from only two countries were analyzed.

References

  1. Abel, S. & Le Roux, P. (2016). Determinants of Banking Sector Profitability in Zimbabwe. International Journal of Economics and Financial Issues 6(3), 845-54.
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Case Study on Amalgamation of Vijaya Bank and Dena Bank with Bank of Baroda

Case Study on Amalgamation of Vijaya Bank and Dena Bank with Bank of Baroda

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

Effects of Deposit Mobilization on Performance of Commercial Banks in Ghana

Effects of Deposit Mobilization on Performance of Commercial Banks in Ghana

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.
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Effects of the Central Bank of Kenya Regulations on the Financial Performance of Commercial Banks in Kenya

Effects of the Central Bank of Kenya Regulations on the Financial Performance of Commercial Banks in Kenya

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.

Essay on Digital Transformational Change in Metro Bank

Essay on Digital Transformational Change in Metro Bank

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
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Role of Banks in South Africa: Analytical Essay

Role of Banks in South Africa: Analytical Essay

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.

World Bank Pros and Cons Essay

World Bank Pros and Cons Essay

The World Bank is an international organization that has the largest sources of development assistance that help its group to develop countries with various goals to make sure people around the world can live a better life by eradicating extreme poverty and hunger, achieving universal primary education, promote gender equality and empower women, reduce child mortality, improve maternal health, combat HIV/AIDS, malaria, and other diseases, ensure environmental sustainability and develop a global partnership for development. The World Bank was founded in 1944 during the Bretton Woods Conference. Its initial aim was to help rebuild the economies of European countries struggling after the Second World War. It did this by providing loans to these countries with specific conditions of the World Bank. Later on, its aim spread out to third-world countries outside of Europe too.

The World Bank, an international organization, has so many economic and humanitarian benefits for developing countries and their citizens. The key point is that thanks to its successful activities over the past 20 years it has been possible to reduce poverty in third-world countries from 40% to 21%. Because poverty is one of the greatest forces that affect a country’s economy, reducing it will help boost economies. That is why the World Bank should be seen in this as a clear advantage. Moreover, thanks to the World Bank, life expectancy has increased by 20 years and the number of child deaths has decreased by 50%. Obviously, this is another benefit, as a higher life expectancy could lead to an increase in per capita income in a country, which can help improve their economy.

Of course, nothing is without flaws. And the activity of the World Bank is not an exception. The economic advantages of the World Bank may come with a cost, which will not be specified, as it’s from the perspective of the World Bank or its supporters. A clear example of this is the policy of the World Bank towards Brazil in 1981. That year, it financed Brazil’s Polonoroeste development program, which caused uncontrolled migration and a land rush that eventually led to the destruction of rainforests. This had an extremely negative effect on their economy, as they lost a significant amount of coffee and cocoa, which were the source of imports for their exports.

Nevertheless, I believe that the pros of the World Bank still outweigh the cons, because its activities still help to strengthen the economies of many countries, fight various world problems, and contribute to the prosperity of today’s society.