Challenges in the Era of Globalization - iaabd

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Proceedings of the 12th Annual Conference © 2011 IAABD in relation to risk weighted assets and off balance sheet exposure stood at 22%. The report further revealed that, five largest banks command 59% of the total banking capital and 67% of total loan portfolio for the banking sector as well as 65% of the deposits. Theoretical Literature Theory of Banking. Freixas and Rochet (1997) defined a banking firm as an institution whose current operations consist in granting loans and receiving deposits from the public. The underpinning theory of banking firms emphasizes the fact that the banking firms are special institutions which reacts to its regulatory environment to optimally allocate its assets. The provision of deposit and loan products normally distinguishes banks from other types of financial firms (Heffernan, 2006). Contemporary banking theory classifies banking functions into four main categories namely liquidity and payment services, Transforming assets, Managing risks and Processing information and Monitoring borrowers. Historically, banking firms are highly regulated and supervised firms (Saunders, 1994). This is due to their ability channel monetary policies and thus to protect the safety and soundness of the economic system (Gardner & Mills, 1988). The banking sector is probably the most regulated sector (Baer & McElravey, 1993). Banks have a fundamental influence on capital allocation, risk sharing and economic growth (Freixas & Rochet, 1997). This is due to the fact money as scarce resources are demanded by various economic units. There is evidence that the portfolio behavior of the banks is shaped by the regulatory activities rather than the general equilibrium which is chosen by the banks in response to the asymmetric information problems (Calomiris & Wilson, 2004). The main focus of the study is on two functions of banking firm which are transformation of assets and risk management. Commercial Banking Portfolio Selection. Modern financial theory holds that the assets and liabilities can be viewed as comprising some components of portfolio, which can be optimized. Early study on portfolio maximization was pioneered by Markowitz (1959) whereby the initial model was based on the maximization of portfolio returns for one period measured by the variance and standard deviation. Further improvement of the portfolio theory was done by Klein (1971) who introduces the issue of multiple periods in the modeling as well as other variable. The usual analysis of portfolio behavior considers the problem of allocation of asset levels of banking institution given a certain portfolio size (Parkin, 1970). Bank portfolio behavior has been defined as a process of allocating a given amount of wealth (defined as capital plus total deposits, between nonearning assets (required and excess reserves) and earning assets (loans and other investments) (Andersen & Burger, 1969). Considering the structure of assets in the balance sheet of a commercial bank, in period t , total assets ( TA t ), are the sum of Cash ( t C ), required reserves ( RR t ), loans ( L t ), investment in Government securities ( t GS ), and other assets ( OA t ). The relationship can be summarized as: (1) TAt = Ct + RRt + GSt + Lt + OAt The percentage of a bank’s deposits invested in different assets is invariant with respect to time path of deposits. Within a given period portfolio adjustments can be taken into consideration the impact of deposits. Diversified bank portfolio can be optimal in absence of uncertainty if not all assets have secondary markets. In developing countries case like Tanzania this is likely to happen due to the absence of secondary market due to the lack of derivatives markets. In this case there is no incentive and 836
Challenges in the Era of Globalization Edited by Emmanuel Obuah advantage for banks to hold excess liquidity as outlined in Aikaeli (2006). As long as the relation r > r > 0 holds, the optimal portfolio is not affected by changes in deposits or interest rates. l s Banks are assumed to choose simultaneously through a planning horizon a volume and mix of their assets and liabilities. Klein (1971) develops a model which has three categories of assets and three liabilities category. The assets are cash (C), government securities (GS) and loans (L) while categories of liabilities are demand deposits (DD), time deposits (TD) and equity capital (K). The bank is assumed to maximize in a single period its returns measured by the expected profits, out of the given value of funds. Klein model on the expected return, assume that expected profits and can be presented as: (2) Max[ E( π )] = gGS + l L − [ r DD + r TD + ϕ] s dd td Where: rdd and rtd are returns in demand deposits and time deposits respectively and ϕ is the cost associated with adjustments in deficiencies in liquidity. Empirical Studies Commercial bank portfolio behavior had been researched for more than a century now. Firstly, advocated by Edgeworth (1888) who studied the importance of random deposit variation in the determination of a bank’s optimum portfolio. Several studies (Gupta, 1985; Pierce, 1967; Walker, 1997) have been carried out in developed world, especially US and European countries on the behavior of commercial banks portfolio on various aspects especially in relation to money supply using time series data. In Africa, perhaps there are two pioneer studies which examine portfolio behavior of banks in South Africa by Dennis (1979) and in Nigeria by Fakiyesi (1999). Dennis studies the portfolio behavior of South African banks as related to the economic performance in relation to loans in the private and government sector. The study by Dennis utilized data from 1965 to 1975. Dennis (1979) findings indicated that there is a strong relationship between economic growth and private lending. The study argues that banks regard lending to the government i.e. investment in treasury bills as a constraint on their preferred lending to private sector. Research Hypotheses The reviewed literature on portfolio behavior of commercial banks provides room to suggest hypotheses for the study based on the research objectives. Hypothesis 1: The portfolio choice of Tanzania commercial banks is stable over time Previous studies assume constant portfolio holding. The stability can be measured in a general equation which involves changes in the portfolio allocation and measures for the standard deviation and means. Thus for all banks at time t; A ≠ A → A = f ( A ) (3) i, t i, t−1 i, t i, t−1 Where Ai , t is investment of funds on asset A by bank i for period t. Equation (3) develops a trend by the use of first order autoregressive (AR) model. Hypothesis 2: a) The portfolio holdings of commercial banks is different across time within same banks. This can be measured by a multiple regression equation based on the fixed effect model. For individual bank 1 in time t = 1, 2, 3, … n. 837
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Table of Contents Challenges in the
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Lennart Bangens, Goteborg, Sweden C
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Local Steering Committee Jacob Musi
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Track 1: Accounting, Finance, and I
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Abstract Challenges in the Era of G
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Abstract Determinants of Bank Lendi
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Empirical Results Challenges in the
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Table 3 Determinants of Competitive
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Research Findings Challenges in the
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Abstract: Study on Africa Governmen
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Abstract Challenges of Oil Revenue
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Abstract Land Based Sources of Poll
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Abstract On the Mitigation of Rever
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Assessment of pollutants in nigeria
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Figure 1: Lagos off shore survey po
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Academic Pry School 3 3 0 Backgroun
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Track 5: Management Education Chall
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Table: Model Fitness Regression Sta
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Conclusion Challenges in the Era of
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37. Provision of sound education fo
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The cost structure Challenges in th
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Empirical Analysis Challenges in th
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Variable Coefficient Std. Error t-S
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Abstract The Changing Requirements
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The Model, Data and Variable Defini
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Track 8: Gender and Economic Develo
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Empirical results Challenges in the
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Abstract Gender, poverty and sustai
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Figure 1.1: Spread of directorships
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Theoretical Framework Challenges in
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Single 18.1 Masters and above 35.3
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Source: Field survey, 2010 Table 3:
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Track 9: Global Studies and Politic
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Conceptual Definitions Challenges i
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Conclusions and Implications Challe
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Abstract Exploring Organisational R
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district hospitals: Evidence from N
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Defining the Organisational Culture
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Table 1: A Summary of Operating Ban
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Discussion and Conclusion Challenge
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Abstract What does Globalization me
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7. I see globalization as providing
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Research Methods approach Challenge
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Statement of the Problem Challenges
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Convenient location of banks Challe
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Figure 1.Framework for Bank selecti
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Banks in Ghana Challenges in the Er
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References: Challenges in the Era o
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Figure 5: Causal loop diagram inclu
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The study seeks to: • examine typ
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Figure 2: Customer Perception of MT
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Relationship Commitment Total 1264.
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Factor Item Loading Imaginative 0.4
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Figure 1: Components of Data Analys
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Abstract Marketing Nigerian medicin
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References Challenges in the Era of
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Conclusion Dissatisfied 6 3.4 3.6 7
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Abstract Customer satisfaction with
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Methodology Challenges in the Era o
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Discussion Challenges in the Era of
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Postgraduate 19 Internet experience
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Average daily Internet hours z P-va
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Track 17: Project Management in Afr
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Conclusion Challenges in the Era of
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GOVERNMENT MoFED SECTORS Structure
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�− growth and represented by
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Results Challenges in the Era of Gl
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Input: Process, regulation Referenc
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CSOEs Statesponsored Agenda Resourc
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+ ∑ ∑ β j it )(ln X jt ) + ∑
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