banking operations and management

8/13/2019 Banking Operations and Management

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Banking Operations and

ManagementWHAT IS BANKING?

WHY IS IT ESSENTIAL FOR A NATION?

DISCUSS BANKING ENVIRONMENT IN PAKISTAN.

Adeel Sajjad

MBA (Evening) 2ndSemester

Karachi University Business School


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What is Banking

Banking system is a crucial component of the global economy accounting for trillions in assets

worldwide. Banks are just one part of the world of financial institutions, standing alongside investment

banks, insurance companies, finance companies, investment managers and other companies that profit

from the creation and flow of money. As financial intermediaries, banks stand between depositors who

supply capital and borrowers who demand capital. Given the importance in economy and individual

wealth that rests on banks, it is also among the most stringently regulated businesses in the world.

Basic Functions:

Accept Deposits / Make LoansAt the fundamental level banks accept deposits from customers, raise capital from investors or

lenders and then use that money to make loans, buy securities and provide other financial

services to customers. These loans are then used by individuals and organizations to expand

their operations, which in turn leads to more deposited funds that make their way to banks.

Provide SafetyBanks also provide security and convenience to their customers. At inception, part of the

primary purpose of banks was to offer customers security for their money. This was back in a

time when an individual's wealth consisted of actual gold and silver coins, but to a large extent

this function is still relevant. With banks, consumers no longer need to keep large amounts of

currency on hand; transactions can be treated with checks, debit cards or credit cards,

instead. Many banks maintain vaults and rent out space to customers, in the form of safe

deposit boxes with subsidiary services.

Act as Payment AgentsBanks also serve as payment agents within a country and between nations. Not only does banks

issue debit cards that allow account holders to pay for goods with the swipe of a card, they can

also arrange wire transferswith other institutions. Banks underwrite financial transactions bylending their reputation and credibility to the transaction in the form of banking instruments

such as checks, pay orders, demand draft etc. As payment agents, banks make commercial

transactions much more convenient.


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Why is it Essential for a Nation

Role of Banks in an Economy:

Settle PaymentsEvery day there are millions of financial transactions through banking channel, some conducted

with paper currency, but countless done with checks, wire transfers and various types of

electronic payments. Banks play a valuable role in the settling these payments, ensuring that

proper accounts are credited or debited, in the proper amounts and with relatively little delay.

Credit IntermediationBanks play a major role as financial intermediaries. Banks collect money from depositors, in

essence borrowing the money, and then concurrently lending it to other borrowers, generating

a chain of debts.

Maturity TransformationMaturity transformation is fundamental to what banks do on daily basis. Many investors are

willing to invest on short term basis, but several projects require long-term financial

commitments. What banks do is borrow short-term, in the form of demand depositsand short-

term certificates of deposit, but lend long-term. By doing this, banks transform debts with very

short maturities (deposits) into credits with very long maturities (loans), and collect the

difference in the rates as profit. However, they are also exposed to the risk that short-term

funding costs may rise much faster than they can recoup through lending.

Money CreationOne of the most vital roles of banks is in money creation achieved through fractional reserve

banking. In this system only a fraction of bank deposits are backed by actual cash-on-hand and

are available for withdrawal. This is done to expand the economy by freeing up capital that can

be loaned out to other parties.


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Discuss Banking Environment in Pakistan

The Banking sector is an integral part of the countrys financial services industry. In Pakistan, the sector

witnessed sustained growth in 2012-13. Competition is relatively high, especially after the challenging

capital adequacy benchmarks set by the State Bank of Pakistan to nourish a stable banking system.

Attracting foreign investment and winning profitable customers are the only options left to banks forsurvival. A significant shift of focus from industrial lending to consumer products has allowed the banks

to enjoy enormous spreads.

The banking sector has now diversified its product base and carried out a lot of innovation. They have

expanded their outreach to agriculture, SMEs, mortgage financing and consumer financing. Not only

that this diversified lending portfolio mitigates risks but it also raises the purchasing power of a large

segment of population that was completely shut out from credit markets.

Pakistans Banking Sector can be classified under following broad categories

Category Description

State Bank of Pakistan Central Bank and the Autonomous and Governing Body for all

banking operations in the country.Nationalized Scheduled Banks These deal primarily in industries of banking and capital

markets. They offer a host of unique policies, banking training,

services and products which include loans, credit cards,

savings and consumer banking.Private Scheduled Banks Banks engage in channeling funds from depositors to lenders

against the primary objective of acquiring profit i.e. Bank

Spread.Foreign Banks These concentrate primarily on International Trade Finance,Innovative Credit Orientation and Plastic Money.Development/ Cooperative/

Investment Banks Investment Banks act as underwriter or agent serving asintermediary between an issuer of securities and the investingpublic.

Specialized Banks These banks are created with specific interest thus specializingand catering to a particular sector industry.


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Role of Central Bank

Like a Central Bank in any developing country, State Bank of Pakistan (SBP) performs both traditional

and development functions to achieve macro-economic goals. The traditional functions, which are

generally performed by central banks all over the world, may be classified into two groups:

a) Primary functions: include issue of notes, regulation and supervision of the financial system,bankers bank, lender ofthe last resort, banker to Government, and conduct of monetary policy

b) Secondary functions: include the agency functions like management of public debt,management of foreign exchange, etc.

Other functions like advising the government on policy matters and maintaining close relationships with

international financial institutions. The non-traditional or promotional functions, performed by the State

Bank include development of financial framework, institutionalization of savings and investment,

provision of training facilities to bankers, and provision of credit to priority sectors. The State Bank has

also been playing an active part in the process of islamization of the banking system.

Current Scenario and Recent Developments

Risk Management SystemCurrently Banks are in implementation phase of new Capital Accord (Basel II) whereby capital

adequacy requirements have been made more risk-oriented by linking capital to operational risk

and changing the risk measurement approaches for credit and market risks. However, due to

present risk management systems in Pakistan at primary stage, its implementation is going to be

challenging.

Similarly, the banking institutions are also required to carry out stress testing, a technique used

around the globe by financial institutions to assess risk exposures across the institution and to

estimate the changes in the value of the portfolio, if exposed to various risk factors. Initially,

SBP has advised banks to carry out the simple sensitivity analysis keeping in the view the

varying levels of skill and available resources among banks; however, going forward more

sophisticated techniques will be adopted.

Financing Infrastructure DevelopmentIn Pakistan, the conventional form of financing infrastructure projects only through Public Sector

Development Program has resulted in congestions and bottlenecks that have raised the need to

find alternative way of fostering private-public partnership in the areas of infrastructure

development. After success of private sector in infrastructure development, local banking

industry is undertaking different modes of infrastructure financing and the associated risk

management systems.


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Development of Liability ProductsIt should be noted that although new products have been introduced in preceding three years

on asset side including consumer finance, SME finance, etc.; little attention has been given to

developing and innovating the liability products. The stagnant financial savings in the economy

for last few years is an outcome of this neglect and this has raised the need to design the

lucrative savings products in the country so as to look after the interest of the small savers and

mobilize their savings in an efficient way. Initiative in this regard, taken by NBFIs in recent past is

gradually making its way to banking sector as well.

E-BankingSmall and medium banks are now offering on-line services to their customers. Large banks with

more expanded branch network and number of customers are moving expeditiously, optimally

utilizing the E-banking network. The ATM penetration ratio is still quite low in Pakistan and the

efforts are needed to not only further expand the ATM network more aggressively but also to

improve upon the security standards.

Islamic BankingIslamic banking is emerging in Pakistans banking system. More and more banks are seeking

license to commence Islamic banking operations. At present five full fledged Islamic banks are

operating in Pakistan and 14 which operate Islamic window. A number of conventional banks

aim to grow or spin off their existing Islamic windows, while new entrants are expected.

However, 56 per cent of the Islamic industry's 1,161 branches are in the five largest cities,

leaving smaller cities underserved. Islamic Banking is in the development phase and significant

growth in guidance of SBP is anticipated in this sector in near future.

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