The components : The concept and types of banking Departments of banking : Administrative department Technical department Role and principles of banking Electronic banking Risk management in banking
The definition of banking It’s a financial institution that trade on money, its major purpose is to act as an intermediary between the capital “which seeks to find areas of investment” and the areas of investment “which seeks to find capital”.
Types of banks: The legal status of the bank The sources of funds The legitimacy of operations The diverse nature of business in the bank
A) In terms of the legal status of the bank:1-Public Banks:Banks are owned by the state; they have full capital and oversee their works and activities: Central banks (the national banks, SAMA Saudi Arabic monetary association). Specialized banks i.e., specialized in a particular area), such as Commercial Banks, Industrial Banks, Agriculture Banks and Real-State Banks
2. Private Banks: Banks are owned by persons whether natural or legal persons; they take over management of its affairs and consider all legal and financial responsibilities for the State (represented in the Central Bank)
3. Mixed Banks: Both the state and individuals have the right to participate in the ownership and management of those banks in order to maintain the state control over them. Those banks are permitted to acquire capitals that allow the state to oversee and channel them in line with the financial and economic policy of the state.
B) In terms of the sources of funds Central banks: The Banks that are established by the State to take over the supervision, guidance and oversight to the banking system They also have the right to issue currency and keep liquid assets for the state such as gold and foreign currencies. Their capital come from what’s allocated to them by the state as well as what’s deposited on them by the commercial banks.
2. Deposits Banks (Commercial Banks):The Banks that make up their own funds through the partners own capital as well as the Individuals and institutions Deposits, for the purpose of investment or current accounts.
3. Business and investment banks: The Banks, which rely mainly on their own funds in addition to deposits, it carry out the work set up (created) for them. The most important works for the purpose of investment is to provide long-term loans for projects or at least to contribute on it. Therefore these banks are allowed by law to create investment companies.
C) In terms of the legitimacy ofoperations : 1. Conventional banks (usury) 2. Islamic banks (interest- free Banks)· They Are banks operate according to the provisions and rules imposed by Islamic law.· They are characterized by not dealing with benefits neither with depositors nor borrower
Its relationship with customers is characterized by its simplicity such as a partner relation with his partner, as it neither specifies in advance a return on its deposited funds nor provides funds in the form of profit, speculation or participation As both borrowers and depositors strictly try to keep away from dealing in interest which is prohibited by religion. Islamic banks also perform a various services for charged commissions, such as those carried out by conventional banks. Generally speaking, all interest-free banks agree on the basic principles. However, individual banks differ in their application. These differences are due to several reasons including the laws of the country, objectives of the different banks, individual bank’s circumstances and experiences or maybe their need to interact with other interest-based banks.
(A) Commercial Bank:1. The financial institution that provides services, such as accepting deposits, giving business loans and auto loans, mortgage lending, and basic investment products like (savings accounts and certificates of deposit).
2. In exchange, they generally pay higher interest rates on investments and deposits, and charge lower fees.
3. Commercial banking activities are different than investment banking which include underwriting acting as intermediary between an : (issuer of securities and the investing public) (facilitating mergers and other corporate reorganizations). and also acting as (broker for institutional clients).
Notes:a) Some commercial banks do not have any physical branches and required consumers to complete all transactions by (phone or internet).b) Commercial bank such as (CIB/City Bank).c) City Bank has investment banking divisions.
(B) Industrial Bank :• The financial institution with a limited scope of services.• Industrial banks sell certificates that are labeled as investment shares and also accept customer deposits.
3. They then invest the proceeds ininstallment loans for consumers and smallbusinesses.4. Industrial banks differ from commerciallenders because they accept deposits.5. Industrial banks differ from commercialbanks because they do not offer checkingaccounts.
Note : industrial banks are known as industrial loan companies.
1. Department of Budget and Administrative Services Isresponsible for providing senior management and the Board of Executive Directors information on performance and resource allocation in order to inform and enhance decision-making
2.Department of Legal Affairs consistsof a large number of skilled lawyers and also seeks outside counsel from those professionals who can provide responsible and cost-effective services well on time while keeping the standard of banks professional and ethical practices.
3. Department of Investigation and Inspection Its Mission is to strive for soundness and stability of the financial System to safeguard interest of stakeholders through proactive inspections. Its main function is to conduct regular and special onsite inspection of Commercial Banks, Micro Finance Institutions and exchange companies
4. Department of General Accounting Explains how to analyze a banks financial position and operations using the banks financial statements, and illustrates alternative bank financial statement presentations Discusses accounting principles applicable to banks within the framework of their operations Trading account securities, loans, property and equipment
• Provides a working knowledge of bank operations and internal accounting controls• Demonstrates applications of internal accounting controls, accounting and reporting principles to banks cash, investment securities,
5. Department of managing External Relations Seeking and researching foreign partners for raising funds Maintaining relationship and correspondence with foreign partners Tracking the process and timelines of report preparation and final submission Organizing the process of signing international agreements
• Updating information about bank in international web pages• Managing relationship with Media representatives• Organizing interviews and press releases• Preparing internal announcements and organizing the activity of internal clubs
6. Department of Publications Banking publications provides the latest industry data and statistics, and the latest banking technology trends Publications focusing on Banking technology is the key to run a successful business
7.Queries department Queries allow the user to describe desired data, leaving the database management system (DBMS) responsible for planning, optimizing and performing the physical operations necessary to produce chooses. Queries can be divided according to which functions undertaken by the three main sections: -Data definition language (DDL) -Data manipulation language (DML) -Data control language (DCL)
8.Planning, Studies and research department planning and studies department is responsible for suggesting the general policies of the bank, developing resources, raising the workers efficiency, providing assistance and technical advice for productive projects.
planning and studies department perform its duties through : -department of planning and training. -department of studies and research. -department of resources development.
9.Public relations department public relations department is a basic administrative role which is to provide advices for management to rationalize the administrative and executive decisions and carry out the communication processes.
10.personnel management department personnel management department includes all functions of personnel administration and their payroll. and the most important features are: Record all data for all staff. The expense of social security and income tax. Account the receipts for employees who ended their services. Record the data of members who ended their services in the archive department.
11.Computers department Computers are used in banks for a variety of reasons. They help bank personnel operate more efficiently and effectively. Computers are used to track certain transactions and they help process other customer information as well. Without computers, it would be very hard for a bank to offer good customer service day in and day out. Computers help a bank save time and money, and can be used as an aid to generate profits.
12.Archive department The Banks archive holds a broad range of material of interest to researchers in a large number of fields. The Banks records are of prime importance to economic historians, but our holdings are also of potential interest to social, local and business historians, architectural specialists, biographers and genealogist
13.credit facilities department• banks grant short-term financial assistance by way of: -cash credit. -overdraft. -discounting of bills.
Technical department in banking Definition : It is the sections which allow the bank to introduce his work and it’s daily activity for his client and it divided into 15sections
1- Department of Treasury (Teller) Bank tellers are responsible for quickly and accurately processing routine transactions that customers conduct at banks. Routine transactions include cashing checks and making deposits, loan payments, and withdrawals.
2 - Department of current accounts Features of Current Bank Account ↓ The main features of current account are as follows:- The main objective of current bank account is to enable the businessmen to conduct their business transactions smoothly.
There is no restriction on the number and amount of deposits. There is also no restriction on the withdrawals. Generally bank does not pay any interest on current account. Nowadays, some banks do pay interest on current accounts. Current account is of continuing nature and as such there is no fixed period.
3–Deposits Department Deposits: are the amounts that were deposited in a bank account either in the form of demand deposit or a deposit fund and savings deposits represent an important source of money in traditional banks
4 - Department of clearing Every bank performs the function of paying and collecting. The cheque drawn on other bank by the customers of the bank is collected by the bank for or without charging fee is called clearing To accept transfer, transfer delivery and clearing Cheques from the customers of the branch and to arrange for their collection
To arrange the payment of Cheque drawn on the branch and give Cheque for collection to any other branch. or any other member or sub member of local clearing house. To collect amounts of Cheques drawn on members of local clearing house sent for collection. branches, not represented at the local clearing house.
5 - Department of commercial paper commercial paper is an unsecured promissory note with a fixed maturity of 1 to 270 days. Commercial paper is a money-market security issued (sold) by large banks and corporations to get money to meet short term debt obligations . Commercial paper is usually sold at a discount from face value, and carries higher interest repayment rates than bonds.
6 -section rental lockers Leased to its customers for the deposit of valuables or secret no desire to keep them in their homes or their offices for fear of theft or disclosure of secrets like jewelry, precious and secret documents, letters and so on.
7-Department of Foreign Exchange Foreign Exchange department in a bank has following functions: 1-EXPORTs 2-IMPORTS 3-EXCHANGE DEALINGS 4-REMITTANCES
8 -Department of Letters of GuaranteeThere are two types of letters of guarantee there are : first a contract given by a bank that states that the bank will guarantee a customers business purchases if the customer ends up defaulting Second The other letter of guarantee is issued by a bank when someone writes a call option. It guarantees that the call writer owns the asset in question and promises that the bank will transfer the assets to the purchaser if the call is exercised.
Other departments Department of securities . Department of Securities Department of documentary credits Department of remittances and foreign operations Department of Provident Fund Operations Section Credit department is the most important department in the bank and often in small branches includes letters of guarantee and documentary credits and loans and advances and the Social Fund . Purchases, supplies and maintenance Department of documentary credits
The Roles Played byBanks Due to the important role played by banks as financial intermediaries, banks have emerged as unique institutions enjoying the trust of people. As a financial institution, banks perform the following functions: Financial Intermediary Constituent of the payment system Provider of other financial services
Principles of Banking In order to retain the trust of people, banks have to adhere to certain principles while conducting their business. These principles are listed below: Liquidity Safety Secrecy Profitability Service Quality
Electronic banking (e-banking) What is electronic bank ? E-banking is a result of the growing expectation of banks customer
Advantage of E-banking Operating cost per unit service is lower forthe banks . There is very low incidence of errors. It offers convenience to customers as they are not required to go to the bank’s premises
The customer can obtain funds at any time from ATM machines The credit cards and debit cards enables the obtain discount from retail outlets The customer can easily transfer the funds from one place to another place electronically
Automated Teller Machine [ATM] The introduction of ATMs has provided customers with an option to access the banking services beyond the regular banking hours. An ATM is a device for receiving and dispensing cash, round the clock, and may be placed either inside or outside the bank s premises.
Working of the ATMs For availing the services of an ATM, a customer needs to have an ATM card, debit card, or credit card, as well as Personal Identification Number [PIN]. PIN is issued to the customers along with the card. PIN is a randomly generated sequence of digits. Only the customer knows the PIN and has to secure it.
Core ServicesThe core services provided by ATMs include: Cash withdrawal Cash or cheques deposit Ultra fast cash Funds transfer Balance enquiry Mini statement PIN change Check book requests
Types of ATMs Onsite ATM: is situated either within the branch premises or in very close proximity of the branch. Offsite ATM: is not situated within the branch premises but is located at other places, such as shopping centres, airports, railway and petrol stations
Worksite ATM: is located within the premises of an organization and is generally meant only for the employees of the organization Cash dispenser: Allows only cash withdrawal, balance enquiry, and mini statement requests. Unlike an ATM, CD cannot be used for depositing cash or cheques. Mobile ATM: refers to an ATM that moves in various areas for the customers. Few private banks have introduced ATM on wheels.
Risk Management is the process of measuring or assessing the actual or potential dangers of a particular situation.
Risk Has Two Components Uncertainty. Exposure
Types of Risk Operational. Credit. Reputational
Operational RiskThe risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.
Operational Risks Include Internal Fraud. External Fraud. Employment Practices and Workplace Safety. Clients, Products and Business Practices. Damage to Physical Assets. Business Disruption and System Failures. Execution, Delivery and Process Management.
Credit RiskRisk due to an uncertainty in a counterparty’s ability to meet its obligations in accordance with agreed upon terms.
Credit risks include : Loans Equities Acceptances Letters of credit Interbank transaction options Trade financing FX transaction Futures Swaps
Reputational RiskReputational risk is the potential that negative publicity, whether true or not, will result in loss of customers, severing of corporate affiliations, decrease in revenues and increase in costs.
Benefits of Effective Reputation Management Improving relations with shareholders. Creating a more favorable environment for investment. Recruiting/retaining the best employees. Reducing barriers to development in new markets. Securing premium prices for products. Minimizing threats of litigation.
Success Depends Upon A positive corporate culture. Actively observed policies and procedures. Effective use of technology. Independence of risk management professionals.