Economical crisis facing the banking Industry - Essay Example

? Economical crisis facing the banking Industry Banks as financial s receives deposits from s then directs such amounts to several individuals, businesses, organizations or states through a certain loaning scheme. Banks can also contribute to the capital market. Banks’ benefits are majorly from the interests earned after loan repayments. However, some revenue comes from banking charges among other sources. The banking sector has developed due to some favorable factors like increase in population, hence customers, Good interest rates as stipulated by the central bank, improved security, advanced banking technologies and increase in banking professionals among other factors (Morr 2009). However, the same sector is compromised by some economic factors like the global financial crisis, increased unemployment rates and unstable interest rates among other factors. This work focuses on some of the economic crisis facing the banking industry. Different types of banking have different economical challenges. This work will consider both the retail and the mobile banking systems. The financial crisis is one of the major limitations facing the banking industry. It is defined as a situation where a certain banking institution in not in a capacity to run its operations due to lack of sufficient funds. Financial crises come in different forms, for instance, currency crises, where there is insufficient currency in a certain nation (Angelides 2011). Here the banking institutions are forced to operate in different currencies which might be expensive in the long run. Bank crisis on the other hand applies if a certain bank has insufficient funds to lend its customers and pay its employees among other statutory obligations. Then there is the twin crisis which is a combination of currency and bank crises. Currency crises may result from unfavorable internal or external factors. A calamity or disaster like war and earthquake is likely to limit internal business operations which may lead to fall of economy in that nation. The country will have to pay more for its imports and this could lead to reduced currency. Cutting ties with super power nations like U.S may also compromise the strength of a certain currency. Bank crises on the other hand, are subject of both micro and macroeconomic elements. A bank is likely to lack sufficient funds to perform its obligations due to bankruptcy, business merges; this is a scenario where a bank loses its business control on forming partnership with another business entity, or nationalizing the entire banking sector or a section. Global financial crisis left some huge France and U.S banks with suspended bonds due to incapability to do the valuations due to the frozen market. The banking default levels increased and this hiked the interest rates by an estimate of 5%. Global financial crisis (2007) limited the operations of the banking sector. The U.S legislators through President George W. Bush authorized financial institutions to provide some unsecured loans to the U.S citizens who wished to construct their own residential facilities. The problem arose when the citizens or real estate sectors failed to repay the loans (loan defaulters). The crisis affected the banking sector on a global scale. Although the government directed some state funds to settle the loans, the financial facilities adopted some strategies to recover such loans. The central bank hiked interest rates for more revenues (Proctor 2000). This had some negative implications with the banking customers. Several agencies and businesses stopped operations waiting the interest rates to fall. Some opted to seek financial assistances from a micro - finance industry whose interest rates were not greatly affected. The crisis made some financial institutions close their operations for the lack of adequate finances. The banks had insufficient funds to loan its customers and even pay the employees. President Bush ordered for a committee comprising chief economists and financial managers to suggest for the best solution for the crisis. First, the government had to direct some funds from the national treasury and fund some banking institutions (United Nations 2009). The committee came with a comprehensive report with some of the factors to be considered to avoid occurrence of such crisis in the future. First, the national legislators should not meddle in the banking business. This is because they lack economical or financial knowledge to make effective decisions with regard to banking operations. Secondly, the banking sector was urged to insist on a good percentage of initial deposits in a certain loaning scheme. The banking sector is facing stiff business competitions from other financial institutions. Currently, there are micro-finance institutions which target the low scale business owners or low economical class. This is a great disadvantage to the banking sector following a certain business survey that depicted that the secret in the banking industry is numbers and not the class. Micro-finance institutions may be serving the low class business owners, but they turn up in large numbers while banks may be serving large class business entities but they are few. Several companies have formed their own cooperatives as a financial custody to the employees. The cooperatives are always in a capacity to loan its members at very friendly interest rates. This discourages employees from seeking banking services. The emergence of several insurance companies and asset management companies has also compromised the banking business. The majority may opt to pay bonds to certain insurance companies so that he/she can be compensated in case of any risk (Savona 2011). Other people may also decide to transform the monetary assets to tangible assets and keep them in the asset management firms. Advantages of keeping tangible assets is that its value depreciates at a controllable rate unlike finances whose value fluctuates day and night depending on the central bank rates. Insurance and asset management companies provide convincing security unlike banks whose rates are controlled or determined by a lot of factors. Increased unemployment rate has got negative impacts on the banking industry. The majority of modern workplaces pay their employees or stakeholders through bank accounts. Increased unemployment rate is a subject or reduced global economy. Millions of employees lost their jobs after the 2007, global financial crisis. Several studies have been conducted to confirm whether such employees were reinstated. The results have varied results but the bottom line is that about 35% of such employees retained their original jobs or were recruited in different workplaces. Banks have lost several customers and stakeholders from employee’s retrenchments. The president of South Africa banks and the minister for finance in his latest banking report lamented that South Africa’s banks lost over 2.3 billion USD following increased rates of retrenchment not only in the country but the globe as a whole. Banks benefit a lot from the working class generation, first, their salaries are paid from the bank, meaning the bank can use such deposits to loan other customers, and earn interests upon loan repayments (The United Nations, 2009). Employees are charged for the banking services, and the larger the number, the higher the revenue. Fluctuating interest rates is another limiting factor in the banking sector. Major revenues in the banking industry are of interest once the loans are repaid. Interest rates are determined by the central bank through authorized agencies (Mullineux 2003). Such fluctuations are caused by a fall or rise in the global economy. Disasters like civil and international wars have negative impacts on the global economy hence interest rates. Wars would scare away investors and reduce business establishments. Natural disasters like floods, hurricanes, landslides and natural fires among other disasters. These destroy properties or assets which have negative impacts on the global economy. Banking sectors have lost several customers to micro and macro financial institutions due to fluctuating interest rates. Fluctuating interest rates make it difficult for loan beneficiaries to clear their loans with the banking institutions. Several banking researches indicate that fluctuating interest rates are a subject beyond the banking managers, it is a global factor that cannot be avoided (Thomke 2006). Banks are facing efficiency limitations in the market. Banking sector should be subjected to low cost funds so that it can lend its customers and earn interest in the long run. However, the current banking sector is faced with difficulties in both attaining the financial resources as well as lending it out. Banks require both equity and debit capital for the start and maintenance. Several shareholders have lost trust in the banking sector for its instabilities, for instance, the 2007/2008 financial crisis scared the majority of national and international shareholders from having ties with the banking sector. Pricing pressure has also limited smooth operations in the banking sector. Some currencies tend to be stronger than the other depending on the national economy. This implies that some customers may be disadvantaged on possessing currencies with weaker values. There have been scenarios when some business owners opt to keep that finances with micro and macro financial institutions since such do not observe the international exchange rates (Frixas 2000). The issue of efficiency is also indicated when some loan beneficiaries fail to repay their loan in appropriate time as it happened in 2008. Some governments have no legal consequences for such loan defaulters (Koch 2009). This will always encourage the majority to seek both short and long term loans and fail to repay in the long run. Some national banks have gone bankrupt from such allegations. Banks in a losing trend have also opted to merge with other related businesses resulting in loss of the banking controls. Inadequate funds to implement some of the latest or advanced banking technology and management strategies are still a huge problem in the sector. Credit card facilities for instance are proven to be fast and attract more banking customers. The system enables customers to transact without necessarily carrying huge cash with them. The technology is also convenient, more so in emergency situations. Credit facilities are currently synchronized with automated foreign exchange rates to enable customers transact wherever they are (Keyes 2000). However, the banking sector has failed to establish such technology in remote regions of the world. The banking sector is advancing in the urban centers with world class shopping malls and entertainment joins like Las Vegas, Paris and New York among other major cities in the world. It is worth mentioning that the rural or remote areas also have business men and women who may appreciate such services and increase the banking revenues. Lack of sufficient resources has also limited banking marketing strategies in several parts of the globe. The banking sector is so competitive that inadequate communications with the stakeholders like customers may see majority move to other financial institutions like insurance and asset management companies among others. Banking sectors have inadequate automated machine teller (ATM) to facilitate instant withdrawals and deposits and save customers from the long queue in the baking halls (Hubbard 2002). These machines are only installed in urban regions and not in the rural regions (Murinde 2003). The banking sector has a shortage of qualified economists and financial managers due to reduced numbers of graduates in such fields. The few available specialists are absorbed in national organizations, military organizations, and non-governmental organizations among other workplaces with more attractive salary packages. It is believed that banking industry is one of the sectors offering the lowest salary packages, more so to degree and diploma graduates. Banking industry depends on governmental specialists who are always consulted at costly payments. Banks are subjected to huge taxes that increase banking operating costs. Each government has different business policies hence subjecting respective banks to different taxing schemes depending on the national economy. Huge taxes have discouraged several shareholders from maintaining their ties with the banking sector (Monasa 2008). The latest business reports indicate that majority of banking shareholders sold off their shares at subsidized costs then moved to the real sector which has been generating huge amounts after the 2008 global financial crisis. Increased corruption dealings have made the majority of stakeholders lose trust in the banking industry. Banking sector is unique in its kind since a simple corrupt deal may see the interest rates change to discourage several shareholders and customers as well. The 2008 global financial crisis is blamed on the greedy legislators and banking managers who wished to make cash out of the unsecured loans offered to the real estate sector. It is recorded in history that the U.S legislators passed several bills to boost private residential property developments (Foster 2009). They planned to earn their share once all the loans were repaid. Unfortunately, the majority of the loan beneficiaries were not in a capacity to repay the loans. The greatest economic mistake the banks committed was to offer such loans without reasonable security or initial deposits. Insecure mobile banking has also been a challenge in the banking industry. A few years ago, the banks partnered with several banking institutions to enable sending and receiving money through mobile gadgets like smart phones, tablets and mobile phones among others. Since its introduction, the banking sector made a revenue increase by about 2.4%. We live in a generation where there is at least one or two such mobile devices in every homestead. Increased number of demographic figures has also boosted the mobile banking business (Heffernan 2005). Customers are charged some amounts for both withdrawing and sending moneys to other parties. However, the banking sector is facing lots of challenges with regard to this kind of banking. First, there are several imposters who tend to confuse customers and deprive them of their money. About 23% of mobile banking customers in developing nations have cut their links from such transactions because of the increased theft (Cook 2004). The banking sector has lacked appropriate security measures to trace such imposters and bring them to justice. Mobile banking is not working well with the illiterate society members, more so the older adults. They tend to forget or confuse their pin numbers leading to blockage to individual accounts. Mobile banking is also faced with an increase in charges which tend to scare away a good number of customers, more so the lower economic class. Finally mobile banking sector is faced with an increase of counterfeit mobile gadgets which may not support the mobile transfer applications. Such devices are majorly dumped in the developing nations where the majority can hardly differentiate the genuine from counterfeit ones (Marks 2007). Online banking or e-banking has also increased the industry’s revenue. It is ideal for tourism, entertainment sectors where customers are expected to make payments through recognized electronic bank accounts. E-banking is also ideal between parties in different locations or nations. Currently, there are several online banking companies to ensure advancements in the sector. These include the money bookers and pay pal among others. However, the online-banking sector has also faced several challenges to make the industry lose its customers to competitive companies like the money grams among others. To conclude, banking sector or industry is among the major determinants of the global economic status. However, the industry is faced with several economical hurdles that limit its operations. The 2008 global financial crisis almost crippled major banking operations in almost all parts of the universe. The crisis meant reduced financial capabilities for further lending, which form part of the statutory obligations of the banking sector (Schmenner 2004). Increased financial institutions in the market have greatly reduced the demand for banking sector hence reduced revenue. Finally, lack of adequate banking professionals has also compromised smooth running of the banking operations and decision making. Bibliography Angelides, P. 2011. Financial crisis. New York: DIANE Publishing. Cook,S. 2004. 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