Theories of Banking

Introduction

In this post you are going to learn about the various theories of banking. These theories which are propounded by scholars who, bearing in mind the banks unique type of business, sought to provide solutions on how can the unique business survive. These theories include the Real Bills Doctrine, the shiftability theory, the anticipated income theory, and the liability management theory.

The Real Bills Doctrine         
The Real Bills Doctrine or the commercial loan theory states that a commercial bank shoyuld advance only short-term self-liquidating loans to business firms. In other words, this theory holds that banks should lend only on “short-term, self-liquidating commercial papers. This is for the simple reason that a bank has liabilities payable on demand, and it cannot meet these obligations if its assets are tied up for long periods of time. Rather, a bank needs a continual and substantial flow of cash moving through it in order to maintain its own liquidity, and this cash flow can be achieved only if the bank limits its lending activities to short-term maturities. Self-liquidating loans are those which are meant to finance the production, and movement of goods through the successive stages of production, storage, transportation and distribution. When such goods are ultimately sold, the loans are considered to liquidate themselves automatically.

The theory states that when commercial banks make only short-term self-liquidating productive loans, the central bank, in turn should only lend to the banks on the security of such short-term loans. This principle would ensure the proper degree of liquidity of each bank and the proper money supply for the whole economy. This in essence aim at the stabilization of the banking system. The weakness of this theory stems from the failure to realize that the loans are made, given the value of the goods and not the good itself; and also the value of goods itself is subject to variations, given the state of the economy.  

The Shiftability Theory  
The Central thesis of this theory holds that the liquidity of a bank depends on its ability to shift its assets to someone else without any material or capital loss when the need for liquidity arises. This theory asserted that if the commercial banks maintain a substantial amount of assets that can be shifted on to the other banks for cash without material loss in case of necessity, then there is no need to rely on maturities.

According to this view, an asset to be perfectly shiftable must be immediately transferable without capital loss when the need for liquidity arises. This is particularly applicable to short-term markets investments, such as treasury bills and bills of exchange which can be immediately sold whenever it is necessary to raise funds by banks. For example, it is quite acceptable for a bank to hold short-term open market investments in its portfolio of assets, and if a large number of depositors decide to withdraw their money, the bank need only sell these investments, take the money thus required and pay off its depositors.

Therefore, the theory tried to broaden the list of assets demand legitimate for bank ownership, and hence redirected the attention of banks and the banking authorities from loans to investments as a source of bank liquidity that is; the fundamental source of liquidity is the banks secondary resources.  

The flaw of this theory does not lie on the theory itself, but on the bank management practices to which the theory led. One bank could obtain the needed liquidity by shifting its assets but not so possible when all members of the bank behave the same way (Fallacy of composition). Hence, the problem of liquidity of the whole banking system is simply not solvable by commercial banks alone. This is where a central bank that is prepared to act quickly and decisively is an absolute necessity.

The Anticipated Income Theory  
According to this theory, regardless of the nature and character of a borrower’s business, the bank plans the liquidation of the loan from the anticipated income of the borrower. This theory opines that a bank should make long-term and non-business loans since even a “real bill” is repaid out of the future earnings of the borrower; i.e out of anticipated income. At the time of granting a loan, the banks take into consideration not only the security, but the anticipated earnings of the borrower. Thus a loan by the bank gets repaid out of the future income of the borrower in installments, instead of in lump sum at the maturity of the loan.  

The Liability Management Theory
According to this theory, there is no need for banks to grant self-liquidating loans and keep liquid assets because they can borrow reserve money in the money market in case of need. A bank can acquire reserves by creating additional liabilities against itself from different sources.

These sources include the issuing of time certificates of deposits, borrowing from other commercial banks, borrowing from the central bank, raising of capital funds by issuing shares, and by ploughing back of profits. Arguing that a bank can use its liabilities for liquidity purposes, the theory opines that it  can manage its liabilities so that they actually become a source of liquidity by going out to by money when it needs it (for paying its demand deposits and meeting loan requests). That is, liability management suggests that the bank borrow the funds it needs by means of various bank-related money market instruments. 

Greece's Euro Exit Back on theAgenda Next Year

Greece's Euro Exit Back on the Agenda Next Year

BANKER-CUSTOMER RELATIONSHIP

According to Akrani, G. (2012), the relationship between banker and customer is mainly that of a debtor and creditor. However, they also share other relationships. The banker-customer relationship is that of a: Debtor and Creditor; Pledger and Pledgee; Licensor and Licensee; Bailor and Bailee; Hypothecator and Hypothecatee, Trustee and Beneficiary; Agent and Principal; and Advisor and Client, among other miscellaneous relationships. Discussed below are important banker-customer relationships.

1. Relationship of Debtor and Creditor

When a customer opens an account with a bank and if the account has a credit balance, then the relationship is that of debtor (banker / bank) and creditor (customer). In case of savings / fixed deposit / current account (with credit balance), the banker is the debtor, and the customer is the creditor.

This is because the banker owes money to the customer. The customer has the right to demand back his money whenever he wants it from the banker, and the banker must repay the balance to the customer. In case of loan / advance accounts, banker is the creditor, and the customer is the debtor because the customer owes money to the banker.

The banker can demand the repayment of loan / advance on the due d, and the customer has to repay the debt. A customer remains a creditor until there is credit balance in his account with the banker. A customer (creditor) does not get any charge over the assets of the banker (debtor).

The customer's status is that of an unsecured creditor of the banker. The debtor-creditor relationship of banker and customer differs from other commercial debts in the following ways:

a) The creditor (the customer) must demand payment  

On his own, the debtor (banker) will not repay the debt. However, in case of fixed deposits, the bank must inform a customer about maturity.

b)  The creditor must demand the payment at the right time and place

The depositor or creditor must demand the payment at the branch of the bank, where he has opened the account. However, today, some banks allow payment at all their branches and ATM centres. The depositor must demand the payment at the right time (during the working hours) and on the date of maturity in the case of fixed deposits. Today, banks also allow pre-mature withdrawals.

c)  The creditor must make the demand for payment in a proper manner

The demand must be in form of cheques; withdrawal slips, or pay order. Now-a-days, banks allow e-banking, ATM, mobile-banking, etc.

2. Relationship of Pledger and Pledgee

The relationship between customer and banker can be that of Pledger and Pledgee. This happens when customer pledges (promises) certain assets or security with the bank in order to get a loan. In this case, the customer becomes the Pledger, and the bank becomes the Pledgee. Under this agreement, the assets or security will remain with the bank until a customer repays the loan.

3. Relationship of Licensor and Licensee

The relationship between banker and customer can be that of a Licensor and Licensee. This happens when the banker gives a sale deposit locker to the customer. So, the banker will become the Licensor, and the customer will become the Licensee.

4. Relationship of Bailor and Bailee

The relationship between banker and customer can be that of Bailor and Bailee.

i) Bailment is a contract for delivering goods by one

party to another to be held in trust for a specific period and returned when the purpose is ended.

ii) Bailor is the party that delivers property to another.

iii) Bailee is the party to whom the property is delivered. Therefore, when a customer gives a sealed box to the bank for safe keeping, the customer became the bailor, and the bank became the bailee.

5. Relationship of Hypothecator and Hypothecatee

The relationship between customer and banker can be that of Hypothecator and Hypotheatee. This happens when the customer hypothecates (pledges) certain movable or non-movable property or assets with the banker in order to get a loan. In this case, the customer became the Hypothecator, and the Banker became the Hypothecatee.

6. Relationship of Trustee and Beneficiary

A trustee holds property for the beneficiary, and the profit earned from this property belongs to the beneficiary. If the customer deposits securities or valuables with the banker for safe custody, banker becomes a trustee of his customer. The customer is the beneficiary so the ownership remains with the customer.

7. Relationship of Agent and Principal

The banker acts as an agent of the customer (principal) by providing the following agency services:

i) Buying and selling securities on his behalf,

ii) Collection of cheques, dividends, bills or promissory notes on his behalf, and

iii) Acting as a trustee, attorney, executor, correspondent or representative of a customer.

Banker as an agent performs many other functions such as payment of insurance premium, electricity and gas bills, handling tax problems, etc.

8. Relationship of Advisor and Client

When a customer invests in securities the banker acts as an advisor. The advice can be given officially or unofficially. While giving advice the banker has to take maximum care and caution. Here, the banker is an Advisor, and the customer is a Client.

Who are the bankers of tomorrow and how could the problem of leadership and moral question be solved in the banking industry through these leaders of tomorrow ?

Bankers of tomorrow are students scattered all over the  institutions of higher learning receiving educational instructions in banking and finance and other allied courses. These crops of young men and women are the people on whose shoulder the crest of leadership in the sector will fall and who will also ensurie that standards and professional ethics are not compromised. To achieve these lofty aims there is need to imbibe in them leadership qualities, and moral values such as honesty, integrity, selflessness and professional competence, as all these will set them in good stead in facing the complex challenges in the real world.

The size and complexity of challenges facing bankers are high and numerous. In fact corporate banking world are characterized by bribery, corruption fraud, facilitation payments, harassments, cut throat competition, discrimination issues among others. These forms of unethical practices if not checked and managed effectively could bring the banking industry into disrepute and erode what is left of public trust and confidence in the banking industry. Therefore the need to address moral and leadership question is pertinent in view of the past crises in the financial world popularly known as financial melt down where leading corporate businesses such as Enron, Arthur Anderson among others all failed as a result of a failed leadership for a variety of reasons which may include pressure to achieve, perform and win at all cost.

Coming closer home in Nigeria there were reported cases of bank failure which were attributed to unethical practices by the leadership of such banks. In fact, the Nigerian banking sub-sector was at the point of collapse in 1997, when twenty six commercial bankers failed due to financial irregularities. Also in August 2011, three Nigerian banks namely Spring bank, plc, Afribank plc and Bank PHB all failed due to financial irregularities of their respective corporate managers.

In view of all these development there is need to instill moral discipline and ethical leadership in bankers of tomorrow who will help in bringing growth and stability to the industry. Banking industry need young and vibrant people that can connect well with others and are able to build relationship and effectively communicate as they help in creating best customer relationship build on trust. These bankers of tomorrow when integrated into the industry must not shrink from their obligation. They will need to lead by example by defining their corporate norms and values, live up to expectation, and encourage their followers to adopt same.

At this  moment there is need  for all stakeholders in the industry to come together and formulate educational policies that will see to the inclusion of ethical and leadership development in the curriculum of the academic institutions. Also, The Chartered Institute of Bankers of Nigeria (CIBN) should extend their working relationship with more academic institutions through their linkage programmes as this will ensure that all the institution work towards CIBN standards. And finally there should be speedy implementation of the Act that prevent banks from employing people without CIBN qualification as only professional bankers grounded in practice, law and ethics of banking will be able to navigate the problematic and murky water of leadership and moral terrain. We should not forget that addressing the problems of leadership and moral values is tantamount to enhancing sound practices and professional competence which should be the hall mark of the banking industry.                              

                                                                 

Banker's Right of Set-Off

The term Set-off mean the same thing as combination of accounts, it also means the same thing as consolidation account. This suggests that there is existence of two or more accounts before this right becomes exercisable. The law on combination of account generally is that a bank unless precluded by agreement express or implied, from the cause of business is entitled to combine the account opened for the customer in his own right and in the same bank and treat the balance as that only amount in customer's credit.

Set-off is a legal right which entitles a debtor to take into account the sum immediately to him by a creditor when determining the net sum due to the creditor. It is based on the general commercial principle that says when debt are mutual, only the net balances is payable. According to the case of Ibrahim Alabi V Standard Bank of Nigeria, in which it was defined as the right which entitles the banker to retain a credit balance in customer's account against a debt owed to the bank or to treat the fund in customer's account as not available to meet drawings.  

As far as the banker's right of set-off is concerned, there is a conflict of judicial opinions. In Garnett Vs Mckervan, it was held that in the absence of a special agreement to the contrary, a banker might set-off a customer's credit balance against a debt due to him from the customer, and that there was no legal obligation on a bank to give notice to a customer about its intention to combine accounts.  

Nevertheless, in Greenhalgh and Sons Vs Union Bank of Manchester, the Learned Judge observed: “If the banker agrees with his customer to open two accounts or more; he has not in my opinion, without the assent of the customer, any right to move either assets or liabilities from one account to the other; the very basis of his agreement with his customer is that the two accounts shall be kept separate".

In view of these disagreeing judicial pronouncements, the banker can be on the safer side by entering into an agreement with the customer authorizing the banker to combine the accounts at any time without notice and to return cheques which, as a result of such an action, would overdraw the combined account.

Nonetheless, in cases such as the death or bankruptcy of the customer, in order to recover the net amount owing to him, the banker can exercise the right of set-off without notice even in the absence of an agreement.

At the same time, it may be noted that the right of set-off cannot be exercised by the banker if he has made some agreement, express or implied, to keep the accounts separate. This has been laid down in Halesovven Presswork and Assemblies Ltd. Vs Westminster Bank Ltd. Another point to be noted in this connection is that the banker cannot exercise his right of set-off if the accounts are not in the same right. For instance, the banker cannot setoff the credit balance on a partner's account against a debt due on the partnership firm's account and vice versa. Further, the banker cannot combine a trust account with the personal account of the customer.

Again, the right of set-off applies only to existing debts and not to contingent liabilities. Thus in Jefftyes Vs Agra and Masterman's Bank Ltd., the Learned Judge observed "You cannot retain a sum of money which is actually due against a sum of money which is only becoming due at a future date".

Furthermore, the right of set-off does not apply where the customer has deposited an amount taking a loan from a third party on condition that the money is repayable if not used for a particular purpose, the bank having been notified of this condition and where the customer is unable to utilize the loan due to liquidation, as was decided in Quistclose Investments Ltd. Vs Rolls Razar Ltd. (involuntary liquidation) and Other.

Conditions before right of Set-off can be exercised

i. The amount must be ascertained sum.

ii The debt must be due to and from the same person and in the same bank.

iii. The debt must be due for payment either immediately or on demand.

Negative Pledge

This is a form of security usually given by blue chip companies. There is no formal charge over company's assets, but rather a written undertaking by the borrowing company that it will not charge any of its assets to any other lender without the bank's consent.

Advantages of Negative pledge to the bank

i.  It can be easily taken
ii.  It is not expensive to perfect.
iii. If the borrower's external financing         is much lower than the worth of its         assets, the risk is reduced since there       will be enough for all the creditors.
iv. The higher the repayments, the                 lower the lender's risk.
v. If the terms and conditions of the              security are complied with, the                  borrower's penchant to borrow and        pick up debts is reduced.
vi. The higher the borrower's hidden              /secret reserve, the stronger the                security.

Disadvantages/risks to the bank

i.  It is a weak security.
ii. The security does not attach any                specific assets.
iii. In the event of the borrower's                   liquidation, the unattached assets             could be seized and disposed off by         the liquidator.
iv. In effect of winding up of the                     company, the bank can only prove           as an unsecured creditor.
v. If the company's unattached assets         are insufficient to cover it's liabilities,     the bank might be unable to recover       its total exposure.
vi. Any legal charge subsequently                  created by the borrower in regard to      the existing negative pledge takes            precedence over the bank's security.

Loan Syndication

Loan syndication is an arrangement where more than one financial institutions come together and pool resources to jointly finance a customer's project, utilising common documentation, common security and being bound by a common agreement. The lead bank is usually the bank to the debtor and it will be the one inviting other banks to participate. The lead bank is respossible for ensuring that the conditions precedent and covenants through out the life of the loan are strictly adhered to.

Parties to loan syndication 

i.  The lead bank
ii.  The managing bank (which could still be the lead bank )
iii.  The participating banks and
iv.  The borrower.

Advantages of loan syndication

i. Through this method, viable projects that are highly capital-intensive are financed with benefits to the economy.
ii. Banks are able to finance viable projects while still complying with single obligor limits.
iii. There is the benefit of more expert/professional advice.
iv. The customer is saved from the problem of raising the funds in bits.
v. Since there is only one joint security, no bank has any priority over the others.
vi. The customer is also saved from the problem of signing different agreements.
vii. There is uniformity of pricing.
viii. There is better appraisal of the project by participating banks.
ix. It ensures the spread of risks among all the participants.
x. It may lead to growth in banker-customer relationship.

Disadvantages of loan syndication

i. The process of raising funds through syndication can be very slow.
ii. It could also be more expensive as it could involve other charges like management charges.

Duties of the lead bank 

Typically the lead bank or underwriter of the loan, also known as the arranger, agent, or lead lender, apart from possibly putting up a proprtionally bigger share of the loan,  it perform other duties such as,
i. Lead bank prepares the information memorandum about the customer and the project.
ii. It gets the mandate of the customer to invite other banks to participate.
iii. It arranges consortium meetings between all participating banks.
iv. It ensures the perfection of securities.
v. All participating banks channel their contribution through the lead bank.
vi. All participating banks channel their contributions through the lead bank.
vii. The lead bank ensures, through proper supervision, that the customer does not divert the loan to other uses.
viii. The lead bank must disclose all information necessary to other participating banks.

INTERNATIONAL FINANCIAL SYSTEM

Sometimes referred to as the global
financial system, this is the collective
name for the various official and legal
arrangements that govern international financial flows in the form of loan investment, payments for goods and services, interest and profit remittances.

The international financial system consists of institutions, their customers, and financial regulators that interact and operate act on a global stage. The term is regarded in an all-bracing to constitute the various official and legal arrangements that govern international financial flows in the form of loans, investment, payments for goods and services, interest and profit remittances.

In basic terms, the main elements of international financial system are the surveillance and monitoring of economic and financial stability, and provision of multilateral finance to countries with balance of payments difficulties. Therefore, the organization at the nerve-centre of the system is the International Monetary Fund (IMF). This is because IMF, in line with its charter, is bequeathed with the responsibility of ensuring its effective running. In another perspective, there is the view that international financial system holds that the system involves the interplay of financial companies, regulators and institutions operating on a supranational level.

The global financial system can be divided into regulated entities (international banks and insurance companies), regulators, supervisors and institutions like the European Central Bank or the International Monetary Fund. The system also includes the lightly regulated or non-regulated bodies, which collectively is known as the “shadow banking” system. Essentially, this covers hedge funds, private equity and bank sponsored entities such as off-balance-sheet vehicles that banks use to invest in the financial markets.

In evolutionary terms, the history of financial institutions can be traceable to the first commodities exchange in Europe, the Burges Bourse in 1309 and the first financiers and banks in the 15th–17th centuries in Central and Western Europe. The first global financiers were the Fuggers (1487) in Germany; the first stock company in England (Russian Company 1553); the first foreign exchange market (The Royal Exchange 1566, England); the first stock exchange (the Amsterdam Stock Exchange 1602).

The remarkable developments in the history of global financial system include the establishment of the Gold Standard (1871–1932), the founding of the International Monetary Fund (IMF) and the World Bank at Bretton Woods 1944. Others include the abandonment of the US dollar as reserve currency in 1971, the abandonment of fixed exchange rates in 1973 and China pegging its currency, the Yuan, to the US Dollar in 1994, which led to their accumulation of more than $1trillion of international reserves.

PERSPECTIVES ON INTERNATIONAL FINANCIAL SYSTEM 
There are three primary approaches to viewing and understanding the global financial system.

1. Liberal Perspective The liberal view holds that the exchange of currencies should be determined not by state institutions but instead individual players at a market level. This view has been labeled as the Washington Consensus.

2. Social Democratic Perspective 
The social democratic view advocates the tempering of market mechanisms, and instituting economic safeguards in an attempt to ensure financial stability and redistribution. Examples include slowing down the rate of financial transactions, or enforcing regulations on the behavior of private firms.

3. Neo Marxists Perspective
Neo Marxists Perspective holds the view that the political North comprising the developed countries abuses the financial system to exercise control over developing countries' economies, which promotes inequality between the advanced economies and the less developed nations.

Main Players of International Financial System 

1) International Financial institutions  
These include important financial institutions such as banks, hedge funds whose failure may cause a global financial crisis, the International Monetary Fund and the Bank for International Settlements.

2) Customers of Global financial system
These include multinational corporations, as well as countries, with their economies and government entities, for instance, the central banks of the G20 major economies, finance ministries, EU, NAFTA, and OPEC, among others.

3) Regulators of Global Financial System
Many of these regulators play dual roles because they operate as financial organizations at the same time. These include International Monetary Fund, Bank for International Settlements, particularly its Global Economy Meeting (GEM), in which all emerging economies’ Central Bank governors are fully participating, has become the prime group for global governance among central banks.

Such apex banks’ governors include President of the European Central Bank, financial regulators of the U.S.A (the US agency quintet of Federal Reserve, Office of Comptroller of the Currency, Federal Deposit Insurance Corporation, Commodity Futures Trading Commission, Federal Reserve Board, Securities and Exchange Commission, Europe (European Central Bank) and the Bank of China, besides others.

Security For Bank Advances/Lending

                           

A security is an interest or a right in property given to the creditor to convert it into cash in case the debtor fails to meet the principal and interest on loan . It is an insurance against unforeseen development and the last avenue through which the bank can get its money recouped should things turn sour. It provides bankers with succour if every other things fails. Apparently, good security does not guarantee that loans will not be bad and neither does its absence impair the chance of success of the investment.

Bankers hold various kinds of securities as a cover of advances to their customers. The securities offered to the banks vary in rating.Securities which can be converted into cash without loss of value are ranked higher than that whose value fluctuate widely and tends to become frozen under adverse economic conditions . The main types of security offered against the loans are stocks and shares, title deeds, life policies, bills of exchange, bills of sale, and promissory notes. The banks also sometimes extend credit to their trusted customers on their personal securities or on the guarantees of responsible parties. The guiding principles of accepting securities are that they should be adequate, stable easily realizable e. t. c

Virtues of a good banking security

A good banking securities therefore must have the following essential attributes, viz,

1. Sufficiency
A good security must be adequate to cover the bank's entire exposure. To be on a safer side, the value of the pledge security should be 100% or more of the loan seek.

2. Objective and Stable value
A good banking security must be capable of being valued in a relatively objective rather than sentimental way. And apart from this,  its value must not be volatile but stable in the market.

3. Easily realizable
This attribute has to do with high marketability of the security. This implies that the pledged assets must be in high demand and easy to be sold off without loss in value.

4. Ease of assignment
The security must be capable of having its title legally passed to the bank with little problem. It must also be easy for the bank to re-transfer it back to the customer on liquidation of the debt.

5. Not Onerous
The security must not pose undue liabilities or inconvenience on the bank. For example, a basket of tomatoes.

6. Prime Asset
At best, security must be the borrower's prime asset  i. e an asset that the borrower hold in high esteem and would not like to lose. Borrowers normally have psychological attachment to their prime assets hence they will have the urge to liquidate their debt and take back the asset.

7. Legal binding
The security must be legally water tight so as to make it legally binding and enforceable.

8.Good Title
A good security must have unquestionable title. Registered land without encroachment and encumbrances obviously have good title.

Why Banks Must Strike a Balance Between Profitability and Liquidity

Profitability and Liquidity are two basic concepts that attract the attention of all banks. Given the position of banks as catalyst to economic development, they cannot afford to fail their customers nor the public in any of these two issues.Banks want to make profits but at the same time they are concerned about liquidity and safety. Banks have to earn profits because if they don’t, they would not work at all, as the shareholders would withdraw their invested capital in the business if proper and adequate dividends are not earned. Hence they have to earn profits for their shareholders and at the same time satisfy the withdrawal needs of its customer

A commercial bank should be liquid enough to meet the daily cash need for customers. Even at that, the keeping of idle raw cash in a bank’s strong room is unproductive and creates great loss to a bank. Apart from the inherent risk of keeping cash, there is the cost of insurance on a daily basis. There is also the need not to exceed the cash on premises (COP) limit approval for the branch, which default has a penalty attached to it . Since idle cash in the branches earn no interest, banks deposit this cash with CBN and earn interest or better still sale the cash to other banks that may need them. They trade the cash with other banks through their treasury departments as ''call money", "placement", "treasury bills", "treasury certificate", or other near liquids,  which they can easily convert when needed.

A prudent bank tries to make some profit from every One Naira(#1.00)  deposit made into account by a customer. And mindful of the cost of these deposits (interest paid to the customers or lenders), a bank must turn these liabilities to assets that can earn enough to take care of running cost. In the bid to make more profits a bank may trade on very risky ventures. However the regulatory  authorities through rules and policies may prohibit a bank from over trading or creating excess credits.

To avoid ugly "cash run’’, banks must be adequately liquid. They may resort to withdrawing cash from cash from their accounts with CBN; or even from some windows like the Special Drawing Fund (SDF), provided by the apex bank. It is worth noting that banks are required statutorily to keep certain percentages (legal reserve ratio) of their deposit liabilities with CBN, and other special deposits as control and confidence building measures.

However, profitability is a key word in commercial banking. And to remain profitable in business, banks must give out loans facilities from their deposit liabilities, at a reasonable interest charges. Banks therefore make the buck of their declared profits through financial intermediation. The proper use of liquidity brings about profitability. A bank must be socially responsible in the pursuit of profit to create goodwill for itself, hence repeat purchases of its products by confident customers and prospects alike. There must therefore be a balancing of profitability with customer satisfaction through excellent services delivery strategies.


In order to make the best out of these conflicting corporate objectives, there is need to strike a balance between profitability and liquidity is through ALM

ALM (Asset - Liability Management) is  the process of planning, organizing,and controlling asset and liability volumes,
maturities, rates, and yields in order to balance interest rate risk and maintain acceptable profit and liquidity levels.

One of the main ways in which this is
done is by adjusting the interest rates on loans and deposits in line with their respective maturities in an aim to reduce interest rate risk and maximise profitability. Banks also achieve this by placing guidelines on the types of loans and deposits the sales and marketing departments have to sell at a moment in time.

Apart from ALM, liquidity buffer which describes minimal levels of cash that are deposited within central banks (i.e. Central Bank of Nigeria, Bank of England for UK, Federal Reserve for
U.S.A. etc.) could aid bank's liquidity. This buffer is required to ensure that a bank’s liquidity remains at a sufficient level to protect the bank if a run on the bank were to occur.

Also, Loan-Deposit Ratio (LTD) which is utilised to assess the liquidity and profit earning potential of a bank at any instant and is given by the formula:

if the ratio is greater than 1, the bank does not have enough deposits to fund its outgoing loans. This is a risky position to be in. If a run on the bank were to occur in these circumstances, the bank would not have enough money in stock to cover the deposits made by its customers. The bank would therefore have to rely on wholesale markets that may or may not be prepared to help the bank at its time of need.

If, on the other hand, the ratio is less
than 1, the bank is utilising its own
customer’s deposits to finance its
loans. This is a better position to be
in as there is a surplus of customer
deposits which in turn would be held
in liquid Central Bank of Nigeria deposits.

All in all, striking a balance between the two corporate objectives, gives a win win situation for all parties as shareholders interest will be protected by earning returns on invested funds which add up to profit to be declared at the end of the year  and customers (most especially demand deposit customers, ) will have access to their deposit at any time.

Points to note by an astute and diligent Teller before paying a cheque across the counter

1. Date on the cheque – it should not be stale

2. The presenter of the cheque, the payee [the cheque ] is not endorsed for another person

3. Amount in figures and words must agree

4. The cheque bears the signature authorized in the customer’s mandate

5. The cheque is not mutilated

6. The signature must be regular

7. There is sufficiency of fund to meet the payment

8. There is no stop notice/ countermand of order

9. There is no government order on the account

10. There is no bankruptcy notice on the customer

11. Any alterations on the cheque is duly signed by the authorized signatory

12. There is no court order freezing the account

13. No garnishee order on the account is received