COMERCIAL BANK

MANAGEMENT
ARSHAD MAHMOOD MIAN
EX WING HEAD HRM GROUP
NBP HEAD OFFICE KARACHI
Financial Services Sector- Overview
Banks are the principal source of credit (loanable funds) for millions of
individuals and families. Banks are involved from grocery stores to
automobile dealers. Banks are source of major payments. Businesses
and consumers, make payments for purchase of goods and services,
by bank-supplied cheques, credit or debit cards, electronic accounts
through a Web site, cell phone or other network device. More than any
other financial service firm, banks have a reputation for public trust.
Worldwide banks grant more installment loans to consumers than any
other financial service provider. Banks are leading buyers of bonds and
notes issued by the government to finance public facilities ranging from
auditoriums to football stadiums to airports and highways. Banks are
among the most important source of short term working capital for
business as well as long term business loans to fund the purchase of
new plant and equipment.
Assets held by US banks represent about one- fifth of the total assets
and even larger proportion of the earnings of all US based financial
service institutions. In Japan, banks hold more than half of all assets.
What is a Bank – Introduction
Cambridge Dictionary (English)- meaning -----noun
A - An organization where people and businesses can
invest or borrow money, change it to foreign money, etc., or
a building where these services are offered.
- In gambling, the bank is money that belongs to the
owner and can be won by the players.
B - sloping raised land, especially along the sides of a river.
- a pile or mass of earth, clouds, etc.:
- a row of similar things, especially machines or parts of
machines.
- A bank of something, such as blood or human organs for
medical use, is a place that stores these things for later use:
- to keep your money in a particular bank, or to put
money into a bank. -------a verb
What is a Bank – Introduction
History- Banking began around 2000 BC with the first prototype banks
of merchants of the ancient world, which made grain loans to farmers
and traders who carried goods between cities and this system is known
as a Barter System. Later, in ancient Greece and the Roman Empire,
lenders based in temples made loans and added two innovations: they
accepted deposits and changed money. Ancient China and India also
evidence of money lending activity.
Modern banking practices emerged in the 17th and 18th centuries.
Merchants started to store their gold with the goldsmiths of London who
charged a fee for that service. In exchange deposit of precious metal,
the goldsmiths issued receipts. The Bank of England was the first to
begin the permanent issue of banknotes in 1695.The Royal Bank of
Scotland established the first overdraft facility in 1728. By the beginning
of the 19th century a bankers' clearing house was established in
London to allow multiple banks to clear transactions.
Hhistorical Background in Pakistan –
After independence in 1947, The history of commercial banks in
Pakistan can be divided into 4 eras.
What is a Bank – Introduction
60’s Pre-nationalization
These banks were sponsored by large business houses who used these banks
for their own funding needs. Their scope of operation was restricted to major
urban cities.
70’s Nationalization
All commercial banks were nationalized in 1974 and converted in to
nationalized commercial banks namely Habib Bank Ltd., United bank Ltd.;
Muslim commercial bank Ltd.; Allied bank Ltd.
80’s Post Nationalization
Foreign banks consolidated their position in the market at the expense of
inefficient Nationalized Commercial Banks.
Profit and loss sharing scheme was introduced.
Financial market expanded as brokerage houses, leasing, modarbas,
investment banks entered the market.
90’s Deregulation
The private sector was allowed to enter into the banking business.
Prudential regulations were introduced.
Foreign and private sector banks started emphasizing on retail banking.
What is a Bank – Introduction
A bank is a financial institution that accepts deposits from the public and
creates credit. Due to their importance in the financial stability of a country,
banks are highly regulated in most countries.
An establishment authorized by a government to accept deposits, pay
interest, clear checks, make loans, act as an intermediary in financial
transactions, and provide other financial services to its customers.
A bank is a financial institution which deals with deposits and advances and
other related services. It receives money from those who want to save in the
form of deposits and it lends money to those who need it.
Oxford Dictionary defines a bank as "an establishment for custody of money,
which it pays out on customer's order."
A bank can be defined in terms of :-
1. The economic functions it serves,
2. The services it offers to its customers,
3. The legal basis for its existence.
Certainly, banks can be identified by the functions, they perform in the
economy. They are involved in transferring funds from savers to borrowers.
What is a Bank – Introduction
 Characteristics / Features of a Bank
 A Bank is a financial institution which deals with other people's money.
 A bank may be a person, firm or company which is in the business of
banking.
 A bank accepts money from the people in the form of deposits repayable on
demand. It gives safety to the deposits of its customers, acts as a custodian.
 A bank lends out money in the form of loans for different purposes.
 A bank provides easy payment and withdrawal facility to its customers in the
form of cheques and drafts,
 A bank provides various banking facilities to its customers like utility and
agency services.
 A bank is a profit seeking institution having service oriented approach.
 A bank acts as a connecting link between borrowers and lenders of money.
 Banks collect money from those who have surplus money and give the same
to those who are in need of money.
Financial Services - Roles
The development of any country depends on the economic growth the country.
Economic growth deals about investment and production and also the extent of
Gross Domestic Product in a country. Only when this grows, the people will
experience growth in the form of improved standard of living.
Roles of financial system in economic development of a country.
Savings-investment relationship
To attain economic development, a country needs more investment and production.
This can happen only when there is a facility for savings. As, such savings are
channelized to productive resources in the form of investment. The financial
institutions induce the public to save by offering attractive rates. These savings are
channelized by lending to various business concerns which are involved in
production and distribution.
Financial systems help in growth of capital market
Any business requires two types of capital namely, fixed capital and working capital.
Fixed capital is used for investment in fixed assets, like plant and machinery. While
working capital is used for the day-to-day running of business.
Foreign exchange market enables exporters and importers to receive and raise
funds for settling transactions. It also enables banks to borrow from and lend to
different types of customers in various foreign currencies.
Financial Services - Roles
Government Securities market
Financial system enables the state and central governments to raise both
short-term and long-term funds through the issue of bills and bonds which carry
attractive rates of interest along with tax concessions. eg budgetary gap.
Financial system helps in Infrastructure and Growth
Economic development of any country depends on the infrastructure facility
available in the country. The Development Banks focus key industries like coal,
power to help in raising capital for other industries.
Financial system helps in development of Trade
The financial institutions finance traders and the financial market helps in
discounting financial instruments such as bills. Foreign trade is promoted due
to pre-shipment and post-shipment finance, L.C facility by commercial banks.
Employment Growth is boosted by financial system
The money market which is a part of financial system, provides working capital
to the businessmen and manufacturers due to which production increases,
resulting in generating more employment opportunities.
Financial Services - Roles
Financial system ensures balanced growth
Economic development requires a balanced growth. The financial system in the
country must ensure available funds be distributed to all the sectors.
Financial system helps in fiscal discipline and control of economy
The industries should be given suitable protection through the financial system
so that their credit requirements will be met even during the difficult period.
Role of financial system in attracting foreign capital
Financial system promotes capital market. A dynamic capital market is capable
of attracting funds both from domestic and abroad.
Role of financial system in Political stability
Developed financial system helps to stable the political conditions of a country.
Financial system helps in Uniform interest rates
The financial system keeps uniform interest rate throughout the country.
Financial system role in Electronic development:
Due to the development of technology and the introduction of computers in the
financial system, the transactions have increased manifold bringing in changes
Competing- Financial Service Institutions
The Competitive Challenges for Banks- Leading Competitors with Banks
Savings Associations – Specialize in selling deposits, mortgage loans
Credit Unions - Collect deposit and make loans to their member
Money Market Funds – Collect short term liquid funds from individuals/
institutions and invest in quality securities of short durations.
Mutual Funds – sell shares to the public – stocks, bonds and securities.
Hedge Funds – sell share to upscale investor that support a broad group of
different kinds of assets.
Security Brokers and Dealers – Buy and sell securities on behalf of their
customers and for their own accounts.
Investment Banks – Provide professional advice to corporations and
governments, raise funds in the financial marketplace. Seek to make business
acquisitions and trade securities including prominent investment bankings
Finance Companies –Offers loans to commercial enterprise.
Financing Holding Companies – often credit card companies. Insurance etc
Life and Property/ Casualty Insurance Companies – Protect against risks to
persons or property and manage the pension plans- retirement & business
Services – Banks have offered for Centuries
Banks are financial service providers. As such they play a number of roles in
the economy. Following are the services provided by the banks:-
Currency Exchange – One of the first services offered by bank.
Discounting Commercial Notes and Making Business Loans – Early in
history, bankers began discounting commercial notes, making loans to local
merchants who sold their debts (accounts receivables).
Offering Savings Deposits –Making loans proved so profitable that banks
began searching for additional loanable funds consisting of offering Savings
Deposits on remarkable interest rates i.e. 16% per annum
Safekeeping of Valuables and Certification of Value – During the Middle
Ages, bankers and other merchants (often called Goldsmiths) began the
practice of holding gold and other valuables owned by their customers.
Supporting Government Activities with Credit – During the early years of
the Industrial Revolution, governments in Europe noted bankers 'ability to
mobilize large amounts of funds. Banks were chartered under the provisions
that they would purchase Govt Bonds.
Services – Banks have offered for Centuries
Offering Checking Accounts (Demand Deposits) – The Industrial Revolution
ushered in new financial services including demand deposit services – a
checking account that permitted depositors to write drafts in payment for goods
and services that bank or other service provider had to honor immediately.
Offering Trust Services –For many years banks and a few of their competitors
( such as insurance and trust companies) have managed the financial affairs
and property of individuals and business firms in return for a fee. The property
management function known as trust service, involves acting as trustees for
wills, managing a deceased customer’s estate by paying claims against the
estate. Keeping valuable assets safe an seeing this that legal heirs receive
their rights.
Services by Banks in Past Century –
Granting Consumer Loans – In early 20th century banks relied on consumers
for deposits to fund their large corporate loans. By the 1920s and 1930s
several major banks, led by forerunners of New York’s Citi Bank and North
Carolina’s Bank of America had established consumer loan departments.
Services – Banks have offered for Centuries
Financial Advising – Many service providers today offer vide range of financial
advisory services from helping to prepare financial plans.
Managing Cash – One of the most prominent services is the Cash
management service over the years.
Offering Equipment Leasing – Many banks and finance companies have
moved to offer business consumers to purchase equipment through lease.
Making Capital Venture Loans – Banks, security dealers and other financial
institutions have become active in financing the start up costs of new
companies. Because of the added risk involved this is generally done through a
separate venture capital firm that raise money from investor to support young
businesses in the hope of running a profit.
Selling Insurance Policies – Banks were involved in the business of
insurance. In 1930 a great depression started and US banks were prohibited
from acting as insurance agents or underwriting insurance policies out of fear
that selling insurance would increase bank risk till new century.
Selling and Managing Retirement Plans –Banks, trust departments, mutual
funds and insurance companies are active in managing the retirement plans
that most business available to make their employees.
Services – Banks have offered for Centuries
Dealing in Securities: Offering Security Brokerage and Investment
Banking Services – One of the most popular service targets In recent years,
particularly in United States, has been dealing insecurities, executing buy and
sell orders for security trading customers ( referred to as security brokerage
services). With the passage of time, in 1999, US firms were permitted to
affiliate with security firms. Early in 21st century, investment bank and
commercial banks were confronted with massive security and loan losses and
some of the old investment institutions (Bear Stearns and Lehman Brothers)
were failed and absorbed by commercial banks. In 2008, Goldman Sachs and
Morgan Stanley became commercial banking companies instead of just
investment banks.
Offering Mutual Funds, Annuities, and Other Investment Products –Mutual
fund investments and annuities that offer the prospect of higher yields than the
returns often available on conventional bank deposits are among the most
sought after investment products. Annuities consist of long-term savings plans
that promise the payment of a stream of income to the annuity holder beginning
on a designated future date. In contrast, mutual funds acquire stocks, bonds,
and other assets that appear to “ fit” the funds goals. Recently, many banks
entered into joint ventures with security brokers and insurance companies.
Services – Banks have offered for Centuries
Offering Merchant Banking Services – US financial service providers are
following in the footsteps of leading financial institutions all over the globe.
Barclays Bank – G. Britain and Deutsche Bank – Germany are offering
merchant banking services to larger corporations. These consist of temporary
purchase of corporate stock to aid the launching of a new business venture or
to support expansion of an existing company. In this way, the merchant banker
becomes a temporary stockholder and bears the risk of any decline in value.
Offering Risk Management and Hedging Services – Many observers see
that fundamental changes are going in the banking sector with larger banks (
such as J. P. Morgan Chase) moving away from traditional emphasis on
deposit taking and loan making toward risk intermediation – providing their
customers with financial tools to combat risk exposure in return for substantial
fees. The larger banks around the globe now dominate the risk- holding field,
either acting as dealers ( market makers) in arranging for risk protection for
customers from third parties or directly selling their customers the bank’s own
risk protection contracts. As well as this popular financial service has led to
phenomenal growth in such risk- hedging tools as swaps, options, and future
contracts, but it has brought less stable market conditions frequently as
depicted in recent credit crises.
Modern Banking - Types of Bank Services
In the modern world, banks offer the variety of services to attract
customers, some basic modern services offered by the banks are
discussed below:
1. Advancing of Loans
Banks are profit-oriented business organizations. They have to advance a loan
to the public and generate interest from them as profit.
2. Overdraft
Sometimes, the bank provides overdraft facilities to its customers through
which they are allowed to withdraw more than their deposits.
Interest is charged from the customers on the overdrawn amount.
3. Discounting of Bills of Exchange
Through this method, a holder of a bill of exchange can get it discounted by the
bank, in a bill of exchange, the debtor accepts the bill drawn upon him by the
creditor (i.e., holder of the bill) and agrees to pay the amount mentioned on
maturity. After making some marginal deductions (in the form of commission),
the bank pays the value of the bill to the holder.
When the bill of exchange matures, the bank gets its payment from the party,
which had accepted the bill.
Modern Banking - Types of Bank Services
4. Check/Cheque Payment
Banks provide cheque pads to the account holders. Account holders can
draw cheque upon the bank to pay money.
Banks pay for cheques of customers after formal verification and official
procedures.
5. Collection and Payment Of Credit Instruments
In modern business, different types of credit instruments such as the bill of
exchange, promissory notes, cheques etc. are used.
Banks deal with such instruments. Modern banks collect and pay different
types of credit instruments as the representative of the customers.
6. Foreign Currency Exchange
Banks deal with foreign currencies. As the requirement of customers,
banks exchange foreign currencies with local currencies, which is essential
to settle down the dues in the international trade.
Modern Banking - Types of Bank Services
7. Consultancy
Modern commercial banks expand their function to consultancy business. In
this function, banks hire financial, legal and market experts who provide advice
to customers in regarding investment, industry, trade, income, tax etc.
8. Bank Guarantee
Customers are provided the facility of bank guarantee by modern commercial
banks. When customers have to deposit certain fund in governmental offices or
courts for a specific purpose, a bank can present itself as the guarantee for the
customer, instead of depositing fund by customers.
9. Remittance of Funds
Banks help their customers in transferring funds from one place to another
through cheques, drafts, etc.
10. Credit cards
A credit card is cards that allow their holders to make purchases of goods and
services in exchange for the credit card’s provider immediately paying for the
goods or service, and the cardholder promising to pay back the amount of the
purchase to the card provider over a period of time, and with interest.
Modern Banking - Types of Bank Services
11. ATMs Services
ATMs replace human bank tellers in performing giving banking functions such
as deposits, withdrawals, account inquiries. Key advantages of ATMs include:
24-hour availability, Elimination of labor cost , Convenience of location
12. Debit cards
Debit cards are used to electronically withdraw funds directly from the
cardholders’ accounts.
Most debit cards require a Personal Identification Number (PIN) to be used to
verify the transaction.
13. Home banking
Home banking is the process of completing the financial transaction from one’s
own home as opposed to utilizing a branch of a bank.
14. Online banking
Online banking is a service offered by banks that allows account holders to
access their account data via the internet. Online banking is also known as
“Internet banking” or “Web banking.” Online banking through traditional banks
enable customers to perform all routine transactions, such as account
transfers, balance inquiries, bill payments, and stop-payment requests, and
some even offer online loan and credit card applications.
Modern Banking - Types of Bank Services
15. Mobile Banking
Mobile banking (also known as M-Banking) is a term used for performing
balance checks, account transactions, payments, credit applications and other
banking transactions through a mobile device such as a mobile phone or
Personal Digital Assistant (PDA),
16. Accepting Deposit
Accepting deposit from savers is the primary function of a bank. Banks accept
deposit from those who can save money but cannot utilize in profitable sectors.
People prefer to deposit their savings in a bank.
17. Priority banking
Priority banking can include a number of various services, but some of the
popular ones include free checking, online bill pay, financial consultation, and
information.
18. Private banking
Personalized financial and banking services that are traditionally offered to a
bank’s digital, high net worth individuals (HNWIs). For wealth management
purposes.
Financial Services – An Overview
Financial services are the economic services provided by the finance
industry, which encompasses a broad range of businesses that manage
money, including credit unions banks, credit-card companies, insurance
companies, accountancy companies, consumer-finance companies, stock
brokerages, investment funds, individual managers and some government-
sponsored enterprises. Financial services companies are present in all
economically developed geographic locations and tend to cluster in local,
national, regional and international financial centers such as London, New
York City, and Tokyo.
Commercial banking services- A commercial bank is what is commonly
referred to as simply a bank. The term "commercial" is used to distinguish
it from an investment bank,
• Keeping money safe while also allowing withdrawals when needed
• Issuance of cheque books, facilitation to customer to pay bills etc.
• Provide personal loans, commercial loans, and mortgage loans. Issuance
of credit card and processing of credit card transactions and billing
• Issuance of debit cards for use as a substitute for cheques.
• Allow financial transactions at branches or using ATMs
Financial Services – An Overview
• Provide Wire transfers and Electronic fund transfers between banks
• Facilitation of standing orders and direct debits,
• Provide overdraft - temporary advancement of the bank's own money.
• Provide internet banking system to facilitate the customers
• Notary service for financial and other documents
• Accepting the deposits, providing the credit facilities to customers
• Sell investment products like mutual funds Etc.
Investment banking services- Financial services which helps businesses
raise money from other firms in form of bonds (debt) or stock (equity).
Capital markets services - underwriting debt and equity, assist company deals
(advisory services), and restructure debt into structured finance products.
Brokerage services - facilitating the buying and selling of financial securities
between a buyer and a seller. In today's (2014) online brokerages services.
Private banking - Private banks provide banking services exclusively to high-
net-worth individuals. Private banks often provide more personal services, such
New York City and London - the largest centers of investment banking services.
Financial Services – An Overview
Foreign exchange services –
Foreign exchange services are provided by many banks and specialist foreign
exchange brokers around the world. Foreign exchange services include:
Currency exchange - clients purchase and sell foreign currency banknotes.
Wire transfer - where clients can send funds to international banks abroad.
Remittance - Clients that are migrant workers send money to home country.
Investment services-
Investment management - Companies run collective investment funds,
generally registered with the Securities and Exchange Commission as
Registered Investment Advisors. creating capital through client investments.
Custody services - Safe-keeping of the world's securities trades, servicing the
associated portfolios. Assets under custody in the world about US$100 trillion.
New York City, largest center of investment services, followed by London.
Financial Services – An Overview
Insurance –
Insurance brokerage - Insurance brokers shop for insurance (generally
corporate property and casualty insurance) on behalf of customers.
Insurance underwriting - Underwriters offer commercial lines of coverage for
businesses. Activities include insurance and annuities, life insurance,
retirement insurance, health insurance, and property and casualty insurance.
Finance & Insurance - The F&I manager encompasses the financing and
insuring of the asset which is sold by the dealer.
Reinsurance - Reinsurance is to protect them from catastrophic losses.
Other financial services-
Bank cards include both credit and debit cards. Credit card machine services
and networks – Intermediation or advisory services – Private equity -
Financial Markets- What is?
Financial Markets-
A 'financial market' is a market in which people trade financial securities and
derivatives such as futures and options at low transaction costs. Securities
include stocks and bonds, and precious metals.
The term "market" is sometimes used for what are more strictly exchanges,
organizations that facilitate the trade in financial securities, e.g., a stock
exchange or commodity exchange. This may be a physical location (like the
NYSE, BSE, LSE, JSE) or an electronic system (like NASDAQ). Much trading
of stocks takes place on an exchange;
The Importance of Financial Markets
• Well-functioning financial markets facilitate the flow of capital from investors
to the users of capital.
• Markets provide savers with returns on their money saved/invested, which
provide them money in the future.
• Markets provide users of capital with the necessary funds to finance their
investment projects.
• Well-functioning markets promote economic growth.
• Economies with well-developed markets perform better than economies with
poorly-functioning markets.
Financial Markets- Types
 Capital markets which consist of:
 Stock markets which provide financing through the issuance of shares or
common stock and enable the subsequent trading thereof.
 Bond markets, which provide financing through the issuance of bonds, and
enable the subsequent trading thereof. Goal – long term funding
 Commodity markets which facilitate the trading of commodities. Wheat,
Coffee, Cocoa, Fruits, Sugar, Diamond, Gold, Oil etc.
 Money markets, which provide short term debt financing and investment.
 Derivatives markets, which provide instruments for the management of
financial Instruments like future contracts derived from other assets.
 Futures markets, which provide standardized forward contracts for trading
products at some future date; specific quantity, payment with specified
amount
 Foreign exchange markets, which facilitate the trading of foreign exchange.
 Spot market or Cash Market with immediate payment on the spot.
 Interbank lending market- a market in which banks extend loans to one
another for a specified term for maturities of one week or less
#############################
Performance Management may be summarized as under:

Employees outputs and activities = Company’s goals.