Offshore Banking Services

Banking is one of the most important sectors of the world economy as it influences investment, consumption and other business activities. Furthermore, banking has a substantial impact on the circulation of money and thus influences economic growth. Offshore banking provides a unique opportunity to individuals, business people and companies to access the international market and implement their business and investment plans since offshore banking encompasses stronger privacy and security features. That is to say, the activities you launch through your offshore private banking are more confidential and secure. It should be underlined that you will be able to offer the same privacy to your customers together with other related benefits.

The procedures you need to follow in order to open an offshore bank account are not complex. In other words, every individual may open an offshore bank account within few hours. Note that each offshore banking jurisdiction has its own requirements. Among the most popular offshore banking centres are the Cayman Islands, Seychelles, Saint Vincent and Grenadines, Bahamas, Gibraltar and Netherlands Antilles.

BASIC REQUIREMENTS:

As it has been mentioned before, opening an offshore bank account is rather simple. The procedures you need to follow in order to open an offshore bank account are similar to the procedures you follow in order to open a bank account in your home country. First of all, offshore banks will ask for your personal details: name, date of birth, address, citizenship, occupation and submit a copy of your passport, identity card or any other identification document issued by a governmental authority. Second of all, you will have to verify you residence address by presenting a utility bill or any other document. It should be mentioned that all the submitted documents must be certified.

Some considerable benefits of offshore banking are:

Minimised political risk. In many cases, the biggest threat is not the market risk but the governments, i.e. capital controls measures and bail-ins.
Asset protection.
Currency diversification. Holding foreign currencies leads to the minimisation of the risks you confront.
More options for your business and investment plans.

JURISDICTIONS:

Cayman Islands:

One of the major advantages of the Cayman Islands is the political stability. The annual license fee is 9.000 US dollars. The international banking infrastructure is well-developed with many facilities. Another considerable advantage of the Cayman Islands is the zero taxation on international banking income. Nevertheless, the state’s approach toward international private banks owned by non-banker is poor. Despite the fact the Cayman Islands have well-developed banking structures, the poor attitude towards international banks owned by non-bankers discourages many investors and business people to launch offshore banking activities in the Cayman Islands.

Seychelles:

The major advantage of Seychelles is confidentiality since state authorities have no direct access to bank information without a Court order. Note that Seychelles has double tax treaties with Barbados, Botswana, China, Cyprus, Indonesia, Malaysia, Mauritius, Oman, Qatar, South Africa, Thailand, United Arab Emirates and Vietnam. Furthermore, it should be pointed out that Seychelles has signed Tax Information Exchange Agreements only with the Netherlands.

Saint Vincent and Grenadines:

The country maintains a degree of flexibility and confidentiality that many bank owners prefer. In particular, confidentiality regarding the incorporation and the launch of business of an International Banking License has been ensured by the Confidential Relationships Preservation (International Finance) Act 1996 and by the International Banks Act 1996. Among the major advantages of Saint Vincent and Grenadines is the absence of exchange control restrictions to offshore transactions and stamp duties. Furthermore, there are no corporate taxes, no income tax, no withholding tax, no capital gain tax and no estate/inheritance/succession duties.

The country has political stability, well-developed international banking infrastructures and skillful labour force.

The International Banks Act 1996 issues the following licenses:

Class I Offshore Banking License: The Licensee is involved in offshore banking activities outside the country. The minimum class requirement for Class I license is 500.000 US dollars.
Class II Offshore Banking License: The Licensee is engaged in offshore banking with individuals or groups detailed described in a written undertaking. The minimum class requirement for Class I license is 100.000 US dollars.

Bahamas:

Bahamas is considered one of the most attractive international banking centres in the world because of its excellent communications systems and the frequent air and sea connections with the USA. In addition, the country has a well-developed banking secrecy legislation. It should be taken into account that there are no taxes on international banking income.

There are two types of licenses, the unrestricted and restricted license. The unrestricted license can be obtained by private individual given that they can prove that they have a considerably high net worth. On the other point of view, restricted licenses are granted to financial institutions. Note that a restricted license enables the holder to offer banking and trust services exclusively to a particular class of associated individuals or businesses.

Gibraltar:

Gibraltar is a full member of the European Union. Therefore, banks incorporated in Gibraltar operate under the same legal framework as the banks in the UK. Nevertheless, Gibraltar has some additional advantages such as the efficient and effective bureaucratic procedures. Moreover, banks may operate completely free of tax.

Charting the Waters at Cordell Bank

Until 1978, no diver had explored the Cordell Bank. This extraordinary place is now a National Marine Sanctuary. There’s an interesting history behind how this part of the ocean off the coast of California, northwest of San Francisco became a sanctuary.

The bank was discovered by George Davidson while conducting surveys along California’s north coast in 1853. Sixteen years later, in 1869, a more extensive survey was conducted by Edward Cordell, after whom the bank was named. What follows is some of the experiences shared by the first divers to view the bank.

At 150 feet, air bubbles slide out of my regulator sounding like gravel being poured from a metal bucket. We are 20 miles from the nearest shore on a ridgetop of a large Pacific seamount named the Cordell Bank and the scene below is incredibly bright. Anemone, hydrocoral, sponges, and algae cover everything in sight, in many places growing on top of each other.

While collecting some of these organisms, we are suddenly flushed with a euphoric giddiness. We try to smile, but numb lips and the regulator make the effort that much sillier. Struggling to control the narcosis, we keep collecting and exploring. All too soon, however, my buddy waves a thumbs-up in front of my mask. Now, where’s the ascent line? A flashing strobe catches my eye and I swim toward it. The line’s there, so we follow our bubbles – but not to the surface. At 10 feet, we both grab the regulators of full scuba tanks. The decompression wait seems eternal as we can hardly wait to tell the others about our dive to where no one has been before.

These experiences were shared with the author from Robert Schmeider, Ph.D., of Walnut Creek, California, who was obsessed with the exploration of Cordell Bank. In 1977, while studying a chart of northern California’s coastline, this atomic physicist became intrigued by Cordell Bank, which is 20 miles (32 km) due west of Point Reyes and to the northwest of San Francisco. The chart showed there was at least one shallow place with a depth of 20 fathoms or 120 feet (37 meters). It could be dived using regular scuba tanks, so Schmeider assumed it had been. But when he asked a few diving friends if they had ever been there, he discovered none had. So he talked to people with the Coast Guard, the Navy, the California Academy of Sciences, the University of California at Berkeley, the Department Fish and Game, the Geological Survey, the National Oceanic and Atmospheric Administration (NOAA) and others. After a couple of months, Bob realized to his amazement, no one knew much about the bank at all. The idea of exploring Cordell Bank soon became a serious goal.

But Bob expected many dangers. Deep-diving can always be dangerous, especially with compressed air scuba diving due to the possibility of nitrogen narcosis and decompression problems. Additionally, he knew the water was cold, and a fairly stiff current of one or two knots ran in the area. Two knots is nearly impossible to do any work in. To make matters even worse he expected to encounter lots of sharks, including great whites since Cordell Bank lies about midway between Tomales Bay and the Farallon Islands, both places where great whites are known to congregate.

The fisherman in Bodega Bay knew the Bank well as an excellent fishing area, so Bob lined up a boat and skipper from there. After extensive discussions with several of his regular diving partners, he announced his plan to divers in the Sierra Club’s Loma Prieta chapter from the San Francisco Bay area in October of 1977. He knew exploring the bank would require a large support group. At an organizational meeting held in the U.S. Geological Survey chambers in Menlo Park, the group elected a divemaster and all but one of the 40 people attending pitched in $40 a piece to kick off Cordell Bank Expeditions.

After a few practice dives at Monterey and at the Farallon Islands, Bob felt his group was ready to go to Cordell Bank. Unfortunately, he ran into numerous difficulties. Most importantly, a number of divers had dropped out of the group, so Bob had trouble gathering enough divers for a trip. Finally, on October 20, 1978, with just five divers, Bob made it to Cordell Bank.

As Bob recalls, “What we saw on that day absolutely astonished us. We were totally unprepared for the light level. Not only was it not dark, it was incredibly light. After I made the first dive with a buddy, I told the other drivers not to take their lights, as they simply would not need them. It was so light you could almost read. And we had been to a depth of close to 150 feet.”

“There were enormous aggregates of 12-inch (30 cm) fish swimming around above the pinnacle. To us, it seemed an incredible snowstorm of fish. When we finally broke through the fish on our way down, our entire field of vision was just filled with this miraculous sight. We could see colors – reds and oranges and yellows – and the rocks were covered, just inundated, with organisms. Sponges, especially Corynactics (Strawberry anemone), pink hydrocoral, hydroids, and a lot of large-bladed algae. It looked as if someone had landscaped it. We were just overwhelmed.”

On the first dive, they collected nearly 50 species, including at least one new genus of algae and one new species. By working closely with a number of professional biologists at the University of California at Berkeley, the California Academy of Sciences, the Los Angeles County Museum, the Geological Survey, the Smithsonian, and other institutions, they sorted and identified their new collections until the list included more than 400 species.

After that first dive, made possible by the Sierra Club divers and by grants from such organizations as the San Francisco Foundation and the National Geographic Society, the Cordell Bank Expeditions evolved into a member-supported, systematic, data-gathering organization that bought its own research vessel, the Cordell Explorer, which was retired in 2014. They bought a LORAN-C receiver and carried out depth surveys back and forth across certain areas, measuring depths and recording positions. From that data, they were able to generate their own set of charts. Those charts became a major help in carrying out more successful dives, as they could more reliably find the pinnacles and ridges they wanted to dive. In the summer of 1985, Bob and a colleague were able to obtain state-of-the-art hydrographic survey data on the Bank as a result of a project conducted by the National Oceanic and Atmospheric Administration (NOAA) and the U.S. Geological Survey (USGS). That survey covered the 200-mile Exclusive Economic Zone (EEZ) off the coast that the U.S. claims control over. Cordell Bank may well be the best-surveyed feature off the coast of North America.

Aside from collecting specimens and surveying, the expedition also used 35-millimeter photography, plus Super 8-millimeter, 16-millimeter, and videotape cinematography. Some of their photographs have been useful in identifying species that didn’t show up in their collections and in showing physical features the divers may not have noticed during their dives.

They have found this seamount is roughly elliptical and, at the 50-fathom depth, it is 9-1/2 miles long by 4-½ miles wide (15.3 x 7.25 km). It lies right on the edge of the continental shelf and is the northernmost such shallow place all the way to Canada. The bank is a distinct plateau with its flat top rising to the 30- to 35-fathom depth. Atop this plateau, at least four cliffy ridge systems, two in the north and two in the south, and several pinnacles reach to diveable depths. In fact, the shallowest point the expedition has found is about 19 fathoms (114 feet or 35 meters) and is part of a ridge system in the northeast. Geologically, it is considered a piece of the ancient Sierra Nevada that was sheared off by the Pacific Plate, thus explaining its granite composition.

Growing on this 19-fathom peak is a dense, whitish cap of barnacles and red algae. Below this, from 20 to 25 fathoms (36.6 to 45.7 meters), the sessile community grades to nearly foot-thick piles of sponges, anemones, including the common Strawberry Anemone Corynactis californica, California Hydrocoral Allopora californica, hydroids, and tunicates. Space is the limiting factor. The organisms are very brightly colored with reds, yellow, white, and pinks. At 30 fathoms (55 meters), the community thins to a few large, widely spaced creatures, mainly sponges, urchins, and anemone. By 35 fathoms (64 meters), bare rock dominates the scene. Around 200 feet in various places, brilliant white sediments of almost a hundred percent shell fragments accumulate.

The Cordell Bank community is very healthy showing little evidence of disease or death because the California Current brings clean, clear, cold (50 to 55 degrees F. or 10 to 13 degrees C.) water, with a high nutrient content, upwelling to the relatively shallow bank. When the disruptive El Niño current occurs off California’s coast, the water temperatures at the bank rise to over 60 degrees F. or 15.6 degrees C. The sun’s rays penetrate this water so deeply divers can take photographs using available light at 150 feet (46 meters). Visibility is sometimes as good as 100 feet (30.5 meters). Because of the water’s clarity and nutrient load, photosynthesizing organisms support a vast and complex food chain up to large fish, birds, and mammals.

Cordell Bank has long been known as a superb fishing area. Groups of rockfish congregate around the pinnacles, sometimes so thickly, divers report whiteout conditions. Besides rockfish, sport fishermen regularly catch lingcod, yellowtail, salmon, albacore, and shark. Oddly enough, the divers have yet to see great white sharks, in spite of the fact that the great white’s favorite prey, seals and sea lions, are at the bank. They have, however, seen blue and mako sharks.

Like rockfish, seabirds often congregate around the pinnacles, and it was just such gatherings that enabled the expedition to initially home in on shallow points to dive. On surveying and diving trips since 1978, volunteer observers from the California Marine Mammal Center and San Francisco State University have recorded many sightings of seabirds and mammals at or near Cordell Bank. They’ve seen 33 species of seabirds including black-footed albatross, northern fulmar, surf scoter, south polar skua, common murre, pigeon guillemot, tufted puffin, and brown pelican. The previously endangered brown pelican was particularly noteworthy because it was sighted on about two-thirds of the trips.

The observers also recorded fourteen kinds of marine mammals. Of special interest were two endangered cetaceans, the humpback and blue whales. Both species feed at the bank. The team’s most exciting encounter with blues occurred on October 10, 1982, when a pair approached from off the port bow, surfaced 30 yards away, visibly swam under the ship, and surfaced again several hundred yards astern. Marc Webber and Steven Cooper, reporting for the group, felt the number of blue whale sightings “represents a substantial number of records for this species over the continental shelf in the Cordell Bank area, and along with probable observation of feeding suggest this area is an important autumn habitat for this species.” Also of particular interest were sightings of northern elephant seals whose pelagic habits have only recently become better understood. Other observed mammal species were Minke whale, Dall’s porpoise, harbor porpoise, orca, Pacific white-sided dolphin, Risso’s dolphin, Northern right whale dolphin, California sea lion, Steller sea lion, northern fur seal, and harbor seal. These have all been autumnal observations. The expedition has restricted their trips to the autumn because the weather is most predictable at that time and because the California and Davidson currents more or less cancel each other out, which makes diving more practical.

The greatest mysteries Bob and his divers have encountered are a number of large, cylindrical holes that lie right on the sharpest, highest parts of the region. Some holes appear to be man-made, but others look natural. Hearsay has it the holes were made by the U.S. Navy during the 1960’s in a project related to submarine detection. Bob’s expedition was once followed for nearly an hour by an unidentified submarine. In spite of his security clearance, Bob has been totally unsuccessful in learning anything from the Navy about any of this.

Cordell Bank is now a national marine sanctuary. The Sanctuary Programs Division (SPD) of NOAA, which is in charge of the sanctuaries program held its first informational hearing on the bank in San Francisco on April 25, 1984, and published a draft Environmental Impact Statement and other documents.

Bob is optimistic about Cordell Bank’s future. He believes, “It’s incumbent upon those of us who wish to preserve certain areas of our environment like museums, to set up the legislation to protect those areas. We don’t give any thought whatsoever to commercially developing Yosemite because it’s become part of our national environment, our cultural heritage. And our marine sanctuaries will become the same way. I hope and believe that 50 or 100 years from now, areas like Cordell Bank, which had long since been designated marine sanctuaries, will be part of our national heritage and will be considered inviolate.”

Creating a Marine Sanctuary

The federal marine sanctuaries program was established by Title III of the Marine Protection, Research, and Sanctuaries Act of 1972. This law provides that areas in the ocean as far out as the edge of the continental shelf and in the Great Lakes may be protected.

During its first 5 years, the program crawled slowly along, because no funds were appropriated. By 1977, only two marine sanctuaries had been designated. The first was a six square mile site off Cape Hatteras, North Carolina, to protect the wreck of the U.S.S. Monitor, and the second was Key Largo Coral Reef Marine Sanctuary adjacent to John Pennekamp Coral Reef State Park in the Florida Keys, which covers 100 square miles. In that year, 1977, President Carter, in an environmental message to Congress, expressed support for the program and boosted funding. In contrast to the law’s original intent, Carter was trying to protect areas threatened, in this case, by offshore oil development. As it turned out, one of Carter’s last official acts was the designation of three new sanctuaries: Looe Key in Florida, Gray’s Reef in Georgia, and the Gulf of the Farallones off California. (Cordell Bank neighbors this sanctuary.) Once again, the program was slowed by restricted funding under the Reagan Administration.

The slowness of the marine sanctuaries program was especially disheartening because all the land is under state or federal control already and doesn’t require acquisition funds. Money was needed only for evaluating potential sites, managing a site after it becomes a sanctuary, and enforcing the protective laws.

The marine sanctuaries program works in the following way. Any organization or member of the public may send nominations to the Sanctuary Programs Division (SPD) in the Commerce Department’s National Oceanic and Atmospheric Administration (NOAA) for consideration. The idea of nominating a place need not be intimidating. As Bob Schmeider found out, “the nomination itself doesn’t need to be very specific at all. Of course, if the (SPD) already knows about a site, which they had already known about Cordell Bank from information I had given them well before the nomination, (then) the actual nominating step was simply a letter from me to them saying I would like to nominate Cordell Bank. If a site is totally unknown and you’re preparing a nomination, then you need to include some details and some information, so that they will have some knowledge of it. That’s all.”

Formerly, a nomination was automatically placed on a List of Recommended Areas, but this has been replaced by a Site Evaluation List (SEL) that includes nominated sites meeting certain preliminary criteria. After review by the SPD staff, the SPD can promote the area to active candidacy. At that point, they’ll produce draft documents, including a management plan, environmental impact statement (EIS), and a designation document. These will be circulated among interested individuals, organizations, and governmental agencies. They’ll also schedule public hearings in the communities nearest the candidate site to get additional input. From that, they’ll produce final documents and circulate those and hold more hearings. Congress has the opportunity to review a site’s candidacy and hold their own hearings. Cordell Bank was the first marine sanctuary candidate to receive such scrutiny. If the site is within state jurisdiction, then that state’s governor may veto the designation, but this won’t necessarily cancel a site’s candidacy altogether. (Cordell Bank wasn’t in state waters.) After all of these steps, the Secretary of Commerce can sign the designation document and the site will become a national marine sanctuary.

Biometric Payment Authentication (BPA) – Corporate Banking Transactions: Pakistan Perspective

1. Introduction

The term ‘authentication’, describes the process of verifying the identity of a person or entity. Within the domain of corporate e-banking systems, the authentication process is one method used to control access to corporate customer accounts and transaction processing. Authentication is typically dependent upon corporate customer users providing valid identification data followed by one or more authentication credentials (factors) to prove their identity.

Customer identifiers may be user ID / password, or some form of user ID / token device. An authentication factor (e.g. PIN, password and token response algorithm) is secret or unique information linked to a specific customer identifier that is used to verify that identity.

Generally, the way to authenticate customers is to have them present some sort of factor to prove their identity. Authentication factors include one or more of the following:

Something a person knows – commonly a password or PIN. If the user types in the correct password or PIN, access is granted

Something a person has – most commonly a physical device referred to as a token. Tokens include self-contained devices that must be physically connected to a computer or devices that have a small screen where a one-time password (OTP) is displayed or can be generated after inputting PIN, which the user must enter to be authenticated

Something a person is – most commonly a physical characteristic, such as a fingerprint. This type of authentication is referred to as “biometrics” and often requires the installation of specific hardware on the system to be accessed

Authentication methodologies are numerous and range from simple to complex. The level of security provided varies based upon both the technique used and the manner in which it is deployed. Multifactor authentication utilizes two or more factors to verify customer identity and allows corporate e-banking user to authorize payments. Authentication methodologies based upon multiple factors can be more difficult to compromise and should be considered for high-risk situations. The effectiveness of a particular authentication technique is dependent upon the integrity of the selected product or process and the manner in which it is implemented and managed.

‘Something a person is’

Biometric technologies identify or authenticate the identity of a living person on the basis of a physiological characteristic (something a person is). Physiological characteristics include fingerprints, iris configuration, and facial structure. The process of introducing people into a biometrics-based system is called ‘enrollment’. In enrollment, samples of data are taken from one or more physiological characteristics; the samples are converted into a mathematical model, or template; and the template is registered into a database on which a software application can perform analysis.

Once enrolled, customers interact with the live-scan process of the biometrics technology. The live scan is used to identify and authenticate the customer. The results of a live scan, such as a fingerprint, are compared with the registered templates stored in the system. If there is a match, the customer is authenticated and granted access.

Biometric identifier, such as a fingerprint, can be used as part of a multifactor authentication system, combined with a password (something a person knows) or a token (something a person has). Currently in Pakistan, mostly banks are using two-factor authentications i.e. PIN and token in combination with user ID.

Fingerprint recognition technologies analyze global pattern schemata on the fingerprint, along with small unique marks known as minutiae, which are the ridge endings and bifurcations or branches in the fingerprint ridges. The data extracted from fingerprints are extremely dense and the density explains why fingerprints are a very reliable means of identification. Fingerprint recognition systems store only data describing the exact fingerprint minutiae; images of actual fingerprints are not retained.

Banks in Pakistan offering Internet-based products and services to their customers should use effective methods for high-risk transactions involving access to customer information or the movement of funds to other parties or any other financial transactions. The authentication techniques employed by the banks should be appropriate to the risks associated with those products and services. Account fraud and identity theft are frequently the result of single-factor (e.g. ID/password) authentication exploitation. Where risk assessments indicate that the use of single-factor authentication is inadequate, banks should implement multifactor authentication, layered security, or other controls reasonably calculated to mitigate those risks.

Although some of the Banks especially the major multinational banks has started to use two-factor authentication but keeping in view the information security, additional measure needs to be taken to avoid any unforeseen circumstances which may result in financial loss and reputation damage to the bank.

There are a variety of technologies and methodologies banks use to authenticate customers. These methods include the use of customer passwords, personal identification numbers (PINs), digital certificates using a public key infrastructure (PKI), physical devices such as smart cards, one-time passwords (OTPs), USB plug-ins or other types of tokens.

However addition to these technologies, biometric identification can be an added advantage for the two-factor authentication:

a) as an additional layer of security

b) cost effective

Existing authentication methodologies used in Pakistani Banks involve two basic factors:

i. Something the user knows (e.g. password, PIN)

ii. Something the user has (e.g. smart card, token)

This paper research proposes the use of another layer which is biometric characteristic such as a fingerprint in combination to the above.

So adding this we will get the below authentication methodologies:

i. Something the user knows (e.g. password, PIN)

ii. Something the user has (e.g. smart card, token)

iii. Something the user is (e.g. biometric characteristic, such as a fingerprint)

The success of a particular authentication method depends on more than the technology. It also depends on appropriate policies, procedures, and controls. An effective authentication method should have customer acceptance, reliable performance, scalability to accommodate growth, and interoperability with existing systems and future plans.

2. Methodology

The methodologies applied in this paper build on a two-step approach. First, through my past experience working in Cash Management department of a leading multinational bank, implementing electronic banking solutions for corporate clients throughout Pakistan and across geographies.

Secondly, consulting and interviewing friends working in Cash Management departments of other banks in Pakistan and Middle East for better understanding of the technology used in the market; its benefits and consequences for successful implementations.

3. Implementation in Pakistan

Biometric Payment Authentication (BPA) i.e. biometric characteristic, such as a fingerprint for authorizing financial transactions on corporate e-Banking platform implementation in Pakistan will be discussed in this section. First the descriptive, then the economic benefit analysis for adopting the presented methodology.

As technology is very much advanced today, fingerprint scanners are now readily available on almost every laptop or a stand-alone scanning device may be attached to a computer. Also with the advent of smart phones, now the fingerprint scanner is available on phones as well (e.g. Apple iPhone, Samsung mobile sets etc)

In Pakistan, end users shouldn’t have trouble using a fingerprint-scanning device on a laptop or on a smart phone as all work which needs to be done has to be done by banks introducing this methodology.

Besides this Pakistan is a perfect location to implement biometrics based authentication, mainly because:

a. CNICs are issued after taking the citizen’s biometric information – especially fingerprints

b. Telco companies needs to maintain and validate an individual’s fingerprints before issuing a SIM card

These examples show that a large population Pakistan is already familiar and comfortable with biometrics (fingerprints) methodology. However, banks have to develop their e-banking portal or application in accordance with and by accepting fingerprints for corporate users. The e-banking portal would invoke the fingerprint device of the end user for either login or authenticating financial transactions. Enrollment can be performed either remotely through first time login into e-banking platform after user has received setup instructions and passwords or at the bank’s customer service center.

This article suggests banks in Pakistan to move multifactor authentication through PIN and; fingerprints. Fingerprints are unique and complex enough to provide a robust template for authentication. Using multiple fingerprints from the same individual affords a greater degree of accuracy. Fingerprint identification technologies are among the most mature and accurate of the various biometric methods of identification.

Now let’s discuss the economic benefits of using PIN and; fingerprints instead of token devices for authentications. And before we deep dive into the statistics, first just look into the current process of token inventory ordering to its delivery to the end user and then its maintenance if any token is lost or faulty.

Mostly banks in Pakistan order and import tokens from a US based company called ‘VASCO Data Security International Inc.’. Once order is placed, the VASCO ships the token to the respective ordering bank and the bank receives the tokens after clearing the custom duties. Banks settles the invoices of VASCO by sending back the amount through outward remittance along with the courier charges. Banks then initialize the token and upon customer written request issues the token to an end user. The token is couriered to the end user and training is conducted via phone or physical visit of the bank’s representative to the customer office. Any lost or faulty token are replaced with new ones and again couriered to end users. Tokens are returned back to banks if any end user resigns their organization or is being moved into some other role that doesn’t involve banking related operations or use of e-banking platform.

Theoretically it seems pretty simple, but practically these are very time consuming activities and cost is associated to each and every step mentioned above.

Now, let’s do some cost calculation which are associated to the above activities and build some statistics so that cost benefit analysis can be done.

Currently, some of the banks in Pakistan, locally, have introduced fingerprint recognition technologies to authenticate ATM users and are in the phase of eliminating the need for an ATM card which will eventually help banks in cost saving of replacing lost or stolen cards.

Cost calculations are approximations and not to be taken as true cost for any budgeting.

3.1. Descriptive Statistics

The descriptive statistics for token inventory ordering to its delivery to the end user and then its maintenance if any token is lost or faulty (statistics built on roughly 1000 tokens consumption per year per bank) are shown in the below statistics.

Central Banks, Financial System and the Creation of Money (and Deficit)

In the market economy, the financial system gives money from the positive savers (i.e. depositors) to the negative savers (i.e. people with shortage of funds which need loans to buy property etc.). Furthermore, the financial systems facilitate non-cash payments. from individuals or legal entities.

The financial system has by law a monopoly of services. Only banks can accept deposits, only insurance companies can provide insurance services and mutual funds management can be done better by a large bank rather than by an individual investor.

How money is created

In the past, one of the reasons the ancient Greek states were strong was the ability to create their own currency. In the times of Pericles, the silver Drachma was the reserve currency of that era. The same applied for the golden currency of Philippe from Macedonia. Each of these currencies could have been exchanged with a certain amount of gold.

Nowadays, Fed creates USD and ECB Euro which both is fiat money I.e money with no intrinsic value that has been established as real money by government regulation and we, therefore, have to accept it as real money. Central banks circulate coins and paper money in most countries that they are just 5%-15% of the money supply, the rest is virtual money, an accounting data entry.

Depending on the amount of money central banks create, we live in a crisis or we have economic development. It should be noted that central banks are not state banks but private companies. The countries have given the right of issuing money to private bankers. In turn, these private central banks lend the states with interest and therefore, have economic and of course, political power. The paper money circulated in a country is actually public debt i.e. countries owe money to the private central bankers and the payment of this debt is ensured by issuing bonds. The warranty given by the government to private central bankers for debt repayment is the taxes imposed on people. The bigger public debt is the bigger the taxes, the more common people suffer.

The presidents of these central banks cannot be fired by the governments and do not report to the governments. In Europe, they report to ECB which sets the monetary policy of EU. ECB is not controlled by the European Parliament or the European Commission.

The state or borrower issues bonds, in other words, it accepts that it has an equal amount of debt to the central bank which based on this acceptance creates money from zero and lends it with interest. This money is lent through an accounting entry however, interest rate does not exist as money in any form, it is just on the loan contract obligations. This is the reason why global debt is bigger than real or accounting debt. Therefore, people become slaves since they have to work to get real money to pay off debts either public or individual debts. Very few ones manage to pay off the loan but the rest get bankrupted and lose everything.

When a country has its own currency as it is the case of the USA and other countries, it can “oblige” central bank to accept its state bonds and lend the state with interest. Therefore, a country bankruptcy is avoided since the central bank acts as a lender of last resort. ECB is another case since it does not lend Eurozone member-states. The non-existence of a Europe safe bond leaves the Eurozone countries at the mercy of the “markets” which by being afraid of not getting their money back they impose high interest rates. However, quite recently the European safe bonds have gained ground despite the differences in Europe policymakers whereas the Germans are the main cause for not having this bond since they do not want national obligations to be single European ones. There is also another reason (probably the most serious one) which is that by having this bond, Euro as a currency would be devaluated and Germany’s borrowing interest rates would rise.

In the USA things are different since the state borrows its own currency (USD) from Fed so local currency is devaluated and therefore state debt is devaluated. When a currency is devaluated the products of a country become cheaper without reducing wages but imported products become more expensive. A country which has a strong primary (agriculture) and secondary (industry) sector can become more competitive by having its own currency provided that it has its own energy sources i.e. it should be energy sufficient. Banks with between $16 million and $122.3 million in deposits have a reserve requirement of 3%, and banks with over $122.3 million in deposits have a reserve requirement of 10%. Therefore, if all depositors decide to take their money from the banks at the same time, banks cannot give it to them and bankrun is created. At this point, it should be mentioned that for each USD, Euro etc deposited in a bank, the banking system creates and lends ten. Banks create money each time they give loans and the money they create is money that appears on the computer screen, not real money deposited in the bank’s treasury that lends it. However, the bank lends virtual money but gets real money plus interest from the borrower.

As Professor Mark Joob stated no-one can escape from paying interest rates. When someone borrows money from the bank, s/he has to pay interest rates for the loan but all who pay taxes and buy goods and services pay the interest rate of the initial borrower since taxes have to be collected to pay the interest rates of the public debt. All companies and individuals that sell goods and services have to include the cost of loans in their prices and this way the whole society subsidizes banks although part of this subsidy is given as interest rate to depositors. Professor Mark Joob goes on and writes that the interest rate paid to the banks is a subsidy to them since the fiat/accounting money they create is considered as legal money. This is why bankers have these large salaries and this is why the banking sector is so huge, it is because the society subsidizes banks. Concerning interest rates, poor people usually have more loans than savings whereas rich people have more saving than loans. When interest rates are paid, money is transferred from poor to the rich therefore, interest rates are favourable for wealth accumulation. Commercial banks gain from investments and from the difference between interest rates for deposits and interest rates for loans. When interest rate is added regularly to the initial investment, it brings more interest since there is compound interest which increases exponentially initial capital. Real money by itself is not increased since this interest rate is not derived from production. Only human labour can create interest rate of increasing value but there is a downward pressure for salaries cost and at the same time increase of productivity. This happens because human labour needs to satisfy the demands of exponentially increased compound interest.

The borrower has to work to get the real money, in other words, banks lend virtual money and get real money in return. Since the lent money is more than the real one, the banks should create new money in the form of loans and credits. When they increase the quantity of money there is growth (however, even in this case with the specific banking and monetary system debt is also increased) but when they want to create a crisis, they stop giving loans and due to the lack of money a lot of people bankrupt and depression starts.

This is a “clever trick” created by the bankers who have noticed that they can lend more money than the one they have since depositors would not take their money, altogether and at the same time, from the banks. This is called fractional reserve banking. The definition given by Quickonomics for fractional reserve banking is the following: “Fractional reserve banking is a banking system in which banks only hold a fraction of the money their customers deposit as reserves. This allows them to use the rest of it to make loans and thereby essentially create new money. This gives commercial banks the power to directly affect money supply. In fact, even though central banks are in charge of controlling money supply, most of the money in modern economies is created by commercial banks through fractional reserve banking”.

Are savings protected?

In the case of Italian debt as in the case of Greek debt, we have heard from politicians (actually paid employees by the bankers) that they want to protect people’s savings. However, are these savings protected in this monetary and banking system? The answer is a simple NO. As mentioned, the banks have low reserves in cash. This is the reason that they need their customers’ trust. In case of a bankrun there would face liquidity problems and they would bankrupt. There are deposit guarantee schemes that reimburse, under EU rules, that protect depositors’ savings by guaranteeing deposits of up to €100,000 but in case of chain reactions, commercial banks need to be saved by the governments and central banks act as lenders’ of last resort.

What next?

The economic system as it is shaped by the power of banks is not viable and it does not serve human values such as freedom, justice and democracy. It is irrational and should be immediately changed if we want humanity to survive.

Is My Money Safe? On The Soundness Of Our Banks

Banks are institutions wherein miracles happen regularly. We rarely entrust our money to anyone but ourselves – and our banks. Despite a very chequered history of mismanagement, corruption, false promises and representations, delusions and behavioural inconsistency – banks still succeed to motivate us to give them our money. Partly it is the feeling that there is safety in numbers. The fashionable term today is “moral hazard”. The implicit guarantees of the state and of other financial institutions moves us to take risks which we would, otherwise, have avoided. Partly it is the sophistication of the banks in marketing and promoting themselves and their products. Glossy brochures, professional computer and video presentations and vast, shrine-like, real estate complexes all serve to enhance the image of the banks as the temples of the new religion of money.

But what is behind all this? How can we judge the soundness of our banks? In other words, how can we tell if our money is safely tucked away in a safe haven?

The reflex is to go to the bank’s balance sheets. Banks and balance sheets have been both invented in their modern form in the 15th century. A balance sheet, coupled with other financial statements is supposed to provide us with a true and full picture of the health of the bank, its past and its long-term prospects. The surprising thing is that – despite common opinion – it does. The less surprising element is that it is rather useless unless you know how to read it.

Financial Statements (Income – aka Profit and Loss – Statement, Cash Flow Statement and Balance Sheet) come in many forms. Sometimes they conform to Western accounting standards (the Generally Accepted Accounting Principles, GAAP, or the less rigorous and more fuzzily worded International Accounting Standards, IAS). Otherwise, they conform to local accounting standards, which often leave a lot to be desired. Still, you should look for banks, which make their updated financial reports available to you. The best choice would be a bank that is audited by one of the Big Six Western accounting firms and makes its audit reports publicly available. Such audited financial statements should consolidate the financial results of the bank with the financial results of its subsidiaries or associated companies. A lot often hides in those corners of corporate ownership.

Banks are rated by independent agencies. The most famous and most reliable of the lot is Fitch-IBCA. Another one is Thomson BankWatch-BREE. These agencies assign letter and number combinations to the banks, that reflect their stability. Most agencies differentiate the short term from the long term prospects of the banking institution rated. Some of them even study (and rate) issues, such as the legality of the operations of the bank (legal rating). Ostensibly, all a concerned person has to do, therefore, is to step up to the bank manager, muster courage and ask for the bank’s rating. Unfortunately, life is more complicated than rating agencies would like us to believe. They base themselves mostly on the financial results of the bank rated, as a reliable gauge of its financial strength or financial profile. Nothing is further from the truth.

Admittedly, the financial results do contain a few important facts. But one has to look beyond the naked figures to get the real – often much less encouraging – picture.

Consider the thorny issue of exchange rates. Financial statements are calculated (sometimes stated in USD in addition to the local currency) using the exchange rate prevailing on the 31st of December of the fiscal year (to which the statements refer). In a country with a volatile domestic currency this would tend to completely distort the true picture. This is especially true if a big chunk of the activity preceded this arbitrary date. The same applies to financial statements, which were not inflation-adjusted in high inflation countries. The statements will look inflated and even reflect profits where heavy losses were incurred. “Average amounts” accounting (which makes use of average exchange rates throughout the year) is even more misleading. The only way to truly reflect reality is if the bank were to keep two sets of accounts: one in the local currency and one in USD (or in some other currency of reference). Otherwise, fictitious growth in the asset base (due to inflation or currency fluctuations) could result.

Another example: in many countries, changes in regulations can greatly effect the financial statements of a bank. In 1996, in Russia, to take an example, the Bank of Russia changed the algorithm for calculating an important banking ratio (the capital to risk weighted assets ratio). Unless a Russian bank restated its previous financial statements accordingly, a sharp change in profitability appeared from nowhere.

The net assets themselves are always misstated: the figure refers to the situation on 31/12. A 48-hour loan given to a collaborating firm can inflate the asset base on the crucial date. This misrepresentation is only mildly ameliorated by the introduction of an “average assets” calculus. Moreover, some of the assets can be interest earning and performing – others, non-performing. The maturity distribution of the assets is also of prime importance. If most of the bank’s assets can be withdrawn by its clients on a very short notice (on demand) – it can swiftly find itself in trouble with a run on its assets leading to insolvency.

Another oft-used figure is the net income of the bank. It is important to distinguish interest income from non-interest income. In an open, sophisticated credit market, the income from interest differentials should be minimal and reflect the risk plus a reasonable component of income to the bank. But in many countries (Japan, Russia) the government subsidizes banks by lending to them money cheaply (through the Central Bank or through bonds). The banks then proceed to lend the cheap funds at exorbitant rates to their customers, thus reaping enormous interest income. In many countries the income from government securities is tax free, which represents another form of subsidy. A high income from interest is a sign of weakness, not of health, here today, there tomorrow. The preferred indicator should be income from operations (fees, commissions and other charges).

There are a few key ratios to observe. A relevant question is whether the bank is accredited with international banking agencies. The latter issue regulatory capital requirements and other defined ratios. Compliance with these demands is a minimum in the absence of which, the bank should be regarded as positively dangerous.

The return on the bank’s equity (ROE) is the net income divided by its average equity. The return on the bank’s assets (ROA) is its net income divided by its average assets. The (tier 1 or total) capital divided by the bank’s risk weighted assets – a measure of the bank’s capital adequacy. Most banks follow the provisions of the Basel Accord as set by the Basel Committee of Bank Supervision (also known as the G10). This could be misleading because the Accord is ill equipped to deal with risks associated with emerging markets, where default rates of 33% and more are the norm. Finally, there is the common stock to total assets ratio. But ratios are not cure-alls. Inasmuch as the quantities that comprise them can be toyed with – they can be subject to manipulation and distortion. It is true that it is better to have high ratios than low ones. High ratios are indicative of a bank’s underlying strength of reserves and provisions and, thereby, of its ability to expand its business. A strong bank can also participate in various programs, offerings and auctions of the Central Bank or of the Ministry of Finance. The more of the bank’s earnings are retained in the bank and not distributed as profits to its shareholders – the better these ratios and the bank’s resilience to credit risks. Still, these ratios should be taken with more than a grain of salt. Not even the bank’s profit margin (the ratio of net income to total income) or its asset utilization coefficient (the ratio of income to average assets) should be relied upon. They could be the result of hidden subsidies by the government and management misjudgement or understatement of credit risks.

To elaborate on the last two points: a bank can borrow cheap money from the Central Bank (or pay low interest to its depositors and savers) and invest it in secure government bonds, earning a much higher interest income from the bonds’ coupon payments. The end result: a rise in the bank’s income and profitability due to a non-productive, non-lasting arbitrage operation. Otherwise, the bank’s management can understate the amounts of bad loans carried on the bank’s books, thus decreasing the necessary set-asides and increasing profitability. The financial statements of banks largely reflect the management’s appraisal of the business. This is a poor guide to go by.

In the main financial results’ page of a bank’s books, special attention should be paid to provisions for the devaluation of securities and to the unrealized difference in the currency position. This is especially true if the bank is holding a major part of the assets (in the form of financial investments or of loans) and the equity is invested in securities or in foreign exchange denominated instruments. Separately, a bank can be trading for its own position (the Nostro), either as a market maker or as a trader. The profit (or loss) on securities trading has to be discounted because it is conjectural and incidental to the bank’s main activities: deposit taking and loan making.

Most banks deposit some of their assets with other banks. This is normally considered to be a way of spreading the risk. But in highly volatile economies with sickly, underdeveloped financial sectors, all the institutions in the sector are likely to move in tandem (a highly correlated market). Cross deposits among banks only serve to increase the risk of the depositing bank (as the recent affair with Toko Bank in Russia and the banking crisis in South Korea have demonstrated).

Further closer to the bottom line are the bank’s operating expenses: salaries, depreciation, fixed or capital assets (real estate and equipment) and administrative expenses. The rule of thumb is: the higher these expenses, the worse. The great historian Toynbee once said that great civilizations collapse immediately after they bequeath to us the most impressive buildings. This is doubly true with banks. If you see a bank fervently engaged in the construction of palatial branches – stay away from it.

All considered, banks are risk traders. They live off the mismatch between assets and liabilities. To the best of their ability, they try to second guess the markets and reduce such a mismatch by assuming part of the risks and by engaging in proper portfolio management. For this they charge fees and commissions, interest and profits – which constitute their sources of income. If any expertise is attributed to the banking system, it is risk management. Banks are supposed to adequately assess, control and minimize credit risks. They are required to implement credit rating mechanisms (credit analysis), efficient and exclusive information-gathering systems, and to put in place the right lending policies and procedures. Just in case they misread the market risks and these turned into credit risks (which happens only too often), banks are supposed to put aside amounts of money which could realistically offset loans gone sour or non-performing in the future. These are the loan loss reserves and provisions. Loans are supposed to be constantly monitored, reclassified and charges must be made against them as applicable. If you see a bank with zero reclassifications, charge off and recoveries – either the bank is lying through its teeth, or it is not taking the business of banking too seriously, or its management is no less than divine in its prescience. What is important to look at is the rate of provision for loan losses as a percentage of the loans outstanding. Then it should be compared to the percentage of non-performing loans out of the loans outstanding. If the two figures are out of kilter, either someone is pulling your leg – or the management is incompetent or lying to you. The first thing new owners of a bank do is, usually, improve the placed asset quality (a polite way of saying that they get rid of bad, non-performing loans, whether declared as such or not). They do this by classifying the loans. Most central banks in the world have in place regulations for loan classification and if acted upon, these yield rather more reliable results than any management’s “appraisal”, no matter how well intentioned. In some countries in the world, the Central Bank (or the Supervision of the Banks) forces banks to set aside provisions against loans of the highest risk categories, even if they are performing. This, by far, should be the preferable method.

Of the two sides of the balance sheet, the assets side should earn the most attention. Within it, the interest earning assets deserve the greatest dedication of time. What percentage of the loans is commercial and what percentage given to individuals? How many lenders are there (risk diversification is inversely proportional to exposure to single borrowers)? How many of the transactions are with “related parties”? How much is in local currency and how much in foreign currencies (and in which)? A large exposure to foreign currency lending is not necessarily healthy. A sharp, unexpected devaluation could move a lot of the borrowers into non-performance and default and, thus, adversely affect the quality of the asset base. In which financial vehicles and instruments is the bank invested? How risky are they? And so on.

No less important is the maturity structure of the assets. It is an integral part of the liquidity (risk) management of the bank. The crucial question is: what are the cash flows projected from the maturity dates of the different assets and liabilities – and how likely are they to materialize. A rough matching has to exist between the various maturities of the assets and the liabilities. The cash flows generated by the assets of the bank must be used to finance the cash flows resulting from the banks’ liabilities. A distinction has to be made between stable and hot funds (the latter in constant pursuit of higher yields). Liquidity indicators and alerts have to be set in place and calculated a few times daily. Gaps (especially in the short term category) between the bank’s assets and its liabilities are a very worrisome sign.

But the bank’s macroeconomic environment is as important to the determination of its financial health and of its creditworthiness as any ratio or micro-analysis. The state of the financial markets sometimes has a larger bearing on the bank’s soundness than other factors. A fine example is the effect that interest rates or a devaluation have on a bank’s profitability and capitalization. The implied (not to mention the explicit) support of the authorities, of other banks and of investors (domestic as well as international) sets the psychological background to any future developments. This is only too logical. In an unstable financial environment, knock-on effects are more likely. Banks deposit money with other banks on a security basis. Still, the value of securities and collaterals is as good as their liquidity and as the market itself. The very ability to do business (for instance, in the syndicated loan market) is influenced by the larger picture. Falling equity markets herald trading losses and loss of income from trading operations and so on.

Perhaps the single most important factor is the general level of interest rates in the economy. It determines the present value of foreign exchange and local currency denominated government debt. It influences the balance between realized and unrealized losses on longer-term (commercial or other) paper. One of the most important liquidity generation instruments is the repurchase agreement (repo). Banks sell their portfolios of government debt with an obligation to buy it back at a later date. If interest rates shoot up – the losses on these repos can trigger margin calls (demands to immediately pay the losses or else materialize them by buying the securities back). Margin calls are a drain on liquidity. Thus, in an environment of rising interest rates, repos could absorb liquidity from the banks, deflate rather than inflate. The same principle applies to leverage investment vehicles used by the bank to improve the returns of its securities trading operations. High interest rates here can have an even more painful outcome. As liquidity is crunched, the banks are forced to materialize their trading losses. This is bound to put added pressure on the prices of financial assets, trigger more margin calls and squeeze liquidity further. It is a vicious circle of a monstrous momentum once commenced.

But high interest rates, as we mentioned, also strain the asset side of the balance sheet by applying pressure to borrowers. The same goes for a devaluation. Liabilities connected to foreign exchange grow with a devaluation with no (immediate) corresponding increase in local prices to compensate the borrower. Market risk is thus rapidly transformed to credit risk. Borrowers default on their obligations. Loan loss provisions need to be increased, eating into the bank’s liquidity (and profitability) even further. Banks are then tempted to play with their reserve coverage levels in order to increase their reported profits and this, in turn, raises a real concern regarding the adequacy of the levels of loan loss reserves. Only an increase in the equity base can then assuage the (justified) fears of the market but such an increase can come only through foreign investment, in most cases. And foreign investment is usually a last resort, pariah, solution (see Southeast Asia and the Czech Republic for fresh examples in an endless supply of them. Japan and China are, probably, next).

In the past, the thinking was that some of the risk could be ameliorated by hedging in forward markets (=by selling it to willing risk buyers). But a hedge is only as good as the counterparty that provides it and in a market besieged by knock-on insolvencies, the comfort is dubious. In most emerging markets, for instance, there are no natural sellers of foreign exchange (companies prefer to hoard the stuff). So forwards are considered to be a variety of gambling with a default in case of substantial losses a very plausible way out.

Banks depend on lending for their survival. The lending base, in turn, depends on the quality of lending opportunities. In high-risk markets, this depends on the possibility of connected lending and on the quality of the collaterals offered by the borrowers. Whether the borrowers have qualitative collaterals to offer is a direct outcome of the liquidity of the market and on how they use the proceeds of the lending. These two elements are intimately linked with the banking system. Hence the penultimate vicious circle: where no functioning and professional banking system exists – no good borrowers will emerge.

Bankers’ Banks- The Role of Central Banks in Banking Crises

Central banks are relatively new inventions. An American President (Andrew Jackson) even cancelled its country’s central bank in the nineteenth century because he did not think that it was very important. But things have changed since. Central banks today are the most important feature of the financial systems of most countries of the world.

Central banks are a bizarre hybrids. Some of their functions are identical to the functions of regular, commercial banks. Other functions are unique to the central bank. On certain functions it has an absolute legal monopoly.

Central banks take deposits from other banks and, in certain cases, from foreign governments which deposit their foreign exchange and gold reserves for safekeeping (for instance, with the Federal Reserve Bank of the USA). The Central Bank invests the foreign exchange reserves of the country while trying to maintain an investment portfolio similar to the trade composition of its client – the state. The Central bank also holds onto the gold reserves of the country. Most central banks have lately tried to get rid of their gold, due to its ever declining prices. Since the gold is registered in their books in historical values, central banks are showing a handsome profit on this line of activity. Central banks (especially the American one) also participate in important, international negotiations. If they do not do so directly – they exert influence behind the scenes. The German Bundesbank virtually dictated Germany’s position in the negotiations leading to the Maastricht treaty. It forced the hands of its co-signatories to agree to strict terms of accession into the Euro single currency project. The Bunbdesbank demanded that a country’s economy be totally stable (low debt ratios, low inflation) before it is accepted as part of the Euro. It is an irony of history that Germany itself is not eligible under these criteria and cannot be accepted as a member in the club whose rules it has assisted to formulate.

But all these constitute a secondary and marginal portion of a central banks activities.

The main function of a modern central bank is the monitoring and regulation of interest rates in the economy. The central bank does this by changing the interest rates that it charges on money that it lends to the banking system through its “discount windows”. Interest rates is supposed to influence the level of economic activity in the economy. This supposed link has not unequivocally proven by economic research. Also, there usually is a delay between the alteration of interest rates and the foreseen impact on the economy. This makes assessment of the interest rate policy difficult. Still, central banks use interest rates to fine tune the economy. Higher interest rates – lower economic activity and lower inflation. The reverse is also supposed to be true. Even shifts of a quarter of a percentage point are sufficient to send the stock exchanges tumbling together with the bond markets. In 1994 a long term trend of increase in interest rate commenced in the USA, doubling interest rates from 3 to 6 percent. Investors in the bond markets lost 1 trillion (=1000 billion!) USD in 1 year. Even today, currency traders all around the world dread the decisions of the Bundesbank and sit with their eyes glued to the trading screen on days in which announcements are expected.

Interest rates is only the latest fad. Prior to this – and under the influence of the Chicago school of economics – central banks used to monitor and manipulate money supply aggregates. Simply put, they would sell bonds to the public (and, thus absorb liquid means, money) – or buy from the public (and, thus, inject liquidity). Otherwise, they would restrict the amount of printed money and limit the government’s ability to borrow. Even prior to that fashion there was a widespread belief in the effectiveness of manipulating exchange rates. This was especially true where exchange controls were still being implemented and the currency was not fully convertible. Britain removed its exchange controls only as late as 1979. The USD was pegged to a (gold) standard (and, thus not really freely tradable) as late as 1971. Free flows of currencies are a relatively new thing and their long absence reflects this wide held superstition of central banks. Nowadays, exchange rates are considered to be a “soft” monetary instrument and are rarely used by central banks. The latter continue, though, to intervene in the trading of currencies in the international and domestic markets usually to no avail and while losing their credibility in the process. Ever since the ignominious failure in implementing the infamous Louvre accord in 1985 currency intervention is considered to be a somewhat rusty relic of old ways of thinking.

Central banks are heavily enmeshed in the very fabric of the commercial banking system. They perform certain indispensable services for the latter. In most countries, interbank payments pass through the central bank or through a clearing organ which is somehow linked or reports to the central bank. All major foreign exchange transactions pass through – and, in many countries, still must be approved by – the central bank. Central banks regulate banks, licence their owners, supervise their operations, keenly observes their liquidity. The central bank is the lender of last resort in cases of insolvency or illiquidity.

The frequent claims of central banks all over the world that they were surprised by a banking crisis looks, therefore, dubious at best. No central bank can say that it had no early warning signs, or no access to all the data – and keep a straight face while saying so. Impending banking crises give out signs long before they erupt. These signs ought to be detected by a reasonably managed central bank. Only major neglect could explain a surprise on behalf of a central bank.

One sure sign is the number of times that a bank chooses to borrow using the discount windows. Another is if it offers interest rates which are way above the rates offered by other financing institutions. There are may more signs and central banks should be adept at reading them.

This heavy involvement is not limited to the collection and analysis of data. A central bank – by the very definition of its functions – sets the tone to all other banks in the economy. By altering its policies (for instance: by changing its reserve requirements) it can push banks to insolvency or create bubble economies which are bound to burst. If it were not for the easy and cheap money provided by the Bank of Japan in the eighties – the stock and real estate markets would not have inflated to the extent that they have. Subsequently, it was the same bank (under a different Governor) that tightened the reins of credit – and pierced both bubble markets.

The same mistake was repeated in 1992-3 in Israel – and with the same consequences.

This precisely is why central banks, in my view, should not supervise the banking system.

When asked to supervise the banking system – central banks are really asked to draw criticism on their past performance, their policies and their vigilance in the past. Let me explain this statement:

In most countries in the world, bank supervision is a heavy-weight department within the central bank. It samples banks, on a periodic basis. Then, it analyses their books thoroughly and imposes rules of conduct and sanctions where necessary. But the role of central banks in determining the health, behaviour and operational modes of commercial banks is so paramount that it is highly undesirable for a central bank to supervise the banks. As I have said, supervision by a central bank means that it has to criticize itself, its own policies and the way that they were enforced and also the results of past supervision. Central banks are really asked to cast themselves in the unlikely role of impartial saints.

A new trend is to put the supervision of banks under a different “sponsor” and to encourage a checks and balances system, wherein the central bank, its policies and operations are indirectly criticized by the bank supervision. This is the way it is in Switzerland and – with the exception of the Jewish money which was deposited in Switzerland never to be returned to its owners – the Swiss banking system is extremely well regulated and well supervised.

We differentiate between two types of central bank: the autonomous and the semi-autonomous.

The autonomous bank is politically and financially independent. Its Governor is appointed for a period which is longer than the periods of the incumbent elected politicians, so that he will not be subject to political pressures. Its budget is not provided by the legislature or by the executive arm. It is self sustaining: it runs itself as a corporation would. Its profits are used in leaner years in which it loses money (though for a central bank to lose money is a difficult task to achieve).

In Macedonia, for instance, annual surpluses generated by the central bank are transferred to the national budget and cannot be utilized by the bank for its own operations or for the betterment of its staff through education.

Prime examples of autonomous central banks are Germany’s Bundesbank and the American Federal Reserve Bank.

The second type of central bank is the semi autonomous one. This is a central bank that depends on the political echelons and, especially, on the Ministry of Finance. This dependence could be through its budget which is allocated to it by the Ministry or by a Parliament (ruled by one big party or by the coalition parties). The upper levels of the bank – the Governor and the Vice Governor – could be deposed of through a political decision (albeit by Parliament, which makes it somewhat more difficult). This is the case of the National Bank of Macedonia which has to report to Parliament. Such dependent banks fulfil the function of an economic advisor to the government. The Governor of the Bank of England advises the Minister of Finance (in their famous weekly meetings, the minutes of which are published) about the desirable level of interest rates. It cannot, however, determine these levels and, thus is devoid of arguably the most important policy tool. The situation is somewhat better with the Bank of Israel which can play around with interest rates and foreign exchange rates – but not entirely freely.

The National Bank of Macedonia (NBM) is highly autonomous under the law regulating its structure and its activities. Its Governor is selected for a period of seven years and can be removed from office only in the case that he is charged with criminal deeds. Still, it is very much subject to political pressures. High ranking political figures freely admit to exerting pressures on the central bank (at the same breath saying that it is completely independent).

The NBM is young and most of its staff – however bright – are inexperienced. With the kind of wages that it pays it cannot attract the best available talents. The budgetary surpluses that it generates could have been used for this purpose and to higher world renowned consultants (from Switzerland, for instance) to help the bank overcome the experience gap. But the money is transferred to the budget, as we said. So, the bank had to do with charity received from USAID, the KNOW-HOW FUND and so on. Some of the help thus provided was good and relevant – other advice was, in my view, wrong for the local circumstances. Take supervision: it was modelled after the Americans and British. Those are the worst supervisors in the West (if we do not consider the Japanese).

And with all this, the bank had to cope with extraordinarily difficult circumstances since its very inception. The 1993 banking crisis, the frozen currency accounts, the collapse of the Stedilnicas (crowned by the TAT affair). Older, more experienced central banks would have folded under the pressure. Taking everything under consideration, the NBM has performed remarkably well.

The proof is in the stability of the local currency, the Denar. This is the main function of a central bank. After the TAT affair, there was a moment or two of panic – and then the street voted confidence in the management of the central bank, the Denar-DM rate went down to where it was prior to the crisis.

Now, the central bank is facing its most daunting task: facing the truth without fear and without prejudice. Bank supervision needs to be overhauled and lessons need to be learnt. The political independence of the bank needs to be increased greatly. The bank must decide what to do with TAT and with the other failing Stedilnicas?

They could be sold to the banks as portfolios of assets and liabilities. The Bank of England sold Barings Bank in 1995 to the ING Dutch Bank.

The central bank could – and has to – force the owners of the failing Stedilnicas to increase their equity capital (by using their personal property, where necessary). This was successfully done (again, by the Bank of England) in the 1991 case of the BCCI scandal.

The State of Macedonia could decide to take over the obligations of the failed system and somehow pay back the depositors. Israel (1983), the USA (1985/7) and a dozen other countries have done so recently.

The central bank could increase the reserve requirements and the deposit insurance premiums.

But these are all artificial, ad hoc, solutions. Something more radical needs to be done:

A total restructuring of the banking system. The Stedilnicas have to be abolished. The capital required to open a bank or a branch of a bank has to be lowered to 4 million DM (to conform with world standards and with the size of the economy of Macedonia). Banks should be allowed to diversify their activities (as long as they are of a financial nature), to form joint venture with other providers of financial services (such as insurance companies) and to open a thick network of branches.

The 10 Commandments of Good Governance in Banks

Due to the banking crisis of 2008, the question of how banks can protect themselves against future failures has attracted the attention of regulators, banking experts and business media. An important area is the need for better transparency, mainly regarding remuneration in the banking sector, and how boards of banks should improve their corporate governance practices to reduce the chances of a repeat of the credit crunch.

The recent publication of Central Bank of Egypt draft Code of Corporate Governance for banks marks a significant step in this process. Banks together with their respective boards should pay close attention to the corporate governance guidelines.

There are several tips and recommendations for good governance available for the board of banks. Yet, I consider the following `10 commandments` are central in establishing a sound governance regime:

1-Set the right tone at the top.

The main concerns for the board should include guiding, approving and overseeing the bank’s strategic objectives, corporate values and policies. This could be achieved by developing a code of conduct for the bank employees, management, and board members. Likewise, the board should clearly define areas of responsibility, authority levels and reporting lines within the bank.

2-Adequate qualifications of board members

The board should have adequate knowledge and experience relevant to each of the material financial activities the bank intends to pursue to enable effective governance and oversight of the bank.

To ensure that non-executive directors have the knowledge and understanding of the business, the board should provide thematic business awareness sessions on a regular basis and each director should be provided with a tailored induction, training and development to be reviewed annually with the chairman. Similarly, suitable arrangements should be made for executive board members in business areas other than those for which they have direct responsibility.

Non-executive directors are encouraged to spend more time in the business to ensure that they can participate effectively to strategy and other board decisions.

3-Appoint independent non-executive directors

To foster an independent element within the board, banks must consider that independent directors should constitute a significant membership of the board, and that the board should have at least three independent, non-executives directors. Larger banks may have a higher proportion of non-executive directors.

Non-executives directors should be able to devote sufficient time to the role in order to assess risk and ask tough questions about strategy.

In UK, there are recommendations for banks to appoint a senior independent director (SID) whose role is to provide a sounding board for the chairman and serve as a trusted intermediary for the non-executive directors, when necessary.

4-Establish board-risk governance

Banks should establish a board risk committee to work in tandem with existing audit committee. The risk committee would concentrate on risk strategy and management, free from any conflict with demands placed on audit committees. The risk committee would report regularly (as part of the annual report) on risk strategy and risk management. The risk committee has authority to seek external advice to test its risk management assumptions, particularly in the context of risk related to significant banking transactions.

Given the importance of an independent risk management function, banks should appoint a chief risk officer (CRO) with sufficient authority, stature, independence, resources and access to the board. This executive should be reporting to both the risk committee and internally to the CEO. Removal of the CRO should be subject to board discussion and public disclosure.

5-Expand scope of the remuneration committee

The scope of the remuneration committee should be expanded to cover all aspects of remuneration policy on a bank-wide basis with particular focus on the risk dimension. The remuneration committee is responsible to review the compensation philosophy and major compensation programs.

In order to reduce the perceived excessive risk-taking within banks, this committee will also be expected to approve the links between performance targets and pay or bonus schemes. At least half of bonuses should be paid in the form of a long-term incentive scheme.

6-Develop Information Technology (IT) governance

IT governance provides the structure that links IT processes, resources and information to the bank’s strategies and objectives, enhances effective board decision-making and creates greater transparency and accountability. IT governance ensures that related risks are properly identified and managed. The board needs to approve IT expenditures and provide adequate oversight over all aspects of IT governance, including procurement, outsourcing, the efficiency of systems and procedures, IT security, customer data protection and adequacy of anti-fraud and anti-money laundering systems.

7-Improve efficiency through board evaluation

The board and board committees should be subject to a formal and rigorous performance evaluation with external facilitation of the process every three years. The evaluation statement should either be included as a dedicated section of the chairman’s statement or as a separate section of the annual report, signed by the chairman. Where an external facilitator is used, this should be indicated in the statement, together with their name and other meaningful details for the shareholders.

8-Manage conflicts of interest effectively

Banks should establish information barriers (“Chinese walls”) between the different departments so that decisions by staff in one department are made in ignorance of confidential information available to staff in other departments which might affect their decision. Conflicts by board members or senior executives should be disclosed to the banks’ compliance officer. A good corporate governance practice is to put in place and disclose a conflicts of interest policy.

9-Monitor the governance of banks’ clients

It is important for banks that their clients apply the principles of good governance. Banks may consider that it is in their own best interest to check the governance framework and practices of their corporate borrowers. Even in circumstances where a bank cannot directly influence the governance practices of their borrowers, it can have an important influence by “leading by example”.

10-Track potential governance failures

Banks should have in place a policy setting out adequate procedures for employees with concerns about the integrity of the bank’s operations or its staff (so called whistle blowing policy). Employees should be able to communicate their concerns with corporate protection from retaliation from the management. The procedure should facilitate the flow of confidential and direct or indirect communication to the board (or Audit Committee) outside the internal “chain of command”. The establishment of proper communication channels would allow bank staff to discuss their concerns in confidence without fear of retaliatory action.

Conclusion

Good corporate governance is crucial for today’s complex and dynamic banking environment to ensure long-term sustainability and trust of stakeholders including regulators, investors, clients and employees. Therefore, it should be cultivated and practiced regularly within banks at board and executive management levels. Remember; Corporate governance is like a muscle, should be exercised or it will atrophy!

Hany Abou-El-Fotouh is Chief of Staff & Group Board Secretary, CI Capital Holding – the investment banking arm of Commercial International Bank which is the largest private bank in Egypt. He provides advice and direction to the Board and management with respect to corporate governance practices and formulates corporate policies.

Hany is a leading expert on money laundering and terrorist financing controls in the MENA region. Founder of the Middle East Compliance Officers’ Forum (MECOF), he has been honored for his work in promoting compliance culture and awareness in the MENA region

Hany writes articles to different newspapers and journals on a variety of subjects. He is a public speaker and professional trainer. Previously, he worked in various senior positions in leading banks in Egypt and GCC countries like HSBC, Oman International Bank, Banque Saudi Fransi among others

The Proposed Islamic Banking By Central Bank of Nigeria – The Way Forward

The Banking institution is a place where individuals or corporate organizations alike deposit their money for personal or business transactions for the purpose of savings, current or fixed transactions that would yield profit over a particular period of time. Nigeria as one of the growing economies of the world has taken the right step to restructure the banking system in the country. Dating back to the year 2005 where all the existing banks were mandated to re-capitalize to a minimum balance of Twenty five billion Naira or risk losing its operating licenses during the leadership of Prof. Charles Chukwuemeka Soludo, the then Governor of Nigeria’s apex bank, Central Bank of Nigeria.

Interestingly, this paved way for an organized and thriving banking sector where some of the banks met the expected benchmark while others merged and few dropped by the wayside. Nonetheless, this reform created free flow of capital funds for the banks to play around with – ushering of universal banking. One would not forget the role the banks played in the Capital market during the boom era where investors’ borrowed loans or applied for a margin loan facility from these banks ranging from 7% to 20% interest rates in order to reap bountiful profits on their appreciated stocks invested. Unfortunately, the proliferation of all manner of deals in our capital market over time accounted for the down turn of the economy. It must also be mentioned that Africa was not alone in this economic impasse as most countries of the world suffered the same fate including the United States of America.

In their bid to restore the good old days, economic experts and world scholars proffered solutions to revive the economy. Nigeria was not left out in the fight. With the emergence of Mallam Sanusi Lamido Sanusi as the next Governor of Central Bank of Nigeria succeeding Prof. Charles C. Soludo, he swung into action to continue on the good works of his predecessor. Between 2009 and 2010, about five bank chiefs were indicted and prosecuted for wrong use of depositors funds ranging from personal misappropriation of funds, unauthorized loans with no collateral and wasteful expenses. While others are presently on trial. Having seen the good works of the new Central Bank of Nigeria Governor, the Presidency recently established the Asset Management Corporation of Nigeria. The objectives of the Asset Management Corporation of Nigeria is to acquire ‘toxic’ assets of the troubled banks and would take majority shareholding of the insolvent banks after plugging their equity shortfalls. The public commentators commended the government for this initiative which gradually restored the confidence of the investors to invest in both the money and capital markets. No wonder in 26 April 2011 the prestigious Times Magazine honored Sanusi Lamido Sanusi as one of the 100 Most Influential People in the World in a grand Time Gala Award ceremony held in United States of America. Though, in as much as the reforms may seem to check the excesses of the bank operations, the adverse effects are quite frightening as the capital and money markets are presently witnessing low investors confidence following another purchase of three banks (Afribank, BankPHB and Spring Bank) by three relatively unknown companies (Main street, Keystone and Enterprise) respectively on August 5th, 2011 by the Sanusi led Central Bank of Nigeria.

However, at the beginning of 2011, Mallam Sanusi Lamido Sanusi re-opened the implementation of Non-interest banking, popularly known as Islamic Banking, which was initially introduced by his predecessor as one of the verifiable tools to revive the negatively skewed economy. According to Wikipedia, Worlds free encyclopedia, “interest-free banking seems to be very recent origin whereby a working partner gets a greater profit share compared to a sleeping (non-working) partner” What this simply means is that both the banks and investors (working partner) would get a greater profit share after a certain business transaction. One would ask, would this build the economic growth of the nation as being practiced in United Kingdom, Malaysia, etc? Definitely, it would build the fortunes of our economy but how we go about it is what is technically wrong. Please read Business day online of 29th June, 2011 for more explanation. The CBN Governor has the right to talk about the benefits of any product or scheme the apex bank is rolling out, but attaching more of the religious sentiments than professional cum economic gains, would sway the country to a very rough edge.

This proposed style of banking has generated heated arguments and debates across sections of the country. Remember that Nigeria is a secular state with almost equal number of Christian and Muslim faithful in population not to talk of other religious and traditional groups. For instance, the leadership of the Christian Association of Nigeria (CAN) has strongly opposed to the implementation of the Islamic Banking citing some wrong approaches by the Sanusi led Central Bank of Nigeria as using the state funds to promote the implementation of the scheme with no recourse to other religious groups in the country. The country is still facing serious security threats arising from kidnapping, militancy and most worrying, the terrorist attacks by the dreaded sect, Boko Haram especially in the Federal Capital (Abuja) and other northern parts of the country. It is surprising to know that the Presidency have been silent on the matter which needs an urgent intervention to put the facts right as the masses want better governance in terms of economic and social-political gains.

Whatever the outcome of the proposed Islamic Banking by the Central Bank of Nigeria would be, the apex body should please consider the following points as the way forward:

1. That the implementation processes of the non-interest (Islamic) banking should be done in strict adherence to the laid down procedures of the regulatory authority – Central Bank of Nigeria.
2. That It should also have greater benefits for the investors of the Islamic banking without directly or indirectly affecting other investors of interest banking in the same sector.
3. That the Central Bank of Nigeria should please continue to create more public awareness of the non-interest (Islamic) banking by having a round table discussion with all stake holders which includes: Religious sects, Economic experts, Law makers, Government officials and the Media to douse any misconception of the proposed scheme.

The fact that the non-interest (Islamic) banking with its’ numerous economic benefits as been practiced by some countries of the world, the Central Bank of Nigeria under her current leadership have to convince the over enlightened 55% Nigerians on its benefits without negatively affecting the other interest party for economic growth and tranquility.

The “Why Investment Banking?” Interview Question – How to Give a 10/10 Answer

In a sea of overachievers who are equally talented, likeable and prepared, the “Why investment banking?” interview question can be the only differentiating question left for bankers to ask; making it both a popular & decisive question.

Whilst for college students who don’t look like aspiring bankers on paper (i.e. no fin/acc major, business degree or relevant work experience) it’s of epic importance. After all, you guys need to be able to explain why you want to do investment banking when your past decisions don’t suggest anything of the kind.

How do you give a 10/10 answer to the “Why investment banking?” interview question?

There’s a huge selection of points you could make, but keep it short and sharp. Generally a good answer will contain 3-5 solid reasons why you’re interested in IB.

Typical examples like world class education, skills development, type of work, the challenge, real responsibility in billion dollar transactions etc. are all acceptable.

But try not to trot out the same BS as everyone else.

Importantly, avoid reasons that are self-centered in a ‘bad’ way

Let me explain. As a banker interviewing you I’d be OK if you mentioned investment banking attracts you because of the learning opportunities, as this is a selfish reason that also, and ironically, benefits the bank – passionate 24 year olds put in 100-hour work weeks with ease after all.

But if I heard you wanted to do IB simply in order to ‘build your resume’ and/or to secure an exit opportunity I would – in my mind at least – throw you out the freaking door and then proceed to lay a BlackBerry beat down! Being made to feel like a halfway house for financial vagrants, a mere stepping-stone, is not my idea of good times you see. So even though everyone knows investment banking is attractive for the resume & exit oops don’t say it!

What can help you avoid a BlackBerry Beat Down? Well, you would get me extremely interested if you answered the “Why investment banking?” interview question by talking about how you have older friends in banking who have over the years shared with you what it’s really like to be a banker – both the good and the bad.

And then how that’s made you realize 3 specific things about banking which make it stand out above any other graduate job.

Not only will I believe you still love banking despite the war stories, but that you’ve actually given it some thought beyond “I need a salary of Blankfein proportions if I’m ever going to pay off these student debts”.

What I’m trying to say is that a great answer will list unique and specific reasons ‘why investment banking’ and it will connect them to the sources you learned them from whether they be friends, professors, books etc.

Want 6 specific reasons ‘Why investment banking’ that are sure to work? Try talking about how you love the…

Cornerstone role investment banks play in deals and/or the role they play more broadly within the world of business – IBs are to business what the White House is to the world…central hub HQ! And this is why bankers are called masters of the universe. So bring up this point, albeit laced in more formal language and without ever mentioning ‘masters of the universe’!!
Coalface exposure to industry and financial markets, which is unique to IB – there’s not a graduate job on the planet that puts you closer to the action than banking.
Results-driven deal-oriented approach – this point distinguishes banking from so many other professions like law, consulting etc, where players often get paid for simply ‘doing’, as opposed to ‘achieving’. And by specifically mentioning this point you will show bankers that you’ve got the right mentality and that you’re not an increment-fiend like lawyers. PS Once again be sure to phrase this in a more professional kinda way!
Type of people that work in banking – talk about this from both a learning and enjoyment point of view, and most importantly reference people you know in banking (particularly at that bank) to avoid looking like you’re simply shining shoes and kissing ass!
Nature of the work – analyzing, problem solving, real-world focused. If you are going to talk about this then make sure you bring up a handful of examples in passing; eg 10k analysis, spreading comps, deal structuring etc.
The specific industry/product group you are interviewing with – this is a must! By talking about why IB through the lens of that specific group, you’ll really narrow the reasons down to specific, tangible, relatable ones – and that means bankers are more likely to believe you and like you. eg If you say to Goldman Sachs TMT that you want to do investment banking because you find the business/investing side of the tech industry fascinating after working as an unpaid intern at a social media start up over summer, then you’ll hit the “Why investment banking?” question out of the park!

Whatever you choose, be sure you can talk intelligently about it if probed by the bankers.

Special note for those of you with non-banking experience

If you have work experience in accounting, consulting etc. then tell the bankers that whilst your time at KPMG or BCG or wherever you worked was a terrific experience, it didn’t offer…[reasons why you love IB].

This is a hidden opportunity to further explain your story, point out why you want to change into banking now and assure them again that IB is what you truly want above all else.

Any comparison you make should be delivered subtly though. Not because your interviewer might have worked at KPMG or BCG, but simply because it looks unprofessional to blatantly badmouth others. Negativity in any form doesn’t look good.

Special note for aspiring investment banking analysts

PS for those of you who get this question in an investment banking analyst interview (ie not a summer internship interview), you’ll need to push your story of why IB even harder to convince bankers to take you on. This is because bankers hate offering permanent spots to candidates who might quit the minute things get tough.

Passion is a banker’s best insurance policy against this – so make sure you show it guys!!

If you want to go one step further and really impress the bankers with your answer, then tell them how you became interested in IB years ago and point to the real life things you’ve since done that have confirmed your passion; studies elected, college clubs joined, people met, friends talked to, books read, jobs taken.

Showing a long and considered journey to get into investment banking is the idea here.

What’s the final secret to a magic answer here?

Recognize the downers of banking, not just the uppers. Bankers you see, want to hire students who aren’t being drawn to banking based simply on Hollywood-hype or CNBC-glamor. They want to know you are realistic about the job, prepared to do grunt work, and yet still super passionate.

After all, the Jimmy Cramer fan club and the Gekko Wannabe students will never be able to hack it when they find out what investment banking really involves – and this sort of drop out costs the banks a bomb.

So with all that in mind, during your answer briefly mention how your friends in banking have clued you in on the realities of the job too – the long hours, sacrifice and other downers which we’ll talk candidly about in the Inside Investment Banking System when it comes out this fall.

Of course, don’t end your question on a downer – meaning be sure to follow up any reality checking with your 3 main reasons why IB repeated in very very short form, kind of like “…but of course banking is an easy choice for me, because of…”.

Now that you’ve conquered the “Why investment banking?” interview question, check out our advice on other common investment banking interview questions and answers now.

Richard is the head writer for Inside Investment Banking – a one-stop shop of advice for students just like you who want to know how to get into investment banking without a 4.0 GPA from Harvard or nepotistic connections on Wall Street.

Created by a team of 5 young bankers, Inside Investment Banking contains all the real insider advice you need to write killer banking resumes, answer tough interview questions, network with bankers and much more.

Mobile Banking Grows More Popular Each Year

The term “Mobile Banking” has grown in popularity in recent years, especially with the proliferation of cellular phones around the world. The term does not refer to specific technology, but instead is broadly used when discussing several different methods of using your mobile phone to perform various banking tasks, such as checking balances, transferring funds and making payments. Some mobile customers bank via text messaging, others by accessing their bank’s on-line banking web site via their Smartphone browser, and yet others by using bank-specific applications developed for the mobile phone. Whichever method is selected, the overall trend is the increasing popularity of mobile banking in all demographic groups.

At the end of 2012, a survey and report were prepared by the Consumer Research Section of the Federal Reserve Board’s Division of Consumer and Community Affairs, known as the DCCA. It was a follow-up to a similar study done the previous year. All findings indicate that Smartphones are becoming more and more ubiquitous in the U.S., and as a result, banking via Smartphone is on the rise. The reasons are obvious – portability and convenience make Smartphones a logical choice for keeping track of your finances. And more banks have apps available to mobile customers for a variety of devices, making it even more readily accessible and simple to navigate, even for novice users.

How many mobile owners utilize mobile banking?

87% of adults in the U.S. own a mobile phone, with 52% of those being internet-enabled; the technology referred to generically as Smartphones. Mobile phones that are not able to access the internet can bank via text message, but the survey reports that Smartphone users are much more likely to utilize banking applications than those with non-internet phones. 48% of Smartphone users have taken advantage of mobile banking, but the overall percentage of cell users banking by phone is just 28%. Even that number is on the rise, up from 21% at the end of 2011. Another 10% of cell phone users responded that they most likely would begin during 2013, indicating that the trend will continue. Of course the mobile phone has a wide variety of uses, with banking being far down on the list. It has been noted that even making phone calls is far less common on Smartphones than checking the time, browsing the internet and playing games.

What groups are most likely to bank by phone?

Younger mobile phone users are much more likely to adapt banking via their mobile than their older counterparts, with over 38% of those aged 18-29 banking on their phone versus just 8% of those over the age of 60.
The higher the household income, the more likely a person is to have banked via their phone, with those earning over $100,000 per year at a 28% usage rate compared with 16% for those earning less than $25,000.
Education also factors into banking on a mobile, with 37% of college graduates having banked by mobile phone while less than 6% of those without a high school education have done so.

What kind of banking do people do via their phones?

The study found that by far the most common banking task initiated via mobile phone was balance and transaction checking (87% of mobile banking customers), followed by the transfer of cash between accounts (53% of mobile bank users). On the rise is the usage of mobile devices to deposit checks, by utilizing a service such as Mobile Deposit, which allows bank customers who are Smartphone users to deposit a check into their account by taking a photo of each side of the check and submitting it to the bank via a Smartphone app. 21% of mobile banking users have utilized such a service.

Why don’t people use mobile banking?

Of those surveyed who did not utilize mobile banking, there were 2 common reasons why. The most frequent response was that other banking methods were more useful and convenient, and the customer could see no reason to start banking by phone. The second most cited reason was a concern for the security of their information and finances. In reality, mobile banking applications do offer a high degree of security, with data encryption, strict user authentication and connection limits. If in doubt about the security of your bank’s mobile application, visit their web site or contact a bank representative for additional details.

The Federal Reserve report is available for viewing on-line at the Federal Reserve web site for those interested in additional details. It does seem clear that the trend toward mobile banking is firmly implanted in our current culture, and will continue to expand as technology brings us even better security and fast, easy-to-use applications for managing finances. If you are a mobile phone user who doesn’t utilize mobile banking, contact your bank for details about their options and how to get started!