Read the following paper and write annotated bibliography: Business analysis about bankingand financial sector Banking and financial
Question:
Read the following paper and write annotated bibliography:
Business analysis about bankingand financial sector
Banking and financial services as defined in Laeven (2014) are those economic services that are offered by banks. That relates to but not limited to; money management, providing financial advice, stock brokerage and provision of real estate funds to mention a few.According toAvgouleas and Cullen (2014) the banking sectors is the backbone of any countries economy, this is because the banking sector is responsible for providing the necessary financial resources and advice. That would propel the country forward in different spheres such as enhanced industrial growth, inflow of foreign currency and remittances, industrial and agricultural growth.Conversely, Berger, Molyneux and Wilson (2014) further asserts to the certainty that the banking and financial sectors has been considered to be a boring sector. Relevant stakeholders have adopted different measures such as agent banking, e-commerce transacting, internet, and ATM banking among other technological approaches to banking in order to revive this lackluster image.
The future growth of the banking sector in terms of costs, pricing power and elasticity of demand
The future of the banking and financial sector presents ample opportunities in different spheres such as. Equity financing, pricing power, long-term lending, price elasticity of demand to mention a few. For instance, through equity financing the long-term deposits of the banks will increase, this will translate to more investment banking in the form of pension products and insurance. In addition, due to the shift in the business environment from human-driven to technology-driven operating environment. Banks will be forced to hire professional experts and purchase technology driven devices. Through adopting this strategy, the banking sector will incur more costs but realize improved efficiency and effectiveness. Therefore, in order for the banks to remain profitable, the must identify their revenue and cost center. Upon identifying these centers, companies should adopt strategies to minimize their costs as well as adopt new strategies to improve their revenues (Laeven, 2014).
Currently, the price elasticity of demand in the banking sector is relatively high; this is because the interest that is charged on borrowed funds is high, making banks to have surplus credit to cater for potential credit demand. However, in the future the price elasticity of demand will decrease because of the different interventions and measures such as the Oxley-Act for auditing and accounting that have been adopted by the banking sector. These measures are aimed at ensuring that a low interest scenario is created to help lenders borrow at a low interest rate. Through this strategy, consumers will have more investment and disposable income. To sum it all, the future of the pricing power in the banking sector will decline. The banking sector both nationally and globally is well regulated through the International Monetary Fund (IMF). Through such regulations, banks are required to maintain a balanced play-ground through promoting financial stability through reducing the pricing rates (Avgouleas and Cullen, 2014).
The risks associated with the banking sectors
Banks face numerous risks in the cause of conducting their business. The profitability and sustainability of different banks depend on how effectively and efficiently the banks manage the risks arising out of their operations. The risks also affect the amount of capital in the form of retained earnings and subordinated debts that are held by the banks. Some of the risks associated with the banking sector include; credit risks – these are those risks that arise from borrowers who stop making their credit payments (Laeven, 2014). Liquidity risks – these represent those risks that arise due totrading of financial instruments such as shares and bonds in the securities and stock market. This represents a risk because whenever the financial instruments take a long time to trade the more likely the company is likely to suffer losses.Market risk – these are those risks arising because of the changes in value of market components such as labor and raw materials (Bowe, Briguglio and Dean, 2014).
Just as highlighted earlier, the banking sector plays an integral part in any economy, among the main functions of the banking and financial sector to the economy include. One, issuance of money – the banking sector is responsible for issuing money to different economic actors in the form of banknotes and checks at the request of customers. The banknotes are easily transferrable among economic actors while checks can be drawn either in cash or bank. Two, act as credit intermediaries –banks lend and borrow back-to-back on their own (Avgouleas and Cullen, 2014).
Three, settlement and netting of payments –banks act as paying and collection agents on behalf of their customers, especially when interbank transactions are involved. Through performing this function inflow and outflow transactions offset each other. Four improvements of credit policy – banks lend money to both individuals and corporate bodies, this ensures that the company diversifies its operations by that creating a buffer to absorb any losses that would affect its operations. Five, creation of money – whenever banks give out loans to the fractional-reserve approach. A new virtual sum of money is created due to the interest charged on borrowed funds (Beyhaghi, D’Souza and Roberts, 2014).
There are over five types of banks that operate in the financial and banking sector. These banks include; one, commercial banks – these represent those banks whose operations are limited to banking and investment activities. These are those banks that deal with getting deposits or giving loans to corporate or large business entities. Two, credit banks – they are also commonly referred to as co-operative banks. These are those banks that are owned by depositors who borrow money from these banks at a relatively lowerinterest rate compared to those offered by other banks. Membership to co-operative banks is limited to members of a certain geographicallocation, profession and religion. Three, private banks – these are those banks that manage assets of people who have a net worth that is very high (Bowe, Briguglio and Dean, 2014).
Four, Land Development Banks – these are the oldest banks and as the name suggests, they are those banks that were established in order to promote land development. Increase agricultural development and provide direct and indirect financial support to members in managing their tangible assets. Five, saving banks – traditionally the purpose of these banks was to offer its member ease avenue to saving. However, this role has expanded to include; provision of credit and insurance services to members and retail banking. Other categories of banks include; community-based banks, postal saving banks, Islamic banks, central banks, merchant banks offshore banks and building society banks (Berger, Molyneux, and Wilson, 2014).
According to Berger, Molyneux and Wilson (2014) technological advancement, the internet and emergence of modern facilities and equipments have eliminated the inter-global barriers that hindered the free movement of people and banking services between countries. In addition, modern financial and banking technologies such as Bloomberg have enabled banks to enlarge their global reach. This is because banks do not have to be in the same geographical location with their customers in order to adequately satisfy their needs.Avgouleas and Cullen (2014) further highlights that in the contemporary business environment banks can provide services across national and international boundaries. Despite the huge potential that exists in the global market, banks have not adequately satisfied this need because of the different laws and regulations that must be complied with. For instance, banks in the United States have not entered the global market because of the Riegle-Neal Act that advocates efficient interstate banking at the detriment of venturing into foreign markets.
Berger, Molyneux and Wilson (2014) contend to the reality that, the banking sector is the hardest sector to analyze when a person wants to invest in them. The reason for this being that; most banks have numerous subsidiaries or branches in different geographical locations. Not to mention the amount in billions of dollars that the banks hold both in cash and in form of tangible assets. Additionally, Avgouleas and Cullen (2014) further highlights that the other component that makes the analysis of bank stocks both challenging and tiresome, is the length of their financial records – these records are usually over hundreds of pages. Making it impossible to simply the records when explaining the inflows or outflows in the banking industry