Banking 11: A reserve bank
Introduction to the idea of a reserve bank.
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People & Power – Banking on it – 09 May 07 – Part 1
In this episode of People & Power Max Keiser investigates whether the World Bank really alleviates poverty.
History of Urban Cooperative Banks in India
Introduction
A co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank. Co-operative banks are often created by persons belonging to the same local or professional community or sharing a common interest. Co-operative banks generally provide their members with a wide range of banking and financial services (loans, deposits, banking accounts…). In India co-operative banks are regulated with the RBI and governed by Banking Regulations Act 1949 and Co-operative Societies Act, 1965.
Brief History of Urban Cooperative Banks in India
The Bank was formed in 1872 in the city Manchester in UK. The Co-operative banks in
INDIA have a history of almost 100 years. The Co-operative banks are an important constituent of the Indian Financial System. Co operative Banks in India are registered under the Co-operative Societies Act. The cooperative bank is also regulated by the RBI. They are governed by the Banking Regulations Act 1949 and Banking Laws
(Co-operative Societies) Act, 1965. These banks were conceived as substitutes for money lenders.
The term Urban Co-operative Banks (UCBs), though not formally defined, refers to primary cooperative banks located in urban and semi-urban areas. These banks, till 1996, were allowed to lend money only for non-agricultural purposes. This distinction does not hold today. These banks were traditionally centred around communities, localities work place groups. They essentially lent to small borrowers and businesses. Today, their scope of operations has widened considerably.
The origins of the urban cooperative banking movement in India can be traced to the close of nineteenth century when, inspired by the success of the experiments related to the cooperative movement in Britain and the cooperative credit movement in Germany such societies were set up in India. Cooperative societies are based on the principles of cooperation, – mutual help, democratic decision making and open membership. Cooperatives represented a new and alternative approach to organisaton as against proprietary firms, partnership firms and joint stock companies which represent the dominant form of commercial organisation.
Establishments
Co-operative bank performs all the main banking functions of deposit mobilisation, supply of credit and provision of remittance facilities.
Co-operative Banks belong to the money market as well as to the capital market.
Co-operative Banks provide limited banking products and are functionally specialists in agriculture related products. However, co-operative banks now provide housing loans also.
UCBs provide working capital loans and term loans as well.
The Beginnings
The first known mutual aid society in India was probably the ‘Anyonya Sahakari Mandali’ organised in the erstwhile princely State of Baroda in 1889 under the guidance of Vithal Laxman also known as Bhausaheb Kavthekar. Urban co-operative credit societies, in their formative phase came to be organised on a community basis to meet the consumption oriented credit needs of their members. Salary earners’ societies inculcating habits of thrift and self help played a significant role in popularising the movement, especially amongst the middle class as well as organized labour. From its origins then to today, the thrust of UCBs, historically, has been to mobilise savings from the middle and low income urban groups and purvey credit to their members – many of which belonged to weaker sections.
The enactment of Cooperative Credit Societies Act, 1904, however, gave the real impetus to the movement. The first urban cooperative credit society was registered in Canjeevaram (Kanjivaram) in the erstwhile Madras province in October, 1904. Amongst the prominent credit societies were the Pioneer Urban in Bombay (November 11, 1905), the No.1 Military Accounts Mutual Help Co-operative Credit Society in Poona (January 9, 1906). Cosmos in Poona (January 18, 1906), Gokak Urban (February 15, 1906) and Belgaum Pioneer (February 23, 1906) in the Belgaum district, the Kanakavli-Math Co-operative Credit Society and the Varavade Weavers’ Urban Credit Society (March 13, 1906) in the South Ratnagiri (now Sindhudurg) district. The most prominent amongst the early credit societies was the Bombay Urban Co-operative Credit Society, sponsored by Vithaldas Thackersey and Lallubhai Samaldas established on January 23, 1906..
The Cooperative Credit Societies Act, 1904 was amended in 1912, with a view to broad basing it to enable organisation of non-credit societies. The Maclagan Committee of 1915 was appointed to review their performance and suggest measures for strengthening them. The committee observed that such institutions were eminently suited to cater to the needs of the lower and middle income strata of society and would inculcate the principles of banking amongst the middle classes. The committee also felt that the urban cooperative credit movement was more viable than agricultural credit societies. The recommendations of the Committee went a long way in establishing the urban cooperative credit movement in its own right.
In the present day context, it is of interest to recall that during the banking crisis of 1913-14, when no fewer than 57 joint stock banks collapsed, there was a there was a flight of deposits from joint stock banks to cooperative urban banks. Maclagan Committee chronicled this event thus:
“As a matter of fact, the crisis had a contrary effect, and in most provinces, there was a movement to withdraw deposits from non-cooperatives and place them in cooperative institutions, the distinction between two classes of security being well appreciated and a preference being given to the latter owing partly to the local character and publicity of cooperative institutions but mainly, we think, to the connection of Government with Cooperative movement”.
Under State Purview
The constitutional reforms which led to the passing of the Government of India Act in 1919 transferred the subject of “Cooperation” from Government of India to the Provincial Governments. The Government of Bombay passed the first State Cooperative Societies Act in 1925 “which not only gave the movement its size and shape but was a pace setter of cooperative activities and stressed the basic concept of thrift, self help and mutual aid.” Other States followed. This marked the beginning of the second phase in the history of Cooperative Credit Institutions.
There was the general realization that urban banks have an important role to play in economic construction. This was asserted by a host of committees. The Indian Central Banking Enquiry Committee (1931) felt that urban banks have a duty to help the small business and middle class people. The Mehta-Bhansali Committee (1939), recommended that those societies which had fulfilled the criteria of banking should be allowed to work as banks and recommended an Association for these banks. The Co-operative Planning Committee (1946) went on record to say that urban banks have been the best agencies for small people in whom Joint stock banks are not generally interested. The Rural Banking Enquiry Committee (1950), impressed by the low cost of establishment and operations recommended the establishment of such banks even in places smaller than taluka towns.
The first study of Urban Co-operative Banks was taken up by RBI in the year 1958-59. The Report published in 1961 acknowledged the widespread and financially sound framework of urban co-operative banks; emphasized the need to establish primary urban cooperative banks in new centers and suggested that State Governments lend active support to their development. In 1963, Varde Committee recommended that such banks should be organised at all Urban Centres with a population of 1 lakh or more and not by any single community or caste. The committee introduced the concept of minimum capital requirement and the criteria of population for defining the urban centre where UCBs were incorporated.
Duality of Control
However, concerns regarding the professionalism of urban cooperative banks gave rise to the view that they should be better regulated. Large cooperative banks with paid-up share capital and reserves of Rs.1 lakh were brought under the perview of the Banking Regulation Act 1949 with effect from 1st March, 1966 and within the ambit of the Reserve Bank’s supervision. This marked the beginning of an era of duality of control over these banks. Banking related functions (viz. licensing, area of operations, interest rates etc.) were to be governed by RBI and registration, management, audit and liquidation, etc. governed by State Governments as per the provisions of respective State Acts. In 1968, UCBS were extended the benefits of Deposit Insurance.
Towards the late 1960s there was much debate regarding the promotion of the small scale industries. UCBs came to be seen as important players in this context. The Working Group on Industrial Financing through Co-operative Banks, (1968 known as Damry Group) attempted to broaden the scope of activities of urban co-operative banks by recommending that these banks should finance the small and cottage industries. This was reiterated by the Banking Commisssion (1969).
The Madhavdas Committee (1979) evaluated the role played by urban co-operative banks in greater details and drew a roadmap for their future role recommending support from RBI and Government in the establishment of such banks in backward areas and prescribing viability standards.
The Hate Working Group (1981) desired better utilisation of banks’ surplus funds and that the percentage of the Cash Reserve Ratio (CRR) & the Statutory
Bankers Banks | The Role of Central Banks in Banking Crises
CENTRAL BANKS are relatively another inventions. An American President (Andrew Jackson) even cancelled its country’s central stack in the nineteenth century for the reason that he did not think with the aim of it was very of great consequence. But things maintain misused since. Central banks at the moment are the nearly everyone of great consequence element of the economic systems of nearly everyone countries of the humankind.
Central banks are a bizarre hybrids. Some of their functions are identical to the functions of regular, advertisement banks. Other functions are unique to the central stack. On some functions it has an absolute permissible monopoly.
CENTRAL BANKS take deposits from other banks and, in some luggage, from foreign governments which deposit their foreign replace and gold coffers in place of charge (for illustration, with the Federal Reserve Bank of the USA). The Central Bank invests the foreign replace coffers of the terrain while demanding to retain an investment portfolio comparable to the trade structure of its client – the state. The Central stack besides holds against the gold coffers of the terrain. Most central banks maintain lately tried to contract clear of their gold, due to its continually declining prices. Since the gold is registered in their books in historical morals, central banks are viewing a beautiful profit on this line of pursuit. Central banks (especially the American one) besides participate in of great consequence, international negotiations. If they resolve not resolve so precisely – they exert influence behind the scenes. The German Bundesbank next to dictated Germany’s perception in the negotiations leading to the Maastricht treaty. It strained the hands of its co-signatories to be consistent with to strict provisions of accord into the Euro single currency project. The Bunbdesbank demanded with the aim of a country’s scaling-down be thoroughly settled (low debt ratios, low inflation) by it is expected as part of the Euro. It is an irony of history with the aim of Germany itself is not eligible under these criteria and cannot be expected as a organ in the mace whose rules it has assisted to articulate.
But all these constitute a secondary and marginal portion of a CENTRAL BANKS activities.
The highest function of a contemporary central stack is the monitoring and decree of consequence tax in the scaling-down. The central stack does this by changing the consequence tax with the aim of it charges on money with the aim of it lends to the banking organization through its “discount windows”. Interest tax is invented to influence the level of lucrative pursuit in the scaling-down. This invented link has not plainly proven by lucrative explore. Also, near habitually is a delay sandwiched between the alteration of consequence tax and the foreseen effect on the scaling-down. This makes assessment of the consequence rate document challenging. Still, central banks wear out consequence tax to fine pitch the scaling-down. Higher consequence tax – lesser lucrative pursuit and lesser inflation. The reverse is besides invented to be factual. Even shifts of a quarter of a percentage central theme are sufficient to send out the routine exchanges plummeting mutually with the bond markets. Clothed in 1994 a long designate trend of increase in intensity in consequence rate commenced in the USA, doubling consequence tax from 3 to 6 percent. Investors in the bond markets lost 1 trillion (=1000 billion!) USD in 1 time. Even at the moment, currency traders all around the humankind dread the decisions of the Bundesbank and sit with their eyes glued to the trading screen on days in which announcements are likely.
Interest tax is solitary the hottest craze. Prior to this – and under the influence of the Chicago train of economics – central banks used to television and manipulate money supply aggregates. Simply locate, they would retail bonds to the shared (and, like so absorb liquid channel, money) – or good buy from the shared (and, like so, inject liquidity). Otherwise, they would contain the amount of printed money and limit the government’s capability to borrow. Even previous to with the aim of form near was a extensive belief in the effectiveness of manipulating replace tax. This was especially factual someplace replace controls were still being implemented and the currency was not fully convertible. Britain distant its replace controls solitary as last-minute as 1979. The USD was pegged to a (gold) standard (and, like so not really without restraint tradable) as last-minute as 1971. Free flows of currencies are a relatively another gadget and their long absence reflects this broad held false notion of central banks. Nowadays, replace tax are considered to be a “soft” monetary instrument and are rarely used by central banks. The latter pick up again, though, to intervene in the trading of currencies in the international and domestic markets habitually to rebuff avail and while down their credibility in the process. Ever since the humiliating failure in implementing the infamous Louvre pact in 1985 currency intervention is considered to be a somewhat rusty relic of old ways of thinking.
Central banks are thickly enmeshed in the very fabric of the advertisement banking organization. They run some indispensable services in place of the latter. Clothed in nearly everyone countries, interbank payments pass through the central stack or through a clearance organ which is one way or another linked or reports to the central stack. All major foreign replace transactions pass through – and, in many countries, still ought to be accepted by – the central stack. Central banks control banks, licence their owners, supervise their operations, keenly observes their liquidity. The central stack is the lender of carry on resort in luggage of ruin or illiquidity.
The frequent claims of central banks all on the humankind with the aim of they were surprised by a banking calamity looks, therefore, hesitant by the side of superlative. No central stack can say with the aim of it had rebuff first cautioning cipher, or rebuff access to all the data – and keep a straight look while aphorism so. Impending banking crises allot barred cipher long by they blow up. These cipher should to be detected by a modestly managed central stack. Only major neglect may well explain a startle on behalf of a central stack.
One really sign is the quantity of time with the aim of a stack chooses to borrow using the disregard windows. Another is if it offers consequence tax which are way beyond the tax to be had by other financing institutions. There are may well more cipher and central banks ought to be adept by the side of sense them.
This important involvement is not some degree of to the collection and analysis of data. A central stack – by the very definition of its functions – sets the tone to all other banks in the scaling-down. By shifting its policies (for illustration: By changing its reserve requirements) it can motivation banks to ruin or create bubble economies which are bound to burst. If it were not in place of the stress-free and discounted money provided by the Bank of Japan in the eighties – the routine and real estate markets would not maintain inflated to the area with the aim of they maintain. Subsequently, it was the same stack (under a diverse Governor) with the aim of tightened the reins of belief – and pierced both bubble markets.
The same muddle up was recurring in 1992-3 in Israel – and with the same penalty.
This specifically is why central banks, in my consider, ought to not supervise the banking organization.
When asked to supervise the banking organization – central banks are really asked to pull report on their ancient performance, their policies and their vigilance in the ancient. Let me explain this statement:
Clothed in nearly everyone countries in the humankind, stack supervision is a heavy-weight field inside the central stack. It samples banks, on a periodic basis. Then, it analyses their books meticulously and imposes rules of conduct and sanctions someplace basic. But the role of central banks in determining the physical condition, behaviour and operational modes of advertisement banks is so chief with the aim of it is highly undesirable in place of a central stack to supervise the banks. While I maintain thought, supervision by a central stack channel with the aim of it has to carp itself, its own policies and the way with the aim of they were enforced and besides the results of ancient supervision. Central banks are really asked to cast themselves in the suspect role of evenhanded saints.
A another trend is to locate the supervision of banks under a diverse “sponsor” and to egg on a checks and balances organization, where the central stack, its policies and operations are indirectly criticized by the stack supervision. This is the way it is in Switzerland and – with the exception of the Jewish money which was deposited in Switzerland in no way to be returned to its owners – the Swiss banking organization is tremendously well regulated and well supervised.
We differentiate sandwiched between two types of central stack: The self-governing and the semi-autonomous.
The self-governing stack is politically and financially separate. Its Governor is appointed in place of a episode which is longer than the periods of the sitting nominated politicians, so with the aim of he will not be subject matter to taking sides pressures. Its plan is not provided by the legislature or by the executive arm. It is self sustaining: It runs itself as a corporation would. Its profits are used in leaner years in which it loses money (though in place of a central stack to lose
A Study the Strategies Issue in Indian Banking Sector
1.0 INDIAN BANKING SYSTEM
A banking company in India has been defined in the banking companiesact,1949.as one “which transacts the business of banking which means the accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise.” Most of the activities a Bank performs are derived from the above definition. In addition, Banks are allowed to perform certain activities which are ancillary to this business of accepting deposits and lending. A bank’s relationship with the public, therefore, revolves around accepting deposits and lending money. Another activity which is assuming increasing importance is transfer of money – both domestic and foreign – from one place to another. This activity is generally known as “remittance business” in banking parlance. The so called forex (foreign exchange) business is largely a part of remittance albeit it involves buying and selling of foreign currencies.
Functioning of a Bank is among the more complicated of corporate operations. Since Banking involves dealing directly with money, governments in most countries regulate this sector rather stringently. In India, the regulation traditionally has been very strict and in the opinion of certain quarters, responsible for the present condition of banks, where NPAs are of a very high order. The process of financial reforms, which started in 1991, has cleared the cobwebs somewhat but a lot remains to be done. The multiplicity of policy and regulations that a Bank has to work with makes its operations even more complicated, sometimes bordering on illogical. This section, which is also intended for banking professional, attempts to give an overview of the functions in as simple manner as possible. Banking Regulation Act of India, 1949 defines Banking as “accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheques, draft, and order or otherwise.”
KINDS OF BANKS
Financial requirements in a modern economy are of a diverse nature, distinctive variety and large magnitude. Hence, different types of banks have been instituted to cater to the varying needs of the community. Banks in the organized sector can be classified in to the following
1. COMMERCIAL BANKS:-
Commercial banks are joint stock companies dealing in money and credit. In India, however there is a mixed banking system, prior to July 1969, all the commercial banks-73 scheduled and 26 non-scheduled banks, except the state bank of India and its subsidiaries-were under the control of private sector. On July 19, 1969, however, 14mejor commercial banks with deposits of over 50 Corers were nationalized. In April 1980, another six commercial banks of high standing were taken over by the government.
2. CO-OPERATIVE BANKS:-
Co-operative banks are a group of financial institutions organized under the provisions of the Co-operative societies Act of the states. The main objective of co-operative banks is to provide cheap credits to their members. They are based on the principle of self-reliance and mutual co-operation. Co-operative banking system in India has the shape of a pyramid a three tier structure, constituted by:
3. SPECIALIZED BANKS:-
There are specialized forms of banks catering to some special needs with this unique nature of activities. Foreign exchange banks, Industrial banks, Development banks, Land development banks, Exim bank are important.
4. CENTRAL BANK:-
A central bank is the apex financial institution in the banking and financial system
of a country. It is regarded as the highest monetary authority in the country. It acts as the leader of the money market. It supervises, control and regulates the activities of the commercial banks. It is a service oriented financial institution. India’s central bank is the reserve bank of India established in 1935.and it was nationalized in 1949.It is free from parliamentary control.
ROLE OF BANKS IN A DEVELOPING ECONOMY
Banks play a very important and dynamic role in the economic life of every modern state. A study of the economic history of western country shows that without the evolution of commercial banks in the 18th and 19th centuries, the industrial revolution would not have taken place in Europe. The economic importance of commercial banks to the developing countries may be viewed thus:
1. PROMOTING CAPITAL FORMATION:-
A developing economy needs a high rate of capital formation to accelerate the tempo of economic development, but the rate of capital formation depends upon the rate of saving. Unfortunately, in underdeveloped countries, saving is very low. Banks afford facilities for saving and, thus encourage the habits of thrift and industry in the community. They mobilize the ideal and dormant capital of the country and make it available for productive purposes.
2. ENCOURAGING INNOVATION:-
Innovation is another factor responsible for economic development. The entrepreneur in innovation is largely dependent on the manner in which bank credit is allocated and utilized in the process of economic growth. Bank credit enables entrepreneurs to innovate and invest, and thus uplift economic activity and progress.
3. MONETSATION:-
Banks are the manufactures of money and they allow many to play its role freely in the economy. Banks monetize debts and also assist the backward subsistence sector of the rural economy by extending their branches in to the rural areas. They must be replaced by the modern commercial bank’s branches.
4. INFLUENCE ECONOMIC ACTIVITY
Banks are in a position to influence economic activity in a country by their influence on the rate interest. They can influence the rate of interest in the money market through its supply of funds. Banks may follow a cheap money policy with low interest rates which will tend to stimulate economic activity.
5. FACILITATOR OF MONETARY POLICY
Thus monetary policy of a country should be conductive to economic development. But a well-developed banking system is on essential pre-condition to the effective implementation of monetary policy. Under-developed countries cannot afford to ignore this fact.
PRINCIPLES OF BANK LENDING POLICIES
The main business of banking company is to grant loans and advances to traders
as well as commercial and industrial institutes. The most important use of banks money is lending. Yet, there are risks in lending. So the banks follow certain principles to minimize the risk:
1. SAFETY
Normally the banker uses the money of depositors in granting loans and advances. So first of all initially the banker while granting loans should think first of the safety of depositor’s money. The purpose behind the safety is to see the financial position of the borrower whether he can pay the debt as well as interest easily.
2. LIQUIDITY
It is a legal duty of a banker to pay on demand the total deposited money to the depositor. So the banker has to keep certain percent cash of the total deposits on hand. Moreover the bank grants loan. It is also for the addition of short term or productive capital. Such type of lending is recovered on demand.
3. PROFITABILITY
Commercial banking is profit earning institutes. Nationalized banks are also not an exception. They should have planning of deposits in a profitability way pay more interest to the depositors and more salary to the employees. Moreover the banker can also incur business cost and can give more benefits to customer.
4. PURPOSE OF LOAN
Banks never lend or advance for any type of purpose. The banks grant loans and advances for the safety of its wealth, and certainty of recovery of loan and the bank lends only for productive purposes. For example, the bank gives such loan for the requirement for unproductive purposes.
5. PRINCIPLE OF DIVERSIFICATION OF RISKS
While lending loans or advances the banks normally keep such securities and assets as a supports so that lending may be safe and secured. Suppose, any particular state is hit by disasters but the bank shall get benefits from the lending to another states units. Thus, he effect on the entire business of banking is reduced.
OBJECTIVES OF THE STUDY
The following are the main objective of the studies.
Banking 3: Fractional Reserve Banking
Fractional reserve banking and the multiplier effect. Introduction to the money supply.
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Comparative study of non interest income of the Indian Banking Sector, a study of non interest income
Overview Of Banking Project
Title: Comparative study of non interest income of the Indian Banking Sector
Submitted by:
Gaurav Sharma
BBA(Finance, Gold Medal),MBA(Finance)
gksindia1@gmail.com
Index
Introduction 1
Methodology 3
SBI& Associates 5
Nationalized banks(Public sector banks) 10
Private sector banks 15
Foreign banks 20
Findings 25
Conclusion 26
Literature review 26
References 26
Introduction
There are two broad sources of bank revenues:
Interest income Non-interest income.
Interest income is generated from what is known as “the spread.” The spread is the difference between the interest a bank earns on loans extended to customers, corporate etc and the interest paid to depositors for the use of their money. It is also earned from any securities that the banks own, such as treasury bills or bonds.
Non-interest income is earned by providing a variety of services, such as trading of securities, assisting companies to issue new equity financing, securities commissions and wealth management, sale of land, building, profit and loss on revaluation of assets etc.
As compared to the developed world, the Indian banking sector, apart from the relying on traditional sources of revenue like loan making are also focusing on the activities that generate fee income, service charges, trading revenue, and other types of noninterest income. While noninterest income plays an important role in banking revenues in the developed world, its contribution to the total income of the Indian banking was 25% as on 31st March 2008.
Components of non interest income
The major components of non interest income in our banking sector are as follows:
Commission/ exchange and brokerage Profit or loss on Sale of investments Profit or loss Sale of land& buildings Profit/loss on revaluation of investments Profit or loss on Exchange transaction etc. Miscellaneous income source which includes advisory, trading etc.
Share of various sources of non interest income
The share of various sources of non interest income to the total income of banking sector as on 31st march 2008 is shown in the pie chart below:
In the above figure we find that the highest contribution to the non interest income has been of the commission followed by sale of investments, miscellaneous income and exchange transactions.
Movements of interest and non interest income of the Indian banking sector (1994-2004)
Methodology
Under this I have done a comparative study of non interest income of the Indian banking sector by classifying banks into four categories:
SBI and associates which includes State bank of India, State bank of Bikaner and Jaipur, State bank of Hyderabad, State bank of Mysore, State bank of Patiala, State bank of Saurashtra and State bank of Travancore. Nationalized banks: (Public sector banks) which includes Allahabad bank, Andhra bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Canara bank, Central Bank of India, Corporation bank, Dena bank, Indian bank, Indian Overseas bank, New bank of India, Oriental bank of Commerce, Punjab &Sind bank, Punjab National Bank, Syndicate bank, UCO bank, Union bank of India, United bank of India, Vijaya bank.( Total 19) Other scheduled banks: (Private sector banks) which includes Development credit bank, Times bank, Axis bank, Indus land Bank, ICICI bank, Bank of Rajasthan, Catholic Syrian bank, Lakshmi Vilas bank, HDFC bank, Centurion bank, Bank of Punjab, Tamilnad Mercantile Bank, Federal bank, Punjab Cooperative bank, Lord Krishna bank, ING Vyasya bank, IDBI bank, Dhanlakshmi bank.(total 18 banks) Foreign banks: which includes Barclays bank, ING bank, ABN Amro bank, Bank of America, BNP Paribas, Standard Chartered bank, DBS bank ,Citibank, HSBC, Deutsche bank, Mashreq bank, Bank of Nova Scotia, Bank of Bahrain & Kuwait, American Express bank (total 14 banks)
The banks used under private sector and foreign sector category are reflective of major portion of their respective market/category. Moreover data was not available for other banks within that category.
The period of study taken was 11 years i.e. 1994-2004. The period of study was taken as 11 years because, for the above mentioned period the data was available for all the bank and to ensure uniformity.
Objectives of the study:
To analyze the growth of non interest income as a source of revenue for the Indian banking sector over a period of 11 years (1994-2004). To analyze the contribution of major components of the non interest income over a period of 11 years (1994-2004). To find out statistically that how much of the profits of the banking sector over a period of 11 years is determined by non interest income and interest income. To find out statistically the contribution of various components of Non interest income towards the profits of the bank over a period of 11 years. To find out the contribution of interest and non interest income towards the total income in each of the 11 years (1994-04). To find out the correlation between the non interest income and the total income of the banking sector over a period of 11 years. To find out the reasons for the increase in the non interest income and what are the challenges involved to generate non interest income.
Tool used:
Data regarding the interest income, non interest income, profits, various components of non interest income, total income of the banking sector has been collected from the RBI website.
To find out the influence of interest and non interest income on the profits of the banking sector, I have made use of multiple regression tool in E-views software.
The interest and non interest income were independent variable and the profits of the bank was the dependent variable
Two Multiple Regression equation was used for the study:
Equation 1
Profits=a+b1*interest income+b2*noninterest income
Where b1 and b2 were coefficient and a is the intercept term which shows the profits of the bank had been c if interest and non interest income had been 0
Equation 2
Profits: a+b1*commission+b2*profit/loss on sale of land+ profit/loss on sale of investment+ profit/loss on revaluation of investment +profit/loss on exchange transactions+ Miscellaneous income
Where profits was the dependent variable and various components of non interest income were independent variable and a is the constant term
The equation 2 was used to find out the influence of various components of non interest income on the profits of the bank.
SBI and Associates
(Rs‘000)
In the above table we see the following:
Column1: Average
Column 2: Year
Column 3: Other income or the non interest income of the bank
Column 4: Commission, exchange and brokerage
Column 5: Net profit/loss on sale of investment
Column6: Net profit/loss on revaluation of investment
Column7: Net profit/loss on sale of land, building and other assets
Column 8: Net profit/ loss on exchange transactions
Column 9: Miscellaneous income
Column 10: Total income of the bank
Column 11: Profit/loss of the bank
Column
E- BANKING ? RECENT TRENDS IN INDIA
E- BANKING – RECENT TRENDS IN INDIA
INTRODUCTION
Initially, the Indian banking system was domestically oriented at the time of nationalization in 1969. National policy objectives where the guiding force and banks were primarily involved in mobilizing domestic savings, lending funds to specific sectors of the economy and raising resources for financing public deficits. Technology in Indian banking has evolved substantially from the days of back office automation today’s online, centralized and integrated solutions. Once cannot think of ATM, Internet, mobile and phone banking or call centre services without the help of technology?. However, the irony is that most of those products have more of technology and less of banking. Let us look of how banking has changed as a business over the last one decade.
This paper begins with the definition of e- banking, Internet Banking, Mobile banking, ATMs, Debit card and Credit card and electronic fund transfer, Anywhere banking and product and services.
ELECTRONIC BANKING (E-BANKING)
It is an umbrella term for the process by which a customer may perform banking transactions electronically without visiting a brick-and-mortar institution. The following terms all refer to one form or another of electronic banking: personal computer (PC) banking, Internet banking, virtual banking, online banking, home banking, remote electronic banking, and phone banking. PC banking and Internet or online banking are the most frequently used designations. It should be noted, however, that the terms used to describe the various types of electronic banking are often used interchangeably.
E-banking are the buzzwords in the global commercial activities today E-banking or electronic banking refers to conducting banking activities with the help of information technology and computers.
E-banking is a mix of services which include Internet banking, Mobile banking, ATM kiosks, Fund Transfer System, Real Time Gross Settlement (payment & settlement system), Credit/Debit/Smart/Kisan Cards, Cash management services, and Data warehousing, Operational data for MIS and Customer Relationship Management. Latest innovations in technology like broadband transmission, internet access via mobiles (GSM) and WebTV will further provide impetus to digital revolution.
Further, banks are looking forward to scan the image of a cheque which can be zapped to another bank, into the depository and back to customer’s bank.(BSO,2006) Banking transactions can be carried out 24 hours a day using these methods. In fact concept of Anytime, Anywhere banking is making it easy for customers to access their money more conveniently. It has been established that increasing the role of technology in a service organization can serve to reduce costs and often improve service reliability (Lee, 2002).
INTERNET BANKING
The Internet banking is changing the banking industry and is having the major effects on banking relationships. Even the Morgan Stanley Dean Witter Internet research emphasized that Web is more important for retail financial services than for many other industries. Internet banking involves use of Internet for delivery of banking products & services. It falls into four main categories, from Level 1 – minimum functionality sites that offer only access to deposit account data – to Level 4 sites – highly sophisticated offerings enabling integrated sales of additional products and access to other financial services- such as investment and insurance. In other words a successful Internet banking solution offers
ü Exceptional rates on Savings, CDs, and IRAs
ü Checking with no monthly fee, free bill payment and rebates on ATM surcharges
Credit cards with low rates
ü Easy online applications for all accounts, including personal loans and mortgages
ü 24 hour account access
ü Quality customer service with personal attention
Internet banking, sometimes called online banking, is an outgrowth of PC banking. Internet banking uses the Internet as the delivery channel by which to conduct banking activity, for example, transferring funds, paying bills, viewing checking and savings account balances, paying mortgages, and purchasing financial instruments and certificates of deposit. An Internet banking customer accesses his or her accounts from a browser— software that runs Internet banking programs resident on the bank’s World Wide Web server, not on the user’s PC. NetBanker defines a ” true Internet bank” as one that provides account balances and some transactional capabilities to retail customers over the World Wide Web. Internet banks are also known as virtual, cyber, net, interactive, or web banks. To date, more banks have established an advertising presence on the Internet— primarily in the form of informational or interactive web sites—than have created transactional web sites. However, a number of Banks that do not yet offer transactional Internet banking services have indicated on their web sites that they will offer such banking activities in the future. Because Internet banks generally have lower operational and transactional costs than do traditional brick-and-mortar banks, they are often able to offer low-cost checking and high-yield Certificates of deposit. Internet banking is not limited to a physical site; some Internet banks exist without physical branches, for example, Tele bank (Arlington, Virginia) and Bank net (UK). Further, in some cases, web banks are not restricted to conducting transactions within national borders and have the ability to make transactions involving large amounts of assets instantaneously. According to industry analysts, electronic banking provides a variety of attractive possibilities for remote account access, including:
Availability of inquiry and transaction services around the clock;
worldwide connectivity;
Easy access to transaction data, both recent and historical; and
“Direct customer control of international movement of funds without intermediation of financial institutions in customer’s jurisdiction.”
Main Concerns in Internet Banking
In a survey conducted by the Online Banking Association, member institutions rated security as the most important issue of online banking. There is a dual requirement to protect customers’ privacy and protect against fraud. Banking Securely: Online Banking via the World Wide Web provides an overview of Internet commerce and how one company handles secure banking for its financial institution clients and their customers. Some basic information on the transmission of confidential data is presented in Security and Encryption on the Web. PC Magazine Online also offers a primer: How Encryption Works. A multi-layered security architecture comprising firewalls, filtering routers, encryption and digital certification ensures that your account information is protected from unauthorized access:
Firewalls and filtering routers ensure that only the legitimate Internet users are allowed to access the system.
Encryption techniques used by the bank (including the sophisticated public key encryption) would ensure that privacy of data flowing between the browser and the Infinity system is protected.
Digital certification procedures provide the assurance that the data you receive is from the Infinity system.
INTERNET BANKING SERVICES
Save your time and effort with CIB Internet banking
View
Your own accounts and your related ones
Credit and Debit cards
Funds
Time deposit, Saving certificates
Loans
Treasury bonds
Latest transactions of current month
View, print and save your monthly statements (since year 2004)
Transfer
Between your accounts
To another CIB account (Digital signature required)
To your credit card
To another CIB credit card (Digital Signature required)
To any charity you choose as a fund raising
Request
Checkbook
To change your mailing address
To inquire or complain
To add related account (Power of attorney, parent/child or account with different customer number)
To manage supplementary cards
To dispute credit card
To make External transfer ( Digital signature required )
Digital Signature registration
Also
Stop your credit card
Subscribe in Alerts service (SMS /E mail)
Download CIB forms
AUTOMATED TELLER MACHINES (ATMS)
The cash machine or automated teller machine (ATM) as it is more formerly non is the most visible and perhaps most revolutionary element of virtual banking revolution. ATM are self service vendor machine that help the banks to provide round the clock banking services to their customers at convenient places without visiting to the bank premises. They enable the banks to transact more business by offering various services in cost effective way on one side and to get more customer satisfaction on the other. To avail the ATM services customers are provided with ATM card, which is a small plastic card with magnetic strip, containing information about the name of bank, name of the customer, card number, validity period and signature panel. The magnetic strip contains information about the customer which enables the banks to verify ihe identity when the card is inserted at the slot provided in ATM.
The following
Maintenance of Deposit accounts in Coperative Urban Banks
Maintenance of Deposit Accounts
Introduction
Acceptance of deposits and maintenance of deposit accounts is the core activity in any bank. The very basic legal interpretation of the word ‘banking” as defined in the Banking Regulation Act, 1949 means accepting deposits of money, for the purpose of lending or investment, from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. Thus, deposits are the major resource and mainstay of a bank and the main objective of a bank is to mobilise adequate deposits. Various instructions, guidelines, etc. issued from time to time to primary (urban) co-operative banks in regard to opening and conduct/monitoring of deposit accounts are detailed hereunder.
Opening of Deposit Accounts
Introduction of New Depositors
A large number of frauds are perpetrated in banks mainly through opening of accounts in fictitious names, irregular payment of cheques, manipulation of accounts and unauthorised operations in accounts. Considering the fact that opening of an account is the first entry point for any person to become a customer of the bank, utmost vigilance in opening of accounts and operations in the accounts is called for. Even the legal protection under the Negotiable Instruments Act, 1881 which governs payment and collection of negotiable instruments and provides certain rights, liabilities (obligations) and protections to the issuers/drawers, payees, endorsees, drawees, collecting banks and paying/drawee banks, will be available, only if the bank makes the payment or receives payment of a cheque/draft payable to order in due course. Any payment or collection of a negotiable instrument is deemed in due course only when the bank acts in good faith and without negligence and does so for a customer.
Necessity of Introduction
(i) Introduction of an account is obtained not merely as a formality to get protection under section 131 of the Negotiable Instruments Act 1881, but also to enable proper identification of the person opening an account, so that it would be possible, to trace the person later when required.
(ii) It is necessary for banks to know their customers and to put in place proper systems and procedures. The practice of obtaining proper introduction should not be treated as a mere formality, but as a measure of safe-guard against opening of accounts by undesirable persons or in fictitious names with a view, inter alia, to deposit unaccounted money.
2.1.2 Proper Introduction
(i) The account should not be normally opened without a meeting between the bank official and the customer.
(ii) The banks should invariably insist upon prospective depositors to furnish introduction (from either any of the existing account holders or a respectable member of the local community known to the bank or the bank’s staff) for opening not only current and cheque operated savings bank accounts but also all deposit accounts including call, short-term and fixed deposits. The banks should take steps to satisfy themselves about the identity of their depositors.
(iii) The role of the introducers should be made more specific. It is not sufficient to state that he has known the person for a sufficient length of time.
(iv) The person giving introduction should be of some standing and have an account with the bank for at least six months to ensure that the accounts are not opened on the introduction of new account holders or persons having small and marginal balances. The interval will also enable the bank to monitor the account closely to satisfy itself that the transactions in the introducer’s account are satisfactory.
(v) Branch Managers/staff members should be discouraged from giving the introduction.
(vi) Where the party is not able to provide an introduction satisfactorily, it must be made incumbent upon him to provide sufficient proof of his antecedents before the account is allowed to be opened.
(vii) Customers of good standing should be educated to realise the implications of introducing an account without knowing the new parties.
(viii) In the case of a customer who will be getting credits, say by way of salary, and making payments by cheques to government/ semi-government agencies/individuals, simple introduction along with photograph, may suffice.
(ix) In case of accounts, which are likely to be used for putting through remittance transactions and for collection of cheques of substantial amounts besides business payments, deeper enquiries would be necessary on the part of the bank.
2.1.3 Introduction in Absentia
(i) When an introducer does not personally call at the branch to introduce an account, the fact of having introduced a new account should be got confirmed from him in writing.
(ii) In cases where the account opening forms bear ‘the signatures of manager/officials of other branches of the bank for introduction, apart from verifying the signatures of such introducers with the specimen signatures available on record, the branch concerned should obtain written confirmation of the introduction from the officials of the branches who introduced the account. Till such time the confirmation is received, the banks should not collect cheques/draft through the newly opened accounts.
(iii) The same procedures should be adopted in cases where the introducers of accounts are not officials of the bank and do not personally call at the bank to introduce an account.
(iv) The bank should send a letter by post both to the customer and the introducer and seek their confirmation for opening the account/giving introduction. Cheque book may be issued after receipt of confirmation from both.
Photographs of Account Holders
Mandatory Obtention of Photographs
(i) The banks should obtain photographs of the depositors/account holders who are authorised to operate the accounts at the time of opening of all new accounts. The customers’ photographs should be recent and the cost of photographs to be affixed on the account opening forms may be borne by the customers.
(ii) Only one set of photographs need be obtained and separate photographs should not be obtained for each category of deposit. The applications for different types of deposit accounts should be properly referenced.
(iii) Photographs of persons authorised to operate the deposit accounts viz. S.B. and Current accounts should be obtained. In case of other deposits viz. Fixed/Recurring, Cumulative etc. photographs of all depositors in whose names the deposit receipt stands may be obtained, except in the case of deposits in the name of minor, where guardians’ photographs could be obtained.
(iv) The banks should also obtain photographs of ‘Pardanashin” Women.
(v) The banks should also obtain photographs of NRE, NRO, FCNR account holders.
(vi) For operations in the accounts, banks should not ordinarily insist on the presence of account holder unless the circumstances so warrant. Photographs cannot be a substitute for specimen signatures.
2.2.2 Exceptions
(i) The photographs need not be insisted upon by banks in the under noted cases:
(a) new savings bank accounts where cheque facility is not provided; and
(b) fixed and other term deposits upto an amount and inclusive of Rs. 10,000/-
(ii) However, the banks should take usual and necessary precautions/safeguards in regard to opening and operation of these accounts.
(iii) Where a depositor has a term deposit of less than Rs. 10,000/- but he/she is also having a savings bank account with cheque facility or a current account, it will be necessary to have the photograph of the depositor.
(iv) Banks, local authorities and government departments (excluding public sector undertakings or quasi-government bodies) are exempt from the requirement of photographs.
(v) The photographs need not be obtained for borrowal accounts viz. Cash Credit. Overdrafts accounts, etc.
(vi) The banks may not insist for photographs in case of accounts of staff members only (Single/Joint).
Address of Account Holders
It is not proper for banks even unwittingly to allow themselves to be utilised by unscrupulous persons for the purpose of tax evasion. Therefore, banks should obtain full and complete address of depositors and record these in the books and the account opening forms so that the parties could be traced without difficulty, in case of need. Independent confirmation of the address of the account holder should be obtained in all cases.
Other Safeguards
PAN/GIR Number
The banks are required to obtain PAN/GIR number of a depositor opening an account with an initial deposit of Rs.50,000/- and above.
Authorisation
The opening of new accounts should be authorised only by the Branch Manager or by the Officer-in-Charge of the concerned deposit accounts department at bigger branches.
Completion of Formalities
The banks should ensure that all account opening formalities are
Banking 2: A bank’s income statement
Introduction to the income statement of a bank (and to income statements in general).
Video Rating: 4 / 5
Banking Restructuring ? Lessons for Georgia
Restructuring: concept, goal and contest. Termini restructuring is of Latin origin and means changing-improvement of the structure of some object or system, i.e. its forms and consistence (morphology). It basically means unchanged character of directions of its functioning. They use restructuring from large plan in the economical texts mostly with debts, including foreign ones, payments and taxation (trade) balance, corporation sector of the economy and of separate enterprises, of banking system entirely and separate banks (other credit organizations).
They define “restructuring” in legislation in the following way: restructuring of credit organization is a complex of activities directed towards eradication of financial fluctuations of the organization and recovering its pay abilities or towards realization of liquidity of this organization. This definition doesn’t make needed opinion about the occasion to be discussed, as, in the first place, here they mean only separate credit organizations and not banking system itself, and, second, it has very technical character and mixes the essence and contest of the process of restructuring with the activities, which may (or must) be realized in this process.
Thus, there is not common, widely excepted definition of restructuring, though majority agrees with the idea, that we must consider restructuring to be readjustment of (cure) of banking system and its taking out of the crisis phase, also its returning to the conditions of good labor abilities. They sometimes use termini of “stabilization of banking system”, but we consider it to be comfortable. The fact is, that achieving stability may be provided in various ways, including the one of liquidating whole system. There is another point of view, that they consider restructuring to be the process for overcoming difficulties, appeared during the crisis. This point of view is not quite fluent.
Thinking of the essence of the affair and not its definition, hen we must consider in reconstruction of banking system as a process – totality of decisions and actions. Its basic elements are:
eradication and minimization of negative influence of bad macro-economic, political and other common factors upon situation and perspectives of functioning of banking system; improving systemic organization (structure, kinds, types) of totality of credit organizations, creation of conditions for effective and civil competition among them; improving legislative base for mutual-advantage collaboration and organization-economic mechanisms among credit organizations and their clients; increasing quality of managing entire banking system and its separate elements; financial cure of separate banks and other credit organizations; effective (with minimal social experiences) liquidation of vital credit organizations.
Foreseeing these elements, we can state following definition: restructuring banking system in managed process of its global readjustment (improvement), supported by changing in industrial, cash, taxation, budgetary and information policy, also in the policy of the banks themselves, and which is directed towards formation of banking system adequate to effective, trustful and dynamically developed modern requests.
According to this definition, restructuring effective, stabile and healthy banking system in not needed (though, it is possible to improve or reform it). Thus, restructuring is a cure (curing something that is not healthy), i.e. restructuring may be understood and must be understood to be the process, with the help of which banking system of concrete country transit to the new level of development. It is also evident, that restructuring is curing of such systems, which are in crises and can not get out of it without help. Finally, from the point of restructuring (privately displaying necessity of financial curing) we must discuss absolutely every bank. In this case, restructuring, as a process of readjustment, seems to have its own instrumentation, which will not be bounded only with the instruments of ordinal procedure banking management?
According to the mentioned above, we can make main goal of restructuring process of banking system – its recovery and taking its movement to the relatively new trajectory, at which it already gains earlier lost potential of progressive development and becomes adequate to the real sector of the economy again.
In relation with this, we must pay attention to the following principle requests towards the context of the process to be discussed: activities provided in relation to the restructuring will be profitable only in case, if we foresee not only reasons of banking crisis, but also define those fundamental; defects of economical relations, which make banking system viable at the modern stage; restructuring of banking system, which, in fact, must give rise to its reanimation in the earlier condition, doesn’t solve problems neither of whole system, nor of the country economy; it is necessary to process not only tactical activities before starting the process of restructuring, but also to set strategic objects: to receive such structure of banking, which will be adequate to the goals and functions standing towards the banks at the new stage;
while processing activities of reforming banking system they must clearly define a circle of those problems, which must be solved during the process of reforming with the help of renewed banking system and they must set the price of activities;
effective restructuring requests combined methods of approaches towards the problems. World practice processed principles and methods of approaches of solving banking crisis, approbation of which showed their sufficient effectiveness. It is nonprofessional and not expedient to use some principles and refusing others;
a process of solving crisis may not be fast, simple or cheap.
Th8is common goal, mentioned above, in its turn, may be concreted into the list of those problems, working at which must form real concept of restructuring process according to the conditions in modern Georgia:
eradication of conditions provoking banking crisis, solving problems in relation with banking sphere and real sector; financial curing of those problematic banks, which have kept viability and perspectives of development, also state support of those banks, which have abilities of effective usage of this aid; providing trustful satisfaction of basic current requests on bank services (payments and short-termed crediting) of the industrial subjects; foundation of a new, more complete structure of banks and other credit organizations (according to the forms, measures of the property, regional distribution and so on); Creation of more complete rules and instruments regulating new rules of banking activities and of this activities; Creation of conditions. Mechanisms and stimuli for turning banks to the side of enterprises, for their involving into the process of further production, also overcoming inflexibility of the banks in the process of solving investment problems; Recovering trustfulness among banks; Recovering trustfulness in relation with the banking system, appearing stimuli among population for putting their savings on the accounts; Creation of the stimuli for increasing responsibilities and effectiveness of the bank managers; Civilly closing of not viable banks and fulfillment of the mechanisms of their liquidation.
There is an idea about the fact, that main goal of restructuring banking system is recapitalization of the banks (recovering lost a capital and its further growth), but it is not quite correct: since today the hardest problem is, that a spectra of profitableness and trustfulness of capital investment is very tight.
Some bankers offer such understanding of restructuring and such pragmatic activities of radical reforming of banking system, the essence of which finally has been brought to the regrouping of the almost bankrupted banks according to the principles of specialization (specialized banks working in the country scale, banks oriented towards export or those obligated in the groups of large enterprises, also regional banks). they meant, that new “system forming” groups would obey to the strict control of appropriate governmental structures or groups of enterprises, in exchange of it, it will have right for working on budgetary resources. Suggestions of separate bankers were not related with the problems of recovering whole banking system.
We can form basic problems of restructuring banking system in the following way:
Transiting to the foundation of a healthy market banking system by readjustment of separate problematic banks, providing structural reform of banking system;
Increasing whole capital of banks and filling banking system with long-termed resources;
Creation conditions stimulating growth of the quality of market commercial banks, including those in the regions.
Main goal of restructuring program must be: creating such layer of technological market commercial banks, which provides marketing policy and makes basic profit from credit-operations. It is interesting, that within the bound of 2-3 years program share of such capital in the banking system may reach up to 30-40%, and credit share in the credit portfolio of banking system – 30%. Share of profit made from crediting in whole income of banking system must not be less, than 6%. Half of such healthy banks must still function in the regions.
The concept of those first steps, which must make foundation to the realization of effective program of restructuring banking system, must be formed in this way:
processing a conception of developing banking system and its taking as a manual 2-3 years earlier; consisting a program on working at the passed liabilities and its realization;We mean that a special state
2015: A banking retrospective
Looking into the future of where banking could go.
Banking with hitler
Shocking.
Video Rating: 4 / 5
Islamic banking and global financial market: signs of sustainable growth
Islamic Banking and Global Financial Market: Signs of Economic Growth
Introduction
The topic of my present research work is “Islamic Banking and global financial market” and how they are interrelated to lead to the sustainable growth of economic development. Islamic finance is closely related to Islam’s vision of economic development, which gives primary importance to the realization of socioeconomic justice and the well-being.
The subject of Islam and economic development raises a number of
questions, one of which is about the relevance of the subject to a
discussion forum on Islamic finance. This question is not difficult to
answer because finance and development are very closely interrelated.
Finance is not an end in itself; it is one of the essential means to
development, which in turn leads to a rise in financial resources for
accelerating development. The juxtaposition of Islam and economic
development in the title also raises some other questions. One of these
is whether Islam is an asset or a liability for development and whether
Islam and development can coexist without hurting each other. If Islam
is capable of promoting development then the second and third questions
are about the kind of development that Islam visualizes, and the
reasons for the failure of Muslim countries to realize development of
this kind.
As the economic crisis deepens throughout the world, global financial institutions have set about to re evaluate the various systems and business models in place. It is no exaggeration to say that practically every mainstream and conventional banking institution has been affected by the global financial crisis. In contrast, the Islamic banking system has largely escaped the fallout from the financial crisis, thanks to rules that forbid the sort of risky business ventures that infected mainstream institutions.
There is no doubt that the current global financial crisis has presented the Islamic finance industry with an excellent opportunity to expand its appeal beyond Muslim investors as a safe haven from the speculative excesses. The message may have particular resonance in the West after the crumbling of the US mortgage market left banks holding hundreds of billions of dollars of nearly worthless credit instruments tied to home loans by a web of complex structures. Investors traumatized by the credit crisis are seeking assurances and security. The stricter rules imposed on lending by Islamic laws provide these assurances and security. Many of the speculative and highly risky structures and financing methods that have proven to be the nemesis of the western financial industry are forbidden under Islamic laws. Islamic finance practices are undoubtedly fiscally more conservative, requiring direct participation by investors in plans that do not involve esoteric strategies such as parking assets in off-balance-sheet vehicles.
While Islamic banking is no longer a novelty in the international financial world, the United States is yet to embrace this model. While some US financial institutions are venturing into this market, they are few and far between. According to some experts and financial gurus, the United States is almost a decade behind the European and Asian financial counterparts as far as the adoption and implementation of Islamic banking is concerned.
What Is Islamic Finance?
In order for one to understand how Islamic banks have virtually escaped unscathed from this financial crisis, it is essential to have a grasp of the basic fundamentals of Islamic finance. Islamic finance is based on shariah, or Islamic law, which in essence requires that gains be derived from ethical and socially responsible investments and discourages interest-based banking and investments. Islamic finance is fundamentally different from the conventional banking models as it is based on a profit and loss structure (PLS) and the prohibition of riba’ (interest). This structure requires that the financial institution invest with the client in order to finance the client’s transaction rather than lend money to the client. Due to the inherent risk involved in any investment, the financial institution is entitled to profit from the financial transaction. This is a stark contrast to modern finance in which interest is one of the key methods by which banks make money through their products, such as mortgages and personal loans.
Another fundamental distinction of an Islamic bank is the absence of insurance protecting client deposits found in conventional banks. While the PLS structure permits receipt of money by depositors when deposits invested have earned a profit, they must incur losses when deposit investments incur losses to comply with shariah mandates. Deposit insurance, such as the protection provided by the Federal Deposit Insurance Corporation, defeats the very purpose of the PLS model, as the depositor does not incur any risk. The deposit insurance is an integral part of the western banking regulations but is in direct conflict to the basic concepts of Islamic banking. The issue of deposit insurance has proven to be a major hurdle for western, primarily European, banks that wanted and have chosen to provide shariah-compliant products. European banks overcame this hurdle of deposit insurance by informing clients that the insurance was not shariah-compliant.[1]
Islamic banks have been marketing their services aggressively in the West. The conventional commercial banks have in direct competition with the purely Islamic banks begun offering Islamically structured products to their clients through “Islamic banking windows’. However, confusion exists about Islamic banking. In many minds, the prohibition of interest is the defining characteristic of Islamic banking, but it can be distinguished from conventional banking by its concern with spiritual values and social justice.
The fact that interest is prohibited does not mean capital is costless. Islam is not opposed to a return on capital. What it prohibits is the predetermined pricing of capital. The owners of capital have no right to ask for additional payment without sharing risk. Thus in lieu of fixed interest which is prohibited, the lender will be a participant in the enterprise. [2]
Islam and Banking
A. The Prohibition of Riba (interest): legal connotations
The Qur’an, or holy book of Islam, is the primary Islamic authority and it prohibits riba. The prohibition appears in several passages in the Qur’an. One passage states that God does not view interest as true wealth because it represents unearned income. Another passage condemns Jews for not obeying the Torah’s prohibition of interest. A third passage condemns the compounding of interest upon default by stating “O believers, take not doubled and redoubled interest, and fear God so that you may prosper. Fear the fire which has been prepared for those who reject the faith . . . .” A final condemnation warns that those who receive riba are waging war with God and shall be “inhabitants of the fire and abide there forever.” Scholars have noted that the taking of riba is on par with repeated adultery and deemed more sinful than maternal incest–two crimes in Islamic criminal law that are punishable by death.
The riba prohibition reflects the Islamic view that accumulating wealth through collecting riba is not a legitimate mode of “work”. Islam values capital when it is the product of labour and risk-taking. When a lender charges interest for capital, he receives a reward without adding his labour and without regard to the success or failure of the borrower’s venture. The benefit of the loan to the lender is certain while the benefit of the capital to the borrower is uncertain. Islam views these transactions as necessarily including unfair allocations of risk and justifying reward for a passively acquired return on capital. Riba is thus exploitive vies-a-vies the borrower and its prohibition limits the extent to which one party may be disadvantaged by the other party in financial transactions.
Prohibiting economic exploitation is important in Islam because Allah wills his followers to accumulate wealth in a manner that achieves social justice. Social justice, however, should not be mistaken to mean that Allah wanted people to be equal in wealth. Muslims believe that God “deliberately created disparities in the distribution of goods in this world.” Rather, social justice supported by legitimate work means that “no one may claim more than he has earned” and may not use wealth to disparage others. This thought, when applied to conventional banking, means that investments cannot be viewed solely through the lens of achieving the highest profit margin. Instead, Islam places accession to wealth in relation to spiritual costs to the individual and social costs to the community.
Outside of social justice, Islamic scholars have also offered economic critiques of interest that support its prohibition. Scholars have argued that the unjust allocation of risk between borrower and lender creates a “penalty upon entrepreneurial initiative.” In a truly competitive market, Islamic scholars believe it to be unlikely that an investment could result in gross profits that also cover the interest. Since capital would be unproductive without entrepreneurial input, the disincentive to create wealth hinders economic growth.[3]
Ideological issues involved in Islamic Banking mechanism
Twenty years ago, Islamic banks were unknown; today, they number in the hundreds worldwide and hold more than U.S. 0 billion in assets. In the world of global finance, this is not a large amount, but its growth rate is
Discover a Bank Loophole To Buy Foreclosed Homes Dirt Cheap
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Investment banking
Dr Kathy Walsh from the School of Banking and Finance at the Australian School of Business has produced a video that introduces undergraduate students to the world of investment banking. For more information go to www.business.unsw.edu.au
Wachovia Online Banking
Internet has become a substantial part of our lives, therefore there is nothing surprising about the fact that almost every reputable financial institution offers internet banking services to its account holders. The more the assortment, the harder it is to make a right choice of an institution to bank with. Online banking study conducted by ComScore some time ago revealed that Wachovia online banking is one of the best internet banking platforms out there. Internet banking facility offered by the Wachovia bank (headquartered in Charlotte) landed in the top five financial institutions operating on the territory of the United States of America.
Most significant factors that affected the rankings were the facilities availed by the internet banking platform as well as the quality of provided tools, products and services. Wachovia Online Banking has numerous benefits, such as a completely user-friendly interface with a convenient layout. To log in a system an account holder just has to provide his/her username and password. If you have multiple accounts with Wachovia bank, then you will able to view and manage them in one place without logging in every time you need to switch. There is also a combined summary of all your checking, savings, credit cards and other accounts available though Wachovia Online Banking.
Such a combined summary gives you a precise image of your spending and earning making it a valuable tool in managing finances. A customer of Wachovia Online Banking can view details of transactions, payments, withdrawals, deposits, cleared checks with history kept for 90 days. Bank statements are also available online though the Wachovia Online Banking and can be downloaded to your PC. Images of cleared checks are also kept in the system and can be printed out any time you need checks’ details.
Wachovia online banking facilitates lives of its customers offering them an efficient Bill Payment service. You should just put the details of an upcoming payment and it will be proceeded automatically within couple minutes. To make sure that the payment is effected successfully, you can also track your bills online.
Online Brokerage services included into Wachovia Online Banking package allows you to launch an investment account. You can get research reports and stock quotes in real time to earn money on trading stocks. Funds held on your checking or savings account can be easily transferred to your investment account though the online route.
Most of the facilities provided by the Wachovia Online Banking platform are gratis, however some minor fees are required for specific services. Opening online banking account is easy and completely secure. Wachovia bank guarantees that in case unauthorized access to your funds occurs, the bank is liable for all the losses. Just inform operators within 2 months that you experience a problem.
Money, Banking and the Federal Reserve
Thomas Jefferson and Andrew Jackson understood “The Monster”. But to most Americans today, Federal Reserve is just a name on the dollar bill. They have no idea of what the central bank does to the economy, or to their own economic lives; of how and why it was founded and operates; or of the sound money and banking that could end the statism, inflation, and business cycles that the Fed generates. Dedicated to Murray N. Rothbard, steeped in American history and Austrian economics, and featuring Ron Paul, Joseph Salerno, Hans Hoppe, and Lew Rockwell, this extraordinary new film is the clearest, most compelling explanation ever offered of the Fed, and why curbing it must be our first priority. Alan Greenspan is not, we’re told, happy about this 42-minute blockbuster. Watch it, and you’ll understand why. This is economics and history as they are meant to be: fascinating, informative, and motivating. This movie could change America.
Video Rating: 4 / 5
Banking 1
Introduction to how banks make money and the value they (potentially) add to society.