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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)