Banking and the management of financial institutions - Essay Example

Banking and the management of financial s A bank is a financial which offers loans to borrowers and is responsible for gathering for the liquidity need for its borrowers and depositors. These are the two functions that distinguish banks from other institutions even though banks get involved in other activities other than the two specified. The reason why lenders and borrowers can not reach a deal between themselves to transact directly instead having an intermediary like bank is because they don’t have same demands and there are different costs associated (Gup, 2011). In United States banks offers intermediary services at cheaper cost as opposed to them negotiating directly. We will look at the role and how banks channel this money from agents who want to deposit and agents who are in need of money and want to borrow. The role of the bank is very important because they channel funds towards financing investments that are productive. Introduction Financial institutions are very essential in accelerating developments. For developments to be achieved, people have to invest and for people to invest they must save. People therefore can only safe if there are places to save and can invest if there are financial institutions to lend them money to invest. Financial institutions therefore play a key role because they take money from people who want to save and they don’t keep them but lend them to others on the other side who invest in the development programs (Schroeck, 2002). There has to be a process of financial development. Financial development occurs through the process of economic development. In some cases, financial developments are first put in place then steering development growth and in others, the growth of the economy and business lead to a need for a financial institution to sustain it. The current situations have affected financial institutions in immense ways, the current economic crisis have affected the sector and have impacted greatly on individual banks and as a result their priorities have changed in a move to cope with the changes in response to the sudden crisis that have hit across (Schroeck, 2002). Section 2 How are banks able to loan businesses, finance education and make it possible for people to buy homes with mortgages?, how are banks run so as to be able to earn more profits, how are they being managed with regard to balance sheet?, and what are the banks income determinants?. How are banks able to manage interest risks and also able to get financiers? Finally how banks being regulated and what are the benefits and some challenges that are encountered in an effort to regulate banks. Who is responsible or which are the main institution that play a bigger role in the management of banks and other financial institutions. The world economic crisis has reduced drastically people trust on the financial institutions specifically banking (Schroeck, 2002). Marketing therefore no longer guarantees customer loyalty and trust but a rather more practical strategy that is customer centered. Marketing has to be more creative in their work and therefore have to both apply different strategies that but together both science and art to quickly understand customers and find opportunity for growth, They have to apply different ways in dealing with multi diverse issues in order to meet the demand of diverse consumers and business banking customers regardless of their diversity, age and business (Hull, 2012). Majority of banks nowadays are changing and improving the appearance or efficiency of their processes. They have tremendously improved their efficiency and have worked hard towards fine tuning customers facing numerous distribution channels and also in building them into the system. Industries that will thrive well in the current business environment are those financial institutions that are sensitive to the need of customers and ones that control products and services as well as product and are innovative (Hull, 2012). Customers demands are changing every time and therefore the concerned institutions should tune into their demand, they should offer products and services that are of value and profitable. There has been greater urge to get more from little as things shift towards bringing down the cost and upping channels efficiency in order to increase customer satisfaction. It is a must do thing for the banks and other financial institutions to but together both internal and external innovations so as to come up with end-to-end customer experiences (Hull, 2012). They have to assess their models and strategies so as to operate from the customer’s point of view in order to bring the customer at the center hence improving its loyalty. In any financial institution, the current biggest concern is the often changing customers, rapid growth and progress in technology, increasing uncertainties and opportunities (Hull, 2012). Any decision being made by the management within banks is hinging on this key concerns and any decision or any other move by the management should address this issues of key concern adequately. Financial institutions are regulated differently, in some countries they are regulate by a sole agency while in some they are regulated by more than one agency in this case the united states of America (Gup, 2011). The banks make money through interest on loans offered to customers and of those money deposited with them (Gup, 2011). The difference in the interest they charge on lending minus the deposits is the profit banks make. In United States, banks concentrate more on making profits by diversifying their activities, they don’t depend much on the interest from lending but have shifted its focus to fees and offering on financial advices as this seems to be more reliable (Gup, 2011). These banks also currently merge with other financial institutions like insurance so that the customers will have to shop in one place hence banks maximizing their profits on them. Banks in America are also currently charging different interest with different customers based on their credit worthiness (Gup, 2011). Those customers who are not likely to pay back are charged more interest so that when they fail to pay within the stipulated period high rates will have already make up for it and those customers who are credit worthy are charged less as they will pay to completion. The banks have also made it easier for customers to access their money and carry out any transactions through the use of credit cards, debit cards and smart cards (Hull, 2012). All this incentives motivates consumers and drive them to loyalty. Section 4 Financial system has to be integrated so that there is close connections between different parts of this institutions and effectiveness will be enhanced. With such integrations there will be smooth flow of funds and correspondence of interest rate between different parts of the system (Robichek et al, 1967). Financial repressions a times hit the financial institutions. This is in case where governments chip in to the financial markets and subsequently adjusting prices and interest rates. The government will seek to attain low interest rates and by so doing it will discourage people from saving and in turn discouraging investments hence less developments. Such systems are called repressed system and under such system financial markets do not regulate themselves but are rather regulated by government. Internationalization has also dominated the financial markets in modern times. Internationalization has made the domestic financial institution to participate in the foreign markets and foreign financial institutions are playing a key role in the domestic markets (Robichek et al, 1967). This has made them to get integrated and interest rate have been shared as interest rate in one country it can have effect across countries that have integrated financial institutions. Financial can also sometimes be privatized to increase ownership management and control of the system (Robichek et al, 1967). This can only be realized if the states decease from ownership and by disinvestment therefore allowing private sectors to enter in to the sector. Conclusion Banking is the most essential feature for growth. It enables growth to be realized by interlinking those who are in need of money to invest and those who want to deposit money. They however did that at a much cheaper cost and greater efficiency. Banks in the process also do make profits by offering interest rates to the deposits and charging a little more interest rate for those who borrow from them (Sharma, 2001). Banks also don’t rely only on this interest rate for their growth but both from offering financial advisory and charging transaction fees. Financial institutions have transform over the recent few years due to competitiveness in the field and growing consumer’s demands and needs (Sharma, 2001). The crisis that often hit this financial market have raise lowered consumer trust and loyalty to this institutions, this loss of trust among the consumers have forced them to change their approach towards consumers and, currently they are very sensitive to consumer needs and preference. Financial institutions have also been integrated such that there is shared interest rate between domestic financial institutions and foreign. This integration has made it possible for domestic financial institutions to play a key role in the foreign markets while the foreign institutions play the same key role domestically (Sharma, 2001). The reforms in the banking sector have been huge and its impact has been incredible. Due to these reforms banks efficiency and profitability have tremendously improved. There is more use of technology for transaction processing and information management using computer and communication devices. Our banks have now a greater awareness of credit risk. References Benton E. Gup. 2011. Banking and Financial Institutions: A Guide for Directors, Investors, and Borrowers. New York: John Wiley & Sons Gerhard Schroeck. 2002. Risk Management and Value Creation in Financial Institutions. New York: John Wiley & Sons John Hull. 2012. Risk Management and Financial Institutions: Volume 796 of Wiley Finance. New York: John Wiley & Sons Sharma. 2001. Management Of Financial Institutions: With Emphasis On Bank And Risk Management. Ohio: PHI Learning Pvt. Ltd. Alexander A. Robichek et al. 1967. Management of financial institutions: notes and cases: Holt, Rinehart, and Winston series in finance. Texas: Holt, Rinehart and Winston. Read More