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Banking Services & activities

Chapter 2Main features of commercial and investment bankingDevelopment of financial service conglomeratesWidespread acceptance of Universal bankingMain types of banks engaged in Commercial banking activityProducts and services offered to personal and corporate banking customersNon interest based Islamic banking

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Retail or Personal Banking

Traditional banking vs Modern banking

1. Products and services

2. Income sources

3. Competitive environment

4. Strategic Focus

5. Customer Focus

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Payment Services – enable customers to make payments• Cheques•Credit Transfers •Standing orders•Direct debits•Plastic cards ( debit / credit)•Travellers cheques•Pension payment

Retail banking services

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Deposit and Lending services•Current or checking accounts•Savings deposit•Time savings deposit•Mortgages / housing loans• facilities•Hire purchase•Foreign exchange

Retail banking services

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Online banking services•Internet banking•Phone banking•e-money

Retail banking services

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Retail or Personal Banking

• Financial services provided to consumers • Small scale in nature

• Types of banks offer personal banking– Commercial banks

– Savings banks

– Co-operative banks

– Building societies

– Credit unions

– Finance houses

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• Major financial intermediary in any economy

• Main providers of credit to household & corporate

• Owned by public (public listed)

• Privately owned

• Diversified deposit and lending products

• Exp: Citibank, HSBC, Standard & Chartered

Commercial BanksCommercial Banks

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• Known as Savings & Loans Associations

• Owned by members or shareholders who are depositors and borrowers

• Mainly financed by household deposits and lent retail mortgages

• Business is more diversified nowadays

• Objective to maximise shareholders wealth / profits

• Business focus on retail customers and small business

Savings BanksSavings Banks

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Co-operative banks

Owned by cooperatives

Mutual ownership

Typically offers retail and small business banking services

Recently co-operatives banks merge into big entity

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Building societies

Similar to savings and co-operatives banks

Also known as building societies

Mutual ownership

Primary business retail deposit taking and mortgage lending

Exp: UK Building society Association

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Credit Unions

Another type of mutual deposit institution

Non profit institutions

Owned by members

Members deposits used to offer loans to the members

Growing importance in US and Ireland

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Finance houses

Provide finance to individuals and companies

Consumer, commercial loans

They do not take deposits

Raise funds thru money market and capital market

Sometimes known as hire purchase firms

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Private Banking

Provide range of financial services to

• Wealthy clients

• Individuals & families

• Products offered

- Payment & account facilities

- Market investment related services

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Essence of Private Banking

• Services to individual client requirements

• Anticipation of client needs

• Long term relationship orientation

• Personal contact

• discretion

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Market for Private Banking

Targeted by many large banks

Growing wealth of individuals

Profitability of private banking business

Markets for high net worth individuals

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Best Global Banks

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Corporate Banking

Banking services provided to companies

Relatively to large firms

Difference between business banking and corporate banking

Corporate banking – services provided to large firms

Business banking – services provided to small and large companies.

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Banking services used by small Firms

Payment services

• Cash and cheque deposit facilities

• Cheque writing facilities

• Cheque and clearing company ltd. – process majority of cheques.

• Banks automated clearing system – clearing electronic payments between banks

• Process direct debit, direct credits and standing orders

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Debt finance for small Firms

• Asset based finance – Hire purchase and leasing

• Factoring and invoice discounting – usually for immediate cash

• Shareholders and partners – provide personal finance to the firm

• Trade credit – credit given to firms by trading partners allowing to delay payment.

• Venture capital – long term external equity provided by venture capital firms & provide expertise, experience & contacts to develop business.

• Others – Various government grants for small business

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Banking service for mid-market & large corporate clients

Cash management & transaction services

• Controlled reconciliation accounts – up to date of their net cash positions.

• Account reconciliation services – record of firms cheques that have been paid by bank

• Wholesale facilities – centralised collection service to reduce delay in cheque payments

• Electronic funds transfer – payments to different countries.

• Online corporate advisory and management services

• Others – Various government grants for small business

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Banking service for mid-market & large corporate clients

Credit and other financing

• Short term financing – overdraft, negotiate term loans,

• Commercial paper - An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities.

• Euronotes -

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Foreign exchange and interest rate services

• Forward foreign exchange transactions – future payments

• Currency futures – deliver of foreign currency at future date

• Currency options – contract to exchange currency in future.

• Interest rate options – lock pre-determined interest rate in future

• Interest rate and currency swaps – currency swaps contract to exchange cash flows

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Investment banking

Investments bank subsidiaries of commercial banks

Mainly deals with companies and large institutions

Never deals with retail customers (except private banking)

Function – help companies and governments raise funds in capital market i.e. stocks, debt - bonds etc

Main business – issuing new debt and equity

Providing advisory services on mergers and acquisitions

Corporate restructuring

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Investment banking

• Financial advisory• Underwriting securities issues

( guaranteeing a price a new equity or bond issue wills ell for)

• Trading and investing in securities on behalf of bank or clients

• Asset management - managing wholesale investments

• Other securities services – brokerage, financing services and securities lending.

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Islamic banking

• Non interest principles

• Shariah law prohibits payment of riba ( interest)

• Encourages entrepreneurial activities

• Develop products and services that do not charge or pay interest.

• Depositors earn return instead interest

• Repay loans based on profits generated from the project.

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Islamic banking

• Non interest principles

• Shariah law prohibits payment of riba ( interest)

• Encourages entrepreneurial activities

• Develop products and services that do not charge or pay interest.

• Depositors earn return instead interest

• Repay loans based on profits generated from the project.

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Islamic banking

PROFIT SHARING ARRAGEMENT IS KNOWN AS MUSHARAKAH

Bai' al-Inah (Sale and Buy Back Agreement)

Bai' Bithaman Ajil (Deferred Payment Sale)

Bai muajjal (Credit Sale)

Mudarabah (Profit Sharing)

Murabahah (Cost Plus)

Musawamah

Bai salam

Hibah (gift)

Ijarah (lease./rent/wage)

Qard Hassan ( Good loan)

Sukuk ( Islamic bonds)

Takaful ( Islamic insurance)

Wadiah ( safekeeping)

Wakalah (Agency)