Lec 5

Diversity of forms-The Banking

sector.

Content 1-commercial bank

2- central bank

3-specialiest bank

Introduction In the last two decades of the 20th century and the beginning of the

21st century the business institutions in general and the

commercial banks in particular have faced a big challenges.

These periods were characterized by the increase in intense

competition and the amount of the direct and indirect governmental

intervention as well as the big technological advance in the

electronic calculators. The economic development in the state, to a

large extent, depends on the capability of the banks'

administrations facing the present time challenges.

Banks' administration, in this method, is how to run the commercial

banks offering its financial services of accepting all types of

deposits and granting loans to the public of different sects in order

to gain profit.

1- Commercial Banks:

It is one of the financial institutions based on accepting deposits

and granting credit. The commercial bank in this form is considered

as a medium between those who have surplus funds and those

who need these funds. The commercial banks, so-called "Deposits'

Banks", could be defined as (a non-special credit institutions,

primarily accept the individuals' retractable upon request or a short-

term deposits. This definition distinctively determines the

commercial banks' characteristics from other banks.

1. They are non-special banks.

2. They accept the retractable upon request deposits.

3. Unlike the non-commercial banks, they exclusively create

money.

4. It is the medium between the lenders and borrowers.

The commercial banks have three distinctive

features regarding the profitability, liquidity and

safety:

A\ Profitability:

The commercial Banks are profitable financial institutions. In other word, its main revenues are the profits gained from gathering deposits and granting loans. The difference between the generated profits from deposits' investment and its paid interests represents the revenues of the commercial banks.

The profitability is based on:

1. Returns resulting from reliance on the third-party funds in financing the investment specially the stock (shares and bonds).

2. But if the commercial bank relied on the property funds in financing its investments, the inevitable result would be the forever closure.

B\ Liquidity:

The retractable upon request deposits has the loan share

of the commercial bank's financial resources and the bank

must be ready to meet them at any time. This is the most

important trait of the commercial banks. At a time when the

other financial institutions could postpone the paying of

what it dues,

a mere rumor about the bank's insufficient liquidity could

undermine the depositors' confidence leading them

unexpectedly to withdraw their deposits making the bank

vulnerable to bankruptcy.

.

C\ Safety:

The commercial bank's capital is characterized by

smallness. It is not more than 10% of the net

assets. This means that the individual's deposits

represent 90% of the total funds resources. It is

clearly evident that the commercial bank uses the

third-party funds to finances its activities. What

distinguishes the commercial banks from other

banks is that it could turn the ( credits ) the

deposits into (assets).

From the above-mentioned we realize:

1. The smallness of the depositors' safety

edge.

2. The bigness of the financiers or the bank's

owners' safety edge.

Three goals to be realized by the bank's administration:

Firstly: achieving maximum profitability: by increasing revenues as long as the bulk of the costs is fixed costs while any revenues reduction leads to profits reduction as well and vice-versa.

-----

Secondly: avoiding acute shortage of liquidity as it undermines the depositors' confidence in the bank. There is a direct correlation between the increase or decrease of liquidity and the depositors' confidence.

Thirdly: achieving maximum safety for the depositors.

The three goals (profitability, liquidity and safety) have an impact on the shaping of the basic policies governing the commercial banks' activities. They are: attracting deposits, granting loans and investment in stock.

The diagram below represents the most important aspects of the commercial bank's basic activity:

The figure shows that the role of the commercial banks

is basically limited to accepting whatever form of

deposits (retractable, for a period of time, saving

…etc) then employing these deposits in loaning

operations (granting loans) and investment. The figure

also shows that the liquidity is achieved by accepting

deposits which is employed to serve the development

projects, in other word, loans and investment

representing the bank's profitable activities.

2-- The Central Bank:It is an independent public legal personality. It

conducts the credit and banking policy and

supervising its execution. It has the right at any

time to look into the banks' folders and records in a

way that guarantees the obtaining of all the

information that help achieving its purposes.

Today, the central bank conducts some or all of the

following posts:

1. Organizing the currency issuance according to the

national economy requirements. So, the central bank is

the only institution that has the right to issue the currency.

2. Performing the banking services demanded by the

government. It is the government agent in all its banking

transactions.

3. Keeping the cash reserves for the commercial

banks. So it is the bank of banks.

4. Keeping the state's reserves of the foreign cash

balances and running them on its behalf.

5. Offering facilities for other banks and financial

institutions. It is the last resort as it is the bank of banks.

6. Monitoring and directing the credit quantitatively and

qualitatively.

The central bank should have the following condition:

a. It should never accept private deposits.

b. It should never grant loans or dealing directly

with the private sectors Regarding the goals, the

central bank differs from the other banks. It might not

basically aim at gaining profits but rather achieving

national economic, monetary and financial goals.

bank:

No The Central Bank The Commercial Bank

1

Concerned with directing the

other banks. It is the bank of

banks and non-profitable

bank.

Aiming at gaining and

maximizing profits by

increasing the revenues.

2

There is no but one central

bank in the State

There are multiple

commercial banks in the

national economy

3

It Subjects generally to the

monetary authorities or the

supreme authorities in the

State

It subjects to the central bank

authority as it is the first

observer of the credit.

4

It rarely deals with the public

because its prime concerned

is to deal with the other

banks

It deals with the public by

accepting deposits and

granting loans. It is the

"deposits' bank".

5

The central bank's strength or

weakness relies on the extent

of independency form the

government in decision-

making.

The commercial bank's

strength or weakness relies

on the amount of deposits'

revenues because it operates

the third-party funds.

The central bank's domination over the banking system

could be represented as follows

The Central Bank

Special Banks Investment Banks Commercial Banks

Special Banks:

They are the banks that conduct banking operations serving a specific type of economic activity according to its establishing decisions in which the retractable upon request deposits are not one of its basic activities.

The above definition shows that the special banks share the following characteristic:

1. It does not accept individuals' deposits. Instead it relies on its own capitals and long-term accrued bonds as well as long-term loans from the central bank and the commercial banks.

2. The purpose of establishing the special banks includes national and social aims. So, the State grants them loans with special profit price through the central bank.

3. The commercial banks' activity is not limited only to loans granting

process but rather they often perform direct investment.

These include:

• Constructing new projects.

• Contribution to the projects' capitals.

• Offering technical experience and advice in its

specialization for money.

The special banks include:

• The Real Estate Bank.

• The Agricultural Bank.

• The Industrial Bank.

The above-mentioned banks' activities differ from

the commercial banks' activities because it

requires:

1. A long-term finance.

2. Special experiences.

3. Awareness of the operations' nature such as

agricultural, industrial and real estate activity.

4. Existence of Branches' network might be

extended to the small town in the State.