The

Business
the Bankin Banking
Course
BWBB
3193ofSeminar

Topic No. 1
The Business of the Bank
by:

Abmalek F. Abubakar
College of Business
Universiti Utara Malaysia

abmalek@uum.edu.my
Tel : (Office) 04-928 6865
(H/P) 012-386 3764
Room : 025 COB Main Building
UUM College of Business

Abmalek F. Abubakar, 2015

BWBB 3193 Seminar in Banking

The Business of the Bank

Objectives
At the end of this session, you will be able to:
1. study activities undertaken by banks and how
banks generate income from those activities
2. identify the main components of a banks assets
and liabilities
3. identify sources and uses of bank funds
4. discuss factors influencing the banking industry
today

UUM College of Business

Abmalek F. Abubakar, 2015

BWBB 3193 Seminar in Banking

The Business of the Bank

What is a Bank?
A bank is a business. But unlike some business, banks
do not manufacture products or extract natural resources
from the earth
Banks sell services, i.e, financial services such as car
loans, housing loans, business loans, checking accounts,
credit card services, certificates of deposits, etc
Some people go to banks in search of a save place to
keep their money and other valuables
Others go to the bank seeking money for loans to buy
houses and cars, start businesses, expand farms, or do
other things that require borrowing money
UUM College of Business

Abmalek F. Abubakar, 2015

BWBB 3193 Seminar in Banking

The Business of the Bank

What is a Bank?
Banks operate by borrowing funds usually by
accepting deposits or by borrowing from other parties in
the money markets
Banks also borrow from individuals, businesses, financial
institutions, and governments that have surplus funds
Banks then use those deposits and borrowed funds
(liabilities of the bank) to make loans or to purchase
securities (assets of the bank)
Banks make these loans to businesses, other financial
institutions, individuals, and governments (that need the
funds for investments or other purposes)
UUM College of Business

Abmalek F. Abubakar, 2015

BWBB 3193 Seminar in Banking

The Business of the Bank

What is a Bank?
In the conventional environment, interest rates provide the
price signals for borrowers, lenders, and banks
Through the process of taking deposits, making loans, and
responding to interest rate signals, the banking system
helps channel funds from savers to borrowers in an
efficient manner

UUM College of Business

Abmalek F. Abubakar, 2015

BWBB 3193 Seminar in Banking

The Business of the Bank

What is a Bank?
A bank, therefore is, a business concern
Like any other business enterprise, a banks primary
objective is to maximise shareholders wealth, i.e. to make
money for the shareholders
For any business to make money, it must have sales,
turnover, receipts, revenue or whatever it is called. It must
generate income
Banks have 2 major types of incomes:
1. Fund-based income (interest income),
2. Non fund-based income (fee-based income)
UUM College of Business

Abmalek F. Abubakar, 2015

BWBB 3193 Seminar in Banking

The Business of the Bank

Fund-based Income (FBI)
refers to income derived from activities which require
the employment of funds that has some interest
costs
the sources of funds mainly come from
internal reserves
depositors
new capital
money market borrowings

UUM College of Business

Abmalek F. Abubakar, 2015

BWBB 3193 Seminar in Banking

The Business of the Bank

Fund-based Income (FBI)
A typical case of the usage of these funds is when a bank
uses the funds from a fixed deposit placed by a depositing
customer A and lend it out as an overdraft to a borrowing
customer B.
Bank may pay interest rate of 3.0% p.a. to Customer A
for a RM1.0 million fixed deposit
In another transaction, bank charges a 6.0% p.a. interest
to Customer B for an overdraft of same amount
Therefore in a year, the bank makes a gross profit of
3.0% (or RM30,000)
UUM College of Business

Abmalek F. Abubakar, 2015

BWBB 3193 Seminar in Banking

The Business of the Bank

Non Fund-based Income (NFBI)
refers to income obtained by banks by providing
services that do not require the use of funds, and
therefore, do not incur any funding costs
also called fee-based income or non-interest income
this type of income is very much sought after by banks
for the simple reason that it is very profitable no cost of
funds and little overheads
these activities do not involve giving out loans or
advances and as such, do not require capital backing
NFBI consists of commissions, fees, service charges and
other income besides interest
UUM College of Business

Abmalek F. Abubakar, 2015

BWBB 3193 Seminar in Banking

The Business of the Bank

Non Fund-based Income (NFBI)
Some of the common NFBI are:
1. Commission on the issuance of bank guarantees
2. Commission on the issuance of letters of credit
3. Service charges on remittances such as bankers
cheques, TTs, and demand drafts
4. Loan processing fees
5. Service charges on current accounts
6. Inland exchange commission
7. Foreign exchange commission
UUM College of Business

Abmalek F. Abubakar, 2015

BWBB 3193 Seminar in Banking

The Business of the Bank

Sources and Uses of Bank Funds

Retail
Markets
Money
Markets

SOURCES

USES

Customer Deposits

Statutory Reserves
Liquidity Requirements
Loans/Financing
Investment in Securities

Current Accounts
Savings Accounts
Fixed Deposit Account
NIDs

Pool of Funds
Managed by
Bank Treasury

Interbank Deposits

Shareholders Funds
Capital
Markets

Paid-up Capital
Share Premium
Reserves

Investment in Bank
Investment in Subsidiary
Investment in Shares

UUM College of Business

Abmalek F. Abubakar, 2015

Borrow or
Invest in
Money
Market,
FX Mkt,
Capital
Market,
Derivative
Market

BWBB 3193 Seminar in Banking

The Business of the Bank

Bank Financial Statements
Balance Sheet
Cash

Customer Deposits

Financing & Advance

Interbank Funds

Investment in Securities

Capital & Reserves

Income Statement
Interest Income
Interest Expense
Income from Funds (FBI)

Services

Other Income /(Expense) NFBI

Off B/S
Activities

Net Income
UUM College of Business

Abmalek F. Abubakar, 2015

BWBB 3193 Seminar in Banking

The Business of the Bank

Bank Financial Statements
Balance Sheet
Customer
These
include:Deposits
1. Consumer
loans such as
Interbank Funds
personal overdraft, credit
Investment in Securities
Capital & Reserves
cards, housing loans, hire
purchase, investment
Income Statement
loans, etc
2. Business loans such as
Distributable Income
These include:
working capital, trade
Income Attributable to depositors
1. Investment in government
financing, leasing,
securities
Income
from
Funds
(FBI)
factoring, floor stocking
Services
Off B/S
2. Investment in corporate bonds
loans, etc
Elements
Cash

Financing & Advance

Other Income /(Expense) NFBI

Net Income

UUM College of Business

Abmalek F. Abubakar, 2015

BWBB 3193 Seminar in Banking

The Business of the Bank

Sources of Bank Non-Interest Income
1.

2.
3.
4.

5.

In trade finance a bank earns fees and commissions from issuance of

letters of credit, discounting bankers acceptance and providing
documentary collection services
In payment and settlement services banks impose fees and other
charges when making payments via bank drafts, telegraphic transfers, etc
In investment services banks collect fees when handling unit trust and
share trading transactions on behalf of clients
In card business banks charge annual fees from cardholders and
service fees from participating merchants for the usage of credit cards and
charge cards
In international banking a bank can earn fees when providing
collection, guarantees and correspondent banking services
UUM College of Business

Abmalek F. Abubakar, 2015

BWBB 3193 Seminar in Banking

The Business of the Bank

Issues Facing the Banking Industry Today

Convergence
Regulation & Compliance
People
Information gatherers
Costing
Consolidation
Products & Services
Technology

UUM College of Business

Abmalek F. Abubakar, 2015

BWBB 3193 Seminar in Banking

The Business of the Bank

The Competitive Challenge for Banks
Group Discussion Topics
1. Can the business of the banks be undertaken by nonbanking institutions?
2. The effect of globalisation requires banks to consolidate
and merge with other banks to become a big entity. Does
that mean smaller banks are irrelevant?
3. If you are the CEO of a bank in Malaysia, what do you
see the likely growth areas in banking over the next 5 to
10 years?
UUM College of Business

Abmalek F. Abubakar, 2015

BWBB 3193 Seminar in Banking