1.0. INTRODUCTION
The countries of the world practice different banking systems. The
type of banking
system practice by any country depends on the banking rules and
regulations, the size of the
economy and the level of development of the banking and the
financial system of the economy
among other factors. The most common banking systems in most
developed and developing
countries of the world includes the Note banking, Branch banking
and Corresponding banking.
Others include Universal banking, Group banking, and Chain banking
among others. You shall
also learn about the essentials of a sound baking system in this Note.
2.0. OBJECTIVES
At the end of this note, you should be able to;
· Identify and explain each banking system
· Mention and explain the advantages and
disadvantages note banking
· Enumerate and explain the advantages and
disadvantages of branch banking
· List and discuss the essentials of a sound
banking system
3.0. SYSTEMS OF BANKING AND ESSENTIALS OF A
SOUND BANKING SYSTEM
3.1. Systems of Banking
3.1.1. Note Banking
Note banks are independent, one-office- banks. Their operations
are confined to a single
office. The note banks operate in small towns, cities and rural
areas in Nigeria. Examples of Note
banks in Nigeria are the commnotey banks and other banks that
exists only in particular
commnoteies that established them without any branch anywhere. The
existence of note banking
in the USA is due to legal restrictions which prevent the growth
of monopoly in banking. Some
note banks have grown to large sizes but they operate under severe
restrictions which limit or
prohibit the establishment of branches particularly in the U.S.A.
A. Advantages of Branch Banking
Note banks, being independent and one-office-banks, posses certain
advantages which
include:-
i) The provision of prompt and efficient services to customers
ii) Personal relations with the people (Since its organizers and
staff are local people)
which help in mobilizing large resources for the bank.
iii) Meeting the financial needs of the people promptly and
efficiently because of the
usual on-the-sport decision making by the banking management.
iv) Enjoying the advantages of branch banking as they are
connected with a big bank
through correspondent banking system.
B. Disadvantages of Note Banking
Some of the disadvantages of note banking include;
i) Failure to spread risks as the note banking operations are
localized in a
particular area, the failure of customers to repay loan in time
may bring
disaster to the bank.
ii) Limited resources at its deposal which always leads to bank
failure during
financial and economic crisis.
iii) Non-diversified banking services to its customers because of
its inability
to establish branches and higher cost.
iv) Absence of economies of large scale operations. The note
banking system
cannot have advantages of large scale banking in that it cannot
recruit
more efficient and highly paid staff, and cannot enjoy the
economies of
large scale and intensive specialization and division of labor.
3.1.2. Branch Banking
Under this banking system, a big bank has a number of branches in
different parts of the
country and even outside the country. The branch banking is the
most prevalent banking system
in most of the countries of the world. In Nigeria, all the
commercial banks quoted in the stock
exchange market have at least a branch in almost all the 36 states
of the federation including the
Federal Capital Territory Abuja.
A. Advantages of Branch Banking
The branch banking system has many advantages which make this
system supervisor to
the note banking system. Some of the advantages of this system
include;
i) Advantage of spreading risks geographically and industrially.
If branches
in particular area suffers losses due to recession in industries
located there,
the losses can be offset by profits from prosperous areas.
ii) Enjoys the advantage of large scale organization because a
large bank is
able to recruit efficient and trained staff and pay better than note
banks. It
also enjoys the advantage of specialization and division of
labour.
iii) Under this system, the bank enjoys the advantage of
diversification of
banking operations. Big banks can provide banking facilities to
trade,
industry, businessmen and the common man at cheaper rates and more
efficiently than note banks because they posses larger financial
resources.
iv) The central bank of the country can control the banks more
effectively
under the branch banking system than under the branch banking Note
banking system. It is easier to control the credit policies of a
few banks
than those numerous note banks.
B. Disadvantages of Branch Banking
The branch banking system has also some disadvantages which
include the following;
i) Delayance in decision taking under the branch banking system:
there are
bureaucratic procedures in decision making and the management of
all the
branches is under the control of the head office. This leads to
delay in
taking prompt decision by the branch managers. They have to refer
all
cases above certain limit for advance to the head office.
ii) Inability to meet the need of local business commnoteies: The
branch
managers are not able to meet the borrowing needs of the local
business
commnotey as efficiently and sympathetically as the note banks.
This is
because the branch bank managers stays in one locality and have to
operate under rules set by the head office. He may not know the
needs of
the customers at different branches and also may be concentrating
more on
bigger industries at the detriment of small scale businesses in
the rural
areas.
iii) Fear of loss: When branch banking spreads on a large scale,
some of the
branches may run under losses due to bad debts and low
mobilization of
deposits. Such situation may leads to huge loss to the bank
thereby leading
to its failure.
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iv) In adequate supervision: As the big bank has a number of
branches spread
throughout the country, it is difficult to manage and supervise
them
effectively and efficiently. The control become relax, the banking
services
suffer and the clients are hit hard.
v) Unhealthy competition: Branch banking leads to competition
among
different banks in establishing branches at various places. This
tendency
leads to unnecessary increase in expenses.
3.1.3.Group Banking
Group banking is part of the banking system in Nigeria. It is a
type of multiple office
banking consisting of two or more banks under the control of a
holding company, which itself
may or may not be a bank. The parent company controls and manages the
operating banks under
the group but each bank continues to keep its separate entity or
name. The parent company pools
the resources of the group and helps the group banks to make large
loans and advances. An
example of group banking in Nigeria is the Union Group which is
made up of Union Bank of
Nigeria Plc (Banking), UBN Merchant Bank (Merchant Banking), Union
Assurance Co. Ltd
(Insurance), Union Trustees (Trusteeship), and Union Homes Savings
and Loans (Mortgage).
3.1.4 Chain Banking
Chain banking is a system where some individuals or group of
individuals control one or
more banks, as against control by a holding company under group
banking. Chain banking
results when an individual, family or some other close association
of persons controls the
operations of two or more banks. That is, it occurs when a
syndicate or other small group of
individuals with common interest own more than two banks. Chain
banks are controlled through
directors, and a recognized organization hierarchy beyond that of
individual banks.
A principal “key” bank frequently coordinates the management of
the entire group and also
serves as the depository for required reserves of state chartered
holding company banks.
3.1.5.Correspondent Banking
It is a bank which acts as agent for another bank in a place where
the latter has no office,
or for some reasons, is unable to conduct certain operations for
itself. All banks with overseas
business require correspondent banks abroad, and the arrangements
are usually reciprocal with
each party maintaining balances with the other. Correspondent
banking is a familiar banking
feature in the U.S.A and Nigerian financial systems. The U.S.A is
geographically a big country
where there are thousands of banks which operates in restricted
areas. The various types of banks
are able to operate efficiently through a correspondent
relationship with one another. The country
banks have deposits with city banks and city banks have deposit in
the state banks in the same
and other cities. The centre of correspondent banking is the New
York city, followed by Chicago
and other regional centres in big America cities. Many banks have
deposits in more than one
centre and correspondent banks in one centre have correspondent
relations with banks in other
centres.
When a small bank maintains its deposits with a big correspondent
bank having a network of
branches, the later provides such services to the former as
extending large credit facilities,
facilitating foreign exchange transactions, cheque clearing and
collection, purchase and sale of
securities etc. It also provides a wide range of other services to
small banks which include
reports on the state of the economy, advice on portfolio
management, etc. In Nigeria, this kind of
relationship between banks may exist between big commercial banks
and Peoples Banks on one
hand and between commercial banks and Commnotey Banks on the other
hand. The peoples
Banks and the Commnotey banks are not commonly found everywhere,
so they resort to the use
of some commercial banks as their corresponding banks.
3.1.6.Universal Banking
Globally, Universal Banking (UB) is increasingly becoming the
major route to doing
banking as there appears to be a shift in the mindset from
providing customers with only isolated
banking services to that of providing them with a supermarket
where all financial services are
available. Universal banking refers to the combination of
deposit-taking, the making of advances
and the conducting of stock exchange business all under the same
roof. Banks involved accept
deposits of all sizes for the most varied terms, grant short,
medium and long-term credit to the
business sector and private customers, and at the same time carry
on securities business on a
more or less wide scale; handle payment transactions; finance
imports and exports, and deal in
foreign exchange, notes and coins.
The central bank of Nigeria in its draft guideline for the
adoption of universal banking practice in
August 2, 2000, defines universal banking as “the business of
receiving deposits on current,
savings or other accounts paying or collecting cheque drawn or
paid in by customers, provision
of finance, consultancy and advisory services relative to
corporate and investment matters,
making or managing investments on behalf of any person and the
provision of insurance
marketing services and capital market business or such other
services as the Governor of the
CBN may by regulation designate as banking business”. Banks under
the universal banking
programme can choose to undertake one or a combination of the
following; clearing house
activities, underwriting/issuing house business and insurance
services.
Universal banking simply connotes collapsing the various
regulatory divides that separate
commercial and merchant banking activities. In other word, it is
all about creating a level playing
field for both commercial and merchant banks.
Historically, commercial banking, in line with its retail
orientation, involves general commerce
and by implication, a credit policy that favors short-term
finance. On the other hand, merchant
banking or investment banking is about wholesale banking involving
provision of long-term
finance to fund users. On this basis of specialization, banks
concentrate on one of wholesale
banking, retail banking, private banking, savings and loan
mortgage among others. However,
under universal banking, authority is given to banks to decide on
their portfolios of business,
select appropriate delivery channels and infrastructure within an
applicable regulatory
framework. The distinction between money, capital market and
insurance business is removed.
The most important issue in this system is the fact that the
statutory / regulatory dichotomy
between commercial and merchant banking activities is dismantled
and the difference between
banks in terms of functions and activities will only exist as a
matter of choice rather than by
reason of regulatory barriers.
The concept of universal banking came into operation in Nigeria in
November, 2000. The
universal banking system introduced in Nigeria was meant to result
into huge finance
conglomerates where any or all of the following services may be
offered.
Retail (Commercial banking)
Cheque clearing
Funds management, investment (Merchant) banking services.
Financial advisory services including; Financial consulting; Note
trusts; Mutual funds; Mortgage
finance, Securities trading including derivation, under writing
business, Insurance (life and
general), Trusteeship accounts, Pension funds, and Credit cards.
3.1.7.Electronic Banking
Electronic banking more commonly called the electronic funds
transfer system (EFTS)
refers to the application of computer technology to banking
especially the payments (Deposit
transfer) aspects of banking. The major distinct pieces of
hardware that comprises it are the
Automated letter Machine (ATM), the point of scale (POS) system,
and the automated clearing
house (ACH).
An ATM can perform most of the routine banking functions that are
now done by bank tellersdeposits
can be made, funds withdrawn, funds transferred between savings
and current account
etc. The customer operates the ATM by using a plastic card plus a
personal identification number
(PIN) know only to himself.
The POS involves a computer terminal in retail stores that will
transfer funds instantly from the
bank deposit of the customer to the bank deposit of the store in
which he is making purchase. In
the process, the computer will verify that the customer has
sufficient funds to cover the purchase,
and will inform the customer of the new bank balance. The customer
can also arrange for
overdrafts at the bank, so that “instant loan” (Up to a preset
limit) can be made.
On the other hand, the ACH is largely designed to transfer funds
among banks electronically,
although customers may also become involved. For example, a
company may, with the
authorization of its employees record its monthly pay roll on
electronic tape. The company then
takes this type to its bank and that bank then uses the tape to
deposit (In other banks) salaries
directly to the credit of the employees. The ACH can also be used
for preauthorized payments of
a recurring nature, e.g. instance premiums. The major merit of
electronic banking lies in its
ability to reduce costs given the number of cheques written in the
economy each year.
3.2. Essentials of a sound Banking System
The essentials of a sound banking system are regarded, as its
liquidity and profitability. The
secret behind any successful banking business is to distribute
resources between the various
forms of assets in such as way as to get a sound balance between
liquidity and profitability, so
that there is cash (at hand or quickly realizable) to meet every
claim, and at the same time
enough income for the bank to pay its wages and earn profits for
its shareholders. In addition,
some of the essential issues modern banks also consider for a
sound banking system include the
following:
3.2.1. High degree of Liquidity
One of the essentials of a sound banking system is to have a high
degree of liquidity. The bank
holds a small proportion of its assets in cash. Therefore, its
other assets must possess the criterion
of liquidity so that they may be turned in to cash easily. This is
only possible if the bank possess
such securities which can be easily liquidated. The CBN has made
it mandatory for commercial
banks to keep a certain proportion of their assets in cash to
ensure liquidity.
3.2.2.Safety of Bank’s Money
Safety of banks’ money is another essential of a sound banking
system. Since the banks keep the
deposit of the people, it must ensure the safety of their money.
Therefore, the banks are expected
to make safe loans and investments and avoid unnecessary risks. If
the debtors of the banks do
not repay the loans on time and the banks loss their investments,
the banks in the system will
become insolvent. As a result, depositors in the system lose money
and suffer hardship. Thus, the
banks must ensure the safety of deposits in the system
3.2.3.Profitability
A sound banking system should be able to earn sufficient profits
for the shareholders. Profits are
essential for individuals and the entire system to be viable.
Individual banks should be able to
pay corporation tax like any other company, pay interest to its
depositors, dividend to
shareholders, salaries to the staff and meet other expenses. Therefore,
unless the banks earn, they
may not operate soundly in the system. For this purpose, it must
adopt judicious loan and
investment policies.
3.2.4.Stability of the System
A sound banking system must be stable. It should operate
rationally. There should neither be
undue contraction nor expansion of credit. If the banks restrict
the creation of credit when trade
and industry need it most, it will affect the interests of the
business commnotey negatively. On
the other hand, if it expands credit when the economic conditions
do not permit such, it will lead
to boom and inflation. The CBN help in achieving stability in the
banking operations of the
commercial banks by a judicious credit control policy.
3.2.5.Efficient Reserve Management
A sound banking system should be able to possess efficient reserve
management ability. A bank
keeps some amount of money in reserve for meeting the demand of
its customers in case of
emergency. Though the money kept in reserve is idle money, yet the
bank cannot afford the risk
of keeping a small amount in reserve. There are however, some
statutory limits laid down by the
Central Bank in maintaining minimum reserves with itself and with
the central bank. However,
how much reserve money should a bank maintain is governed by its
own wisdom, experience
and the size of the bank. The bank should manage its reserve
policy effectively and efficiently
without keeping too much or too little cash. It has to balance
between profitability and safety.
3.2.6.Expansion
A sound banking system must be spread throughout the country. It
should not be concentrated
only in big towns and cities but also in rural and backward
localities. It is only by widespread
expansion of the banking system that the deposits can be mobilized
and credit facilities can be
made available to trade, industry, agriculture, etc. This is
especially in developing countries
where the banking system must provide these facilities through its
expansion in all areas.
3.2.7.Sufficient Elasticity
The elasticity of banking operations should have sufficient
elasticity, in its lending operations. It
should be in a position to expand and contract the supply of
loanable funds with ease in
accordance with the directives of the Central Bank of Nigeria.
4.0. CONCLUSION
The countries of the world practice different banking systems and
the soundness of the banking
sector of the countries varies from country to country. This note
highlights systems of banking
varying from note banking, Branch banking etc to electronic
banking. It also discusses essentials
of a sound banking system.
5.0. SUMMARY
In this note, you have learned about,
· Systems of banking
· Advantages and disadvantages of note banking
· Advantages and disadvantages of branch banking
· Essentials of a sound banking system
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