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International Banking

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  1. International Banking Introduction to Banking & Financial Systems Session 1 --Hilla Shahpur Maneckji International Banking

  2. Introduction (1) • Oscar Wilde wrote that— a cynic knows the price of everything and the value of nothing. • Although that’s certainly worthy of further reflection, for our purposes — Price and Value refer to the same thing — How much a security or financial asset is worth? International Banking

  3. Introduction (2) • Financial Markets generate prices whenever securities are bought and sold. • Financial Institutions value financial assets whenever making loans to businesses or consumers. • Banks and other financial intermediaries take funds from one group of investors and re-deploy those funds by investing in financial assets. International Banking

  4. Banks International Banking

  5. What is a Bank? (1) • A Bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. • Banks serve as the principal caretaker of the economy’s money supply and with other financial intermediaries provide an important source of funds for consumers and businesses. • The first modern bank was founded in Genoa, Italy in 1406, its name was Banco di San Giorgio (Bank of St. George). • Many other financial activities were added over time. International Banking

  6. What is a Bank? (2) • For example banks are important players in financial markets and offer financial services such as investment funds. • In some countries banks are the primary owners of industrial corporations while in other countries banks are prohibited from owning non-financial companies. • In Japan, banks are usually the nexus of cross share holding entity known as Zaibatsu. • In France “Bancassurance” is highly present, as most banks offer insurance services (and now real estate services) to their clients. International Banking

  7. Primary Operations of a Bank (1) • The primary operations of banks include: • Keeping money safe while also allowing withdrawals when needed; • Issuance of cheque-books so that bills can be paid and other kinds of payments can be delivered by post; • Provide personal loans, commercial loans, and mortgage loans (typically loans to purchase a home, property or business); • Issuance of credit cards and processing of credit card transactions and billing; • Issuance of debit cards for use as a substitute for cheques; • Allow financial transactions at branches or by using Automatic Teller Machines (ATMs) International Banking

  8. Primary Operations of a Bank (2) • Provide Wire Transfers of funds and Electronic Fund Transfers between banks; • Facilitation of standing orders and direct debits, so payments for bills can be made automatically; • Provide overdraft agreements for the temporary advancement of the bank’s own money to meet monthly spending commitments of a customer in their current account; • Provide Charge Card advances of the bank’s own money for customers wishing to settle credit advances monthly; • Provide a cheque guaranteed by the bank itself and prepaid by the customer, such as a Cashier’s Cheque or Certified Cheque; and • Notary service for financial and other documents. International Banking

  9. Traditional Banking Activities (1) • Banks act as payment agents by conducting checking or current accounts for customers, paying cheques drawn by customers on the bank, and collecting cheques deposited to customers’ current accounts. • Banks also enable customer payments via other payment methods such as Telegraphic Transfer, EFTPOS (Electronic Funds Transfer at Point Of Sale), and ATM. • Banks borrow money by accepting funds deposited on current account, accepting term deposits and by issuing debt securities such as banknotes and bonds. International Banking

  10. Traditional Banking Activities (2) • Banks lend money by making advances to customers on current account, by making installment loans, and by investing in marketable debt securities and other forms of money lending. • Banks provide almost all payment services, and a bank account is considered indispensable by most businesses, individuals and governments. • Non-banks that provide payment services such as remittance companies are not normally considered an adequate substitute for having a bank account. International Banking

  11. Traditional Banking Activities (3) • Banks borrow most funds from households and non-financial businesses, and lend most funds to households and non-financial businesses. • Non-bank lenders provide a significant and in many cases adequate substitute for bank loans, money market funds, cash management trusts and other non-bank financial institutions as well as in many cases also provide an adequate substitute to banks for lending savings to. International Banking

  12. Banking Channels (1) • Banks offer many different channels to access their banking and other services: • A Branch, banking centre or financial centre is a retail location where a bank or financial institution offers a wide array of face-to-face service to its customers. • ATM is a computerized telecommunications device that provides a financial institution’s customers a method of financial transactions in a public space without the need for a human clerk or bank teller. Most banks now have more ATMs than branches, and ATMs are providing a wider range of services to a wider range of users. In Hong Kong, most ATMs enable anyone to deposit cash to any customer of the bank’s account by feeding in the notes and entering the account number to be credited. Also, most ATMs enable card holders from other banks to get their account balance and withdraw cash, even if the card is issued by a foreign bank. International Banking

  13. Banking Channels (2) • Mail is part of the postal system which itself is a system wherein written documents typically enclosed in envelopes, and also small packages containing other matter, are delivered to destinations around the world. This can be used to deposit cheques and to send orders to the bank to pay money to third parties. Banks also normally use mail to deliver periodic account statements to customers. • Telephone Banking is a service provided by a financial institution which allows its customers to perform transactions over the telephone. This normally includes bill payments for bills from major billers (e.g. for electricity). • Online Banking is a term used for performing transactions, payments etc. over the Internet through a bank, credit union or building society’s secure website. International Banking

  14. Economic Functions (1) • The economic functions of banks include: • Issue of Money—in the form of banknotes and cheques or payment at the customer’s order. These claims on banks can act as money because they are negotiable and repayable on demand, and are valued at par and can effectively be transferable by delivery in the case of banknotes or by drawing a cheque, delivering it to the payee to bank or cash. • Netting and Settlement of Payments—banks act both as collection agents and paying agents for customers, and participate in inter-bank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economize on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables payment flows between geographical areas to offset, reducing the cost of settling payments between those areas. International Banking

  15. Economic Functions (2) • Credit Intermediation—banks borrow and lend back-to-back on their own account as middle men. • Credit Quality Improvement—banks lend money to ordinary commercial and personal borrowers, but are high quality borrowers. The improvement comes from diversification of the bank’s assets and the bank’s own capital which provides a buffer to absorb losses without defaulting on its own obligations. However, since banknotes and deposits are generally unsecured, if the bank gets into difficulty and pledges assets as security to try to get the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position. International Banking

  16. Economic Functions (3) • Maturity Transformation—banks borrow more on demand debt and short term debt, but provide more long term loans. In other words; banks borrow short and lend long. Bank can do this because they can aggregate issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemptions of banknotes), maintain reserves of cash, invest in marketable securities that can be readily converted to cash if needed, and raise replacement funding as needed from various sources (e.g. wholesale cash markets and securities markets) because they have a high and more well known credit quality than most other borrowers. International Banking

  17. Types of Banks • Most banks are profit-making, private enterprises. However, some are owned by government, or are non-profits. • Banks’ activities can be divided into— • Central Banks are normally government owned banks, often charged with quasi-regulatory responsibilities, e.g. supervising commercial banks, or controlling the cash interest rate. They generally provide liquidity to the banking system and act as the lender of last resort in event of a crisis. • Retail Banking, dealing directly with individuals and small businesses; • Business Banking, providing services to mid-market business; • Corporate Banking, directed at large business entities; • Private Banking, providing wealth management services to high net worth individuals and families; and • Investment Banking, relating to activities on the financial markets. International Banking

  18. Profitability of Banks (1) • A bank generates a profit from the differential between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities. • This difference is referred to as the spread between the cost of funds and the loan interest rate. • Historically, profitability from lending activities has been cyclical and dependent on the needs and strengths of loan customers. • In recent history, investors have demanded a more stable revenue stream and banks have therefore placed more emphasis on transaction fees, primarily loan fees but also including service charges on an array of deposit activities and ancillary services (international banking, foreign exchange, insurance, investments, wire transfers, etc.). • Lending activities, however, still provide the bulk of a commercial bank’s income. International Banking

  19. Profitability of Banks (2) • Merging banking, investment, and insurance functions allows traditional banks to respond to increasing consumer demands for “one-stop shopping” by enabling cross-selling of products. • They have expanded the use of risk-based pricing from business lending to consumer lending, which means charging higher interest rates to those customers that are considered to be a higher credit risk and thus increased chance of default on loans. • This helps to offset the losses from bad loans, lowers the price of loans to those who have better credit histories, and offers credit products to high risk customers who would otherwise been denied credit. • They have sought to increase the methods of payment processing available to the general public and business clients. International Banking

  20. Profitability of Banks (3) • These products include debit cards, pre-paid cards, smart cards, and credit cards. • They make it easier for consumers to conveniently make transactions and smooth their consumption over time (in some countries with under-developed financial systems, it is still common to deal strictly in cash, including carrying suitcases filled with cash to purchase a home). • However, with convenience of easy credit, there is also increased risk that consumers will mismanage their financial resources and accumulate excessive debt. • Banks make money from card products through interest payments and fees charged to consumers and transaction fees to companies that accept the cards. International Banking

  21. Challenges Within the Banking Industry (1) • The banking industry is a highly regulated industry with detailed and focused regulators. • Each regulatory agency has their own set of rules and regulations to which banks must adhere. • While banks struggle to keep up with the changes in the regulatory environment, regulators struggle to manage their workload and effectively regulate their banks. • The impact of these changes is that banks are receiving less hands-on assessment by the regulators, less time spent with each institution, and the potential for more problems slipping through the cracks, potentially resulting in an overall increase in bank failures. International Banking

  22. Challenges Within the Banking Industry (2) • The changing economic environment has a significant impact on banks and thrifts as they struggle to effectively manage their interest rate spread in the face of low rates on loans, rate competition for deposits and the general market changes, industry trends and economic fluctuations. • It has been a challenge for banks to effectively set their growth strategies with the recent economic market. • A rising interest rate environment may seem to help financial institutions, but the effect of the changes on consumers and businesses is not predictable and the challenge remains for banks to grow and effectively manage the spread to generate a return to their shareholders. • The management of the banks’ asset portfolios also remains a challenge in today’s economic environment. International Banking

  23. Challenges Within the Banking Industry (3) • Loans are a bank’s primary asset category and when loan quality becomes suspect, the foundation of a bank is shaken to the core. • While always an issue for banks, declining asset quality has become a big problem for financial institutions. • There are several reasons for this, one of which is the lax attitude some banks have adopted because of the years of “good times.” • The potential for this is exacerbated by the reduction in the regulatory oversight of banks and in some cases depth of management. • Problems are more likely to go undetected, resulting in a significant impact on the bank when they are recognized. • In addition, banks, like any business, struggle to cut costs and have consequently eliminated certain expenses, such as adequate employee training programs. International Banking

  24. Challenges Within the Banking Industry (4) • Banks also face a host of other challenges such as aging ownership groups. • Many banks’ management teams and board of directors are aging. • Banks also face ongoing pressure by shareholders, both public and private, to achieve earnings and growth projections. • Regulators place added pressure on banks to manage the various categories of risk. • Banking is also an extremely competitive industry. • Competing in the financial services industry has become tougher with the entrance of such players as insurance agencies, credit unions, cheque cashing services, credit card companies, etc. • As a reaction, banks have developed their activities in financial instruments, through financial market operations such as brokerage and trading and become big players in such activities. International Banking

  25. Bank Crisis • Banks are susceptible to many forms of risk which have triggered occasional systemic crises. • Risks include Liquidity Risk (the risk that many depositors will request withdrawals beyond available funds), Credit Risk (the risk that those who owe money to the bank will not repay), and Interest Rate Risk (the risk that the bank will become unprofitable if rising interest rates force it to pay relatively more on its deposits than it receives on its loans), among others. • Banking crises have developed many times throughout history when one or more risks materialize for a banking sector as a whole. • Prominent examples include the U.S. Savings and Loan crisis in 1980s and early 1990s, the Japanese banking crisis during the 1990s, the bank run that occurred during the Great Depression, and the recent liquidation by the Central Bank of Nigeria, where about 25 banks were liquidated. International Banking

  26. Banking In Pakistan International Banking

  27. Banking In Pakistan • Banking in Pakistan first formally started in Pakistan during the period of British colonialization in the Asian subcontinent. • After independence from British Raj and India in 1947, and the emergence of Pakistan as a country in the globe, the scope of banking in Pakistan has been increasing and expanding continuously. • Pakistan’s oldest bank is the State Bank of Pakistan, which is also the Central Bank of the nation, formally the Reserve Bank of India, founded in 1935. • After Independence, Muhammad Ali Jinnah took actions to establish a central bank in Pakistan which resulted in the new founding of the State Bank of Pakistan, with its headquarters in Karachi. • Habib Bank Limited is Pakistan’s oldest commercial bank, founded in 1941. International Banking

  28. List of Banks in Pakistan (1) • Central Bank— • State Bank of Pakistan • Nationalized Scheduled Banks— • National Bank of Pakistan • First Women Bank Limited • Specialized Banks— • Industrial Development Bank • Punjab Provincial Cooperative Bank • SME Bank • Zarai Taraqiati Bank International Banking

  29. List of Banks in Pakistan (2) • Private Scheduled Banks— • Allied Bank of Pakistan • Arif Habib Bank Limited (formerly Arif Habib Rupali Bank) • Askari Bank Limited • Atlas Bank Limited • Bank Al-Habib Limited • Bank Alfalah Limited • BankIslami Pakistan Limited • Bank of America (acquired by JS Bank Limited) • Bank of Punjab • Barclays Bank International Banking

  30. List of Banks in Pakistan (3) • Private Scheduled Banks (Cont.)— • Citibank Limited • Crescent Commercial Bank Limited • Faysal Bank Limited • Habib Bank AG Zurich (now Habib Metropolitan Bank Limited) • Habib Bank Limited • Habib Metropolitan Bank Limited • HSBC Bank Limited • JS Bank Limited • KASB Bank Limited • MCB Bank Limited (formerly Muslim Commercial Bank) • Mybank Limited International Banking

  31. List of Banks in Pakistan (4) • Private Scheduled Banks (Cont.)— • NIB Bank Limited • PICIC Commercial Bank Limited (acquired by NIB Bank Limited) • Royal Bank of Scotland (RBS) (formally ABN Amro Bank Limited ) • Samba Bank Limited • Saudi Pak Non-Commercial Bank • Standard Chartered Bank Limited • Soneri Bank Limited • Silkbank Limited (formally Saudi Pak Commercial Bank) • Union Bank Limited (acquired by Standard Chartered Bank) • United Bank Limited International Banking

  32. List of Banks in Pakistan (5) • Investment Banks— • Al-Towfeek Investment Bank Limited • AMZ Securities • Atlas Investment Bank Limited • Crescent Investment Bank Limited • Escorts Investment Bank Limited • First Credit and Investment Bank Limited • First International Investment Bank Limited • Fidelity Investment Bank Limited • Invest Capital Investment Bank Limited • Islamic Investment Bank Limited • Jahangir Siddiqui Investment Bank Limited International Banking

  33. List of Banks in Pakistan (6) • Investment Banks (Cont.)— • Orix Investment Bank (Pakistan) Limited • Prudential Investment Bank Limited • Trust Investment Bank Limited • Islamic Banks— • Dawood Islamic Bank Limited (formerly First Dawood Islamic Bank Limited) • Dubai Islamic Bank Pakistan Limited • Meezan Bank Limited • AlBaraka Islamic Bank • BankIslami Pakistan Limited • Emirates Global Islamic Bank Limited International Banking

  34. List of Banks in Pakistan (7) • Venture Capital Companies— • AMZ Ventures • Pakistan Emerging Ventures Limited • Pakistan Venture Capital Limited • Micro Finance Banks— • The First Micro Finance Bank Limited • Khushali Bank • Karakuram Bank • Network Micro Finance Bank • Pak Oman Micro Finance Bank • Rozgar Micro Finance Bank • Tameer Microfinance Bank Limited • Kashf Foundation Limited International Banking

  35. List of Banks in Pakistan (8) • Development Financial Institutions— • Investment Corporation of Pakistan • Pak Brunaei Investment Company Limited • Pak China Investment Company Limited • Pakistan Industrial Credit and Investment Corporation Limited (PICIC) • Pak Kuwait Investment Company Limited • Pak Libya Holding Company Limited • Pak-Oman Investment Company Limited • Saudi Pak Industrial & Agricultural Investment Company Limited (SAPICO) • House Building Finance Corporation (HBFC) International Banking

  36. List of Banks in Pakistan (9) • Discount & Guarantee Houses— • First Credit & Discount Corporation Limited • Prudential Discount & Guarantee House Limited • National Discounting Services Limited • Speedway Fordmetall (Pakistan) Limited • Housing Finance Companies— • Asian Housing Finance Limited • Citibank Housing Finance Company Limited • House Building Finance Corporation (HBFC) • International Housing Finance Limited International Banking

  37. International Banks International Banking

  38. What is an International Bank? (1) • An International Bank is a financial entity that offers financial services, such as payment accounts and lending opportunities, to foreign clients. • These foreign clients can be individuals and companies, though every international bank has its own policies outlining with whom they do business. • International banks tend to offer their services to companies and to fairly wealthy individuals. • But plenty of international banks, particularly Swiss banks, open their doors to customers of any income bracket. International Banking

  39. What is an International Bank? (2) • Companies do business with international banks to help facilitate international business, the complexities of which can be quite costly. • Individuals work with international banks for a number of reasons, including tax avoidance, probably the term you’ve heard the most in relation to offshore banking. • Tax avoidance isn’t necessarily illegal. • But there are plenty of other hazards in international banking. International Banking

  40. Additional Services Offered by International Banks (1) • International Banks also offer the following  value-added trade products and services such as: • Prepayment and Structured Pre-Export Facilities: these services finance pre-export fabrication and provide export financing for a country’s key exports. • Export Receivables Financing. • Programs offered by Regional Development Banks and Institutions: the International Finance Corporation, Asian Development Bank, World Bank, and other institutions  support international sales by providing guarantees as credit support or enhancement. International Banking

  41. Additional Services Offered by International Banks (2) • Linked Exports and Import Financing: In some countries the export contract can act as security for essential imports.  For example, in some countries that export value-added products (Asia has many), if imports (generally but not always raw materials) do not flow into the country then value-added exports stop.  An international bank can credit-enhance the deal by using the export contract as security thus allowing country imports to continue. • Global Trade Management: This allows you to out-source the trade documentation preparation to others who are more familiar with it and who work with these forms daily. International Banking

  42. Additional Services Offered by International Banks (3) • Government-Backed Insurance and Guarantee Programs: These are available from government bodies such as Exim Bank or private insurers and can help your company spread the risk. • Option-Linked Financings for Commodities: Again, these are risk spreading options.  Examples are trade finance solutions that have interest rate, foreign exchange, and commodity-hedging options.  These can be made part of the transaction if desired. • Counter-Trade Transactions: commodities, durable and other goods are essentially bartered.  International Banking

  43. Additional Services Offered by International Banks (4) • Forfeiting: This is a provision of medium-term trade finance where trade contracts are  sold into the secondary market. • Multinational Inter-Company Structured Trade / Tax Facilities. International Banking

  44. Financial Institutions International Banking

  45. What is a Financial Institution? • A Financial Institution acts as an agent that provides financial services for its clients or members. • Financial Institutions generally fall under financial regulation from a government authority. • Common types of Financial Institutions include— • Commercial Banks; — Saving Banks; • Insurance Companies; — Building Societies; • Credit Unions; — Mutual Funds; • Stock Brokerages; — Finance Companies; • Pension & Retirement Funds; and • Asset Management Companies. International Banking

  46. Functions of a Financial Institution • Financial Institutions provide a service as intermediaries of the capital and debt markets. • They are responsible for transferring funds from investors to companies, in need of those funds. • The presence of Financial Institutions facilitates the flow of monies through the economy. • To do so, savings are pooled to mitigate the risk brought to provide funds for loans. International Banking

  47. What is a DFI? • A DFI or Development Financial Institution is generic term used to refer to a range of alternative financial institutions including microfinance institutions, community development financial institution and revolving loan funds. • Common types of DFIs in Pakistan include— • Pakistan Industrial Credit & Development Corporation (PICIC); • Industrial Development Bank of Pakistan (IDBP); • Agricultural Development Bank of Pakistan (ADBP); • House Building Finance Corporation (HBFC); • National development Finance Corporation (NDFC); • Small & Medium Business Corporation; and • Bankers Equity Limited. International Banking

  48. International Financial Institutions International Banking

  49. What is an IFI? (1) • International Financial Institutions, or IFIs, refers to financial institutions that have been established (or chartered) by more than one country, and hence are subjects of international law. • Their owners or shareholders are generally national governments, although other international institutions and other organizations occasionally figure as shareholders. • The most prominent IFIs are creations of multiple nations, although some bilateral financial institutions (created by two countries) exist and are technically IFIs. International Banking

  50. What is an IFI? (2) • Many of these are multilateral development banks. • The best-known IFIs are— • The World Bank • International Monetary Fund • Regional Development Banks • Some of the IFIs are considered UN agencies. International Banking