Measuring Profitability of Retail Products in Qatar - Coursework Example

Measuring Profitability of Retail Products In Commercial Bank of Qatar Research Proposal Submitted in part fulfillment of the degree of MBA in Management School of Management, University of Bradford Date of Submission May 2007 Table of Contents 1. Introduction 2 2. Research Problem 4 2.1 Research Problem Description 4 2.2 Significance and Contribution of the Research Problem 4 2.2 Delimitation and Assumptions of the Problem 4 2.3 Delimitation and Assumptions of the Problem 5 2.4 Research Objective 5 2.5 Research Questions 6 2.6 Chapter Outline 6 2.7 Research Validity 7 3. Research Data and Methodology 7 3.1 Research Data 7 3.1 Research Methodology 8 4. Research Plan 9 5. Ethical Issues 9 6. Bibliography 10 1. Introduction The first bank in history was referred to the offices of the moneychangers of the London Royal Exchange established in 1565. Since then banks' mission to provide customers with financial activities that would simplify their day-to-day activities did not change. Even though the way banks achieve this mission has changed dramatically. Modern innovations in Information and Communication Technologies (ICT) have enabled banks to widen their range of financial services. Financial institutions deal with millions of different currencies on daily bases. The profit from these services differs according to a number of different factors such as volume and nature of the service provided. To increase bank profitability, it is important to distinguish between retail banking products that produce high profit from those that produce low profit. (Open Solutions 2007) provides a profit analysis solution referred to as "ProfitVision". ProfitVision is ready-to-deploy solution that can be adapted to the financial institution needs. It integrates with other accounting solutions to extract real time data for its operations. The institution decides how deep their profitability measure goes by deciding which products, branches and business units to include. The institution picks the data to use in profit calculations and the formulas to be applied to generate the results. The profit model defines processes, threshold and indices that are specific to the enterprise to provide decision makers with custom reports. ProfitVision allows managers to analyze and segment their customers, products and business entities according to profitability. Results can be exported to internal systems for automated action (Open Solutions 2007). The Commercial Bank of Qatar (CBQ) is the second largest bank in Qatar with 6.8 billion dollars as of June 2006 (Peninsula 2006). CBQ provides a number of retail banking services such as customer accounts, loans and credit cards. 2. Research Problem 2.1 Research Problem Description Most information systems employed within banks do not provide bank managers with measurements of profitability of different bank segments dealing in different banking retail products. Bank managers base their decision making on hunches and not actual profitability of different bank segments. Terri Stonebraker, director of customer services at Bellco Credit Union, said "Bellco operated on hunches about its various segments. We needed to know who the most and least profitable segments are" (Marlin 2003). CBQ similar to most banks suffer from lack of profitability measures of different bank segments. Bank senior managers lack the measures to highlight high and low profitability within bank segments. CBQ senior managers require profitability analysis of bank sectors to improve the quality of financial management within the bank. 2.2 Significance and Contribution of the Research Problem Profit analysis of different retail banking products and bank sectors develops a profit-conscious decision making throughout the institution. Financial institution senior managers would be able to encourage strategies to attract and retain most profitable customers, as well as make necessary change to least-profitable retail products to leverage overall return. 2.3 Delimitation and Assumptions of the Problem Research is limited to the profitability of financial services provided by CBQ. Profitability of retail banking product offered by CBQ is calculated as the net profit from provision of each product which is equal to the difference between income and expenses. 2.4 Research Objective This research aims at achieving the following research objectives: To conduct an in-depth investigation and analysis of the currently available profitability models used to measure the profitability of different retail products within financial institutions. Explore the feasibility of building a profitability model for the retail products provided in CBQ by extracting real time data from the currently employed accounting system. 2.5 Research Questions Based on the research objectives, the extensive literature review, brainstorming questions and informal talks with domain experts, five research questions have been proposed as follows: Question 1: What retail banking product profitability models have been used by current financial institutions Question 2: How can net profit based on difference between income and expenses of different retail banking products be extracted from periodical banking financial reports of CBQ Question 3: How can profitability based on net profit and invested capital be measured for different retail banking products Question 4: How accurately and reliably can profitability of retail banking products be used by CBQ managers to provide profitability-based decision making 2.6 Chapter Outline The answers to the research questions presented in last section would yield the constituents of the chapters of the research dissertation as follows: Chapter 1 Research Introduction and Proposal Chapter 2 Literature Review of retail banking product profitability models that are used by current financial institutions Chapter 3 The proposed model of profitability measure Chapter 4 Results and Analysis of Results Chapter 5 Conclusion and Future Work 2.7 Research Validity CBQ senior management approval of the research would ensure the validity of the data used during the analysis. The risk of invalid data is minimal since the data is extracted from CBQ financial database and periodical financial reports. Data collected by interview with different sectors of the bank are also trustworthy as it comes from employees of the same bank who are informed of their leadership approval and care about the well being of their bank. 3. Research Data and Methodology 3.1 Research Data The data needed to compute the profitability of retail banking products involves the cost and revenues of different products. The cost of product involves employee time on the job and other bank resources utilized to provide the specific retail banking product. The revenue from different retail products could be computed as the aggregate revenue for each retail product. The net profit of each product is computed as the difference between the costs and revenues. 3.1 Research Methodology The research approach and methodology adopted for this paper will employ both qualitative and quantitative research methods. Quantitative research methods will involve mathematical modeling of numerical data extracted from the CBQ financial database. Specially structured queries will be executed on CBQ financial database to extract the required numerical data that relates to the expenses and revenues of the different retail banking products. Extracted numerical data will be processed by numerical methods to compute the revenues for each retail-banking product. Qualitative research methods will involve interviews with different segments of CBQ. Individuals from the sectors that provide different retail banking products would be chosen for interview. The interviews would aim at understand the functions and responsibilities of each sector in addition to the costs of each retail banking product. The results of the interview would provide the time allocated to each product in addition to the time of allocation of other resources of CBQ is computed. The time human and non-human resources are allocated to different retail products is converted into cost as to compute the cost of provision of different retail products to customers. The model of profitability analyzes of different aggregate the costs and revenues of different retail banking products to compute the net profit of products as the difference between both aggregates. 4. Research Plan Research steps are outlines as a function of time in terms of initiating various phases of research and the target date for completion. The table below sets out the key dates for the research. Date Step Completed 5 May 2007 Completion of Research Proposal and completion of chapter 1. Literature Review of Profitability Models and completion of chapter 2. Fieldwork and collection of Data and Interviews Formulation of the profitability model of retail banking products and completion of chapter 3. Analysis of Data and results and completion of chapter 4. 30 July Completion of Conclusions and Future Work 5. Ethical Issues CBQ senior manager would authorize the extraction of data from the financial database, in addition to the data formulated from the interview with different bank segments. All interviewed bank personnel will be informed of CBQ senior management approval. The authorization to use CBQ data is for education purpose only. The researcher is responsible to demonstrate research results to CBQ senior board for determination of best actions to utilize research findings. 6. Bibliography Athanasoglou, P., Brissimis, S. & Delis, M. (2005). Bank-specific, industry-specific and macroeconomic determinants of bank Profitability. http://mpra.ub.uni-muenchen.de/153/. Open Solutions. (2007). Financial Accounting for Credit Unions. Open Solutions Inc. retrieved on 27 April, 2007 from http://www.opensolutions.com/finaccountingCU.htm. Bernstein, P. (1953). Profit Theory--Where do we go from Here The Quarterly Journal of Economics, Vol. 67, No. 3. (Aug., 1953), pp. 407-422. Clark, J. & Siems, T. (2002). X-Efficiency in Banking: Looking beyond the Balance Sheet. Journal of Money, Credit and Banking, Vol. 34, No. 4. (Nov., 2002), pp. 987-1013. Commercial Bank of Qatar. (2006). Interim Condensed Consolidated Financial Statements. Retrieved on 26 April, 2007 from http://www.cbq.com.qa/ Commercial Bank of Qatar. (2005). Annual Report. Retrieved on 26 April, 2007 from http://www.cbq.com.qa/ Commercial Bank of Qatar. (2004). Annual Report. Retrieved on 26 April, 2007 from http://www.cbq.com.qa/ Commercial Bank of Qatar. (2003). Annual Report. Retrieved on 26 April, 2007 from http://www.cbq.com.qa/ Fair Isaac (2004). Accelerating Profitable Customer Acquisitions. A Fair Isaac LiquidCredit White Paper, March 2004. Retrieved on 30 April, 2007 from www.fairisaac.com. Haslem, J. (1967). A Statistical Analysis of Member Bank Profitability Differences. The Journal of Finance, Vol. 22, No. 4. (Dec., 1967), p. 695. Humphrey, D. & Pulley, L. (1997). Responses to Deregulation: Profits, Technology, and Efficiency. Journal of Money, Credit and Banking, Vol. 29, No. 1. (1997), pp.73-93. Katics, K., Upadhyay, V. (2004). Retail Credit Risk Management in Asia/Pacific. A Fair Isaac White Paper in April 2004. retrieved on 28 April, 2007 from www.fairisaac.com Khan, M. & Mirakhor, A. (1990). Islamic Banking: Experiences in the Islamic Republic of Iran and in Pakistan. Economic Development and Cultural Change, Vol. 38, No. 2. (Jan., 1990), pp. 353-375. Laudadio, L. (1962). The Adequacy of Bank Profits. The Journal of Finance, Vol. 17, No. 3. (Sep., 1962), p. 505. Marlin, S. (2003). Profitability Software Pays Off for Bellco Community Bank. Bank Systems and Technology, April 2007. Retrieved on 30 April, 2007 from http://www.banktech.com/story/BNK20030527S0016 Mccarthy, E. (2007). "With Cognos and Fidelity Information services, Customer Data is much more consumable and therefore, much Strategic to our organization. Bank of Ireland. Retrieved on 28 April, 2007 from www.cognos.com Mullineaux, D. (1978). Economies of Scale and Organizational Efficiency in Banking: A Profit- Function Approach. The Journal of Finance, Vol. 33, No. 1. (Mar., 1978), pp. 259-280. Nagar, V. (1999). Operational Design Choices in Retail Banking. University of Michigan Business School, Ann Arbor, Michigan, U.S.A. Neff, D., Dixon, B. & Zhu, S. (1994). Measuring the Efficiency of Agricultural Banks. American Journal of Agricultural Economics, Vol. 76, No. 3. (Aug., 1994), pp. 662-668. Olson, R. (1966). Profit Planning in Commercial Banks. The Journal of Finance, Vol. 21, No. 3. (Sep., 1966), pp. 560-561. Peninsula. (2006). Moody's assigns A1 rating to Commercial bank EMTN plan. The Peninsula, Qatar's Leading English Daily. Obtained on 27 April 2007 from http://www.thepeninsulaqatar.com/Display_news.aspsection=business_news&month=october2006&file=business_news200610034731.xml Robinson, K. (2006). How to Increase Retail Banking Profitability The Banker. Cognos Inc. Retrieved on 28 April, 2007 from www.cognos.com Seiford, L. & Zhu, J. (1999). Profitability and Marketability of the Top 55 U.S. Commercial Banks Management Science, Vol. 45, No. 9, Performance of Financial Institutions. (Sep., 1999), pp.1270-1288. Sanchez, S. (2001). ABC's of Output Analysis. Proceedings of the 2001 Winter Simulation Conference Operations Research Department and Graduate School of Business & Public Policy. Naval Postgraduate School, Monterey, California, U.S.A. Todhanakasem, W., Lynge, M., Primeaux, W. & Newbold, P. Economies of Scale and Organization Efficiency in Banking. Managerial and Decision Economics, Vol. 7, No. 4. (Dec., 1986), pp. 255-261. Read More