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Bank Management and Profitability
Introduction
A bank is a financial institution that mandates itself to provide various services in relation to monetary transactions. Some of these services include; accepting customer deposits, giving loans and clearing of checks. These are not the only tasks performed by the banking institutions. There is also a relationship nurtured between the bank and other classes of clients – the government, populace, other organizations, just to mention a few. The bank management docket is mainly tasked with the responsibility of ensuring that proper planning, organization, coordination and control of bank’s assets, liabilities, capital and liquidity to ensure efficient operation while maximizing service delivery and profit. Management plays a major role in the banks operation to ensure there is no loss of revenue and investments.
Primary sources of Income for Banks
Banks are among the richest financial institutions in the entire world. This is because the assets of the populace and companies are stored in banks. This includes the assets of major insurance agencies and the government. Therefore, the greatest income for banks is the transaction charges and the storage fees for the respective finances or liquid assets. Banks rely on avenues that generate income to cover all running costs and at the same time to realize profits. Some of the primary sources of income include; interest income, income fees, forex operations, and the investment in assets.
Banks earn interest accrued from loans that are availed to industries, individuals, cooperation and even to the government. Interests are calculated as a percentage of the principal amount borrowed and computed over a given period of time (Mona, 2011). The interest rates mostly depend on the amount borrowed and the time spent in repaying back the borrowed amount.
Banks earn income fees from their transactions. For example, Banks charge fees for services such as; bills of exchange, account management, loans processing and providing vault services. The levy fee charged on these services in turn earn revenue to the banks.
One of the greatest income generating operations for banks is forex operations. Banks undertake trading in the forex markets and share marketing. This avenue, when properly managed, earn revenue to the banking institution. Forex trading is very marketable because individuals moving to or transacting business in different countries must exchange their respective currencies at a fee. The fee is the profit to the banks.
Finally, investments is another source of income for banks. Banks invest in assets and other financial investments such as government securities and treasury bills thus earning dividend for the institutions.
Banks also incur various expenses in their daily operations. These include; Cost of office equipment and stationery, the cost of IT equipment, installation and maintenance of various software and databases that are the backbone of the industry and utility expenses that come about from telephone charges, water and electricity charges. Other expenses include services rendered by various clients such as legal advisors, consultants and insurance cover providers and expenses emanating from property taxes and leases. Bank managers have to ensure proper balance between the expenses and revenue in order to realize sizeable profit margins. Without these margins, banks would tend to undergo losses thus face liquidity and takeovers.
Profitability vs safety tradeoffs in banking
A trade – off involves a situation requiring a decision that involves either diminishing or losing one quality in return for a gain in other aspects. The procedure that a bank uses to managing working capital can have a mammoth impact on both its liquidity and profitability (Shin & Soenen, 2009). Proper capital management plays a significant role in ensuring that a bank remains profitable and does not get to experience liquidity or take overs.
Profits serve to increase capital value, ability to sustain loans and return on investments for the banks. In as much as the Banks main agenda is realizing profits, it is also proper to maintain liquidity at a predetermined level. Striking a balance between liquidity and profitability serves to ensure shareholders value is maintained (Niresh, 2012). Therefore, banks have to ensure they have in place, installed proper ways to manage their liquidity risk and mitigate against the same incase such a situation arises. The bank ought to be proactive as compared to reactive. Proactive means a situation is mitigated before it occurs, and reactive means a situation occurs and measures to solve it are put into play. Forecasting is important in solving expected complexities.
Liquidity and liquidity risk. Liquidity refers to the ability of a bank or institution to meet its short-term financial goals. For instance, having treasury bills that can be readily sold at a predictable price puts a financial institute at a high liquidity level. Liquidity risk therefore, refers to the uncertainty to meet the short-term financial demands. In as much as profitability and liquidity contradict each other, banks must strive to find a
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