Chapter Four

Establishing New Banks, Branches, ATMs, Telephone Services, and Web Sites
McGraw-Hill/Irwin Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

4-2

Key Topics
Establishing
New Banks Branches ATMs, Internet and Online Banking, Mobile Banking

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e

2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

4-3

Establishing A New Bank

Questions/Considerations for Organizers of New Banks

Population and Geographic Boundaries of Primary Service Area (PSA) Competing Financial Institutions in PSA Number and Types of Businesses in PSA Traffic Patterns in PSA Population Growth in PSA Banking History in PSA Amount and Holders of Stock in New Bank Business and Banking Experience of Organizers Projections for New Bank in First 3 to 5 Years
McGraw-Hill/Irwin Bank Management and Financial Services, 7/e 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

4-4

Establishing A New Bank

Internal Factors that Affect Decision for New Bank

Qualifications and Contacts of Organizers Management Quality Capital Pledged

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e

2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

4-5

Establishing A New Bank

External Factors that Affect Decision for New Charter

Level of Economic Activity Growth of Local Economic Activity The Need for a New Bank Local Competition in Supplying Financial Services
McGraw-Hill/Irwin Bank Management and Financial Services, 7/e 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

4-6

Establishing A New Branch

Desirable Sites for New Branches

Heavy Traffic Count Large Number of Retail Shops and Stores Above Average Age of Local Populations Area Contains Substantial Number of Managers, Business Owners and Professionals Steady or Declining Number of Service Facilities Operated by Competitors Above Average Population Growth Above Average Population Density Relatively High Target Population per Branch Above Average Levels of Household Income
McGraw-Hill/Irwin Bank Management and Financial Services, 7/e 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

4-7

Establishing A New Branch

Expected Rate of Return

The Decision of Whether to Establish a Branch Office is a Capital Budgeting Decision. The Present Value of the Net Future Cash Flows Should Be Larger Than the Initial Outlay
Expected Rate of Return from Opening a New Branch

CashOutflow

[1 E (r )]

NCF

1 1

[1 E (r )]

NCF

2 2

.....

[1 E (r )]

NCF

n n

Acceptance Criteria: E(r) k (Where k is the minimum acceptable return)

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

4-8

Establishing A New Branch

Geographic Diversification
Reducing a Banks Overall Risk Exposure to its Total Return By Establishing Service Facilities in Different Market Areas Whose Individual Returns are Not Highly Correlated with the Returns from a Banks Existing Market Locations

1. Expected Return

E ( RT ) W E ( RB ) (1 W ) E ( ROA )
2. Risk (Variance> Standard Deviation)

2 (RT ) W 2 2 (RB ) (1 W )2 2 (ROA ) 2W (1 W ) B,OA B OA

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e

2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

4-9

Automation : ATMs
Less Costly to Set Up and Operate (about 36% compared to a human teller per transaction) But Less Effective at Cross Selling, Less Personal Service, and More Vulnerable to Criminal Activity Decision to Install ATM:
The Bank Examines the Present Value of the Stream of Cash Savings from the New ATM Machine
Present Value of the Stream of Cash Savings from New ATM

Net Present Value of the New ATM

Total Cash Outlay for the New ATM

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e

2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

4-10

Automation : Services Provided Through the Internet Verify Real-Time Account Balance Move Funds Instantly Among Accounts Confirm Deposits Made, Checks Cleared and Online Transactions Have Taken Place View and Print Images of Checks Place Orders for New Checks Submit Applications for Loans and Credit Cards Carry Out On-Line Bill Paying
McGraw-Hill/Irwin Bank Management and Financial Services, 7/e 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

4-11

The Internet and Customer Safety

Especially Vulnerable to Fraud and Identity Theft Authentication Factors
Something a Customer Knows Something a Customer Has Something a Customer is

Move to Multi-Factor Authentication From Single Factor Authentication Today

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e

2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

12

Automation : Mobile Banking

Mobile phone penetration rate is very high in Bangladesh:
As of August 2011, Bangladesh has 79.677 million subscribers in total and the penetration rate was estimated at 48.199% over a population estimate of 158 million

12 bank already got licenses Easy access to rural areas

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e

2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

13

Establishing A New Bank Guidelines To Establish A Banking Company In Bangladesh According to Section 31 of the Banking Companies Act, 1991 Must obtain a license from Bangladesh Bank
1. Status of the new commercial bank. 2. Paid up capital requirement for a bank to be established: 3. Mode of payment: 4. Sponsors and share capital contribution: 5. Fit and Proper Test for Sponsors/Directors 6. Management of the proposed bank 7. Operation of the proposed bank. 8. Required documents/ information/ analysis to be submitted to Bangladesh Bank Source: http://www.bangladesh-bank.org/
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

McGraw-Hill/Irwin Bank Management and Financial Services, 7/e

14

Establishing A New Bank Guidelines To Establish A Banking Company In Bangladesh 1. Status of the new commercial bank: Public limited company incorporated in Bangladesh 2. Paid up capital requirement for a bank to be established: Not be less than Taka 400.00 Crore Share capital will be formed with ordinary shares only 3. Mode of payment: Capital contribution shall be in a liquid form such as cash or approved securities
McGraw-Hill/Irwin Bank Management and Financial Services, 7/e 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

15

Establishing A New Bank Guidelines To Establish A Banking Company In Bangladesh

4. Sponsors and share capital contribution: Issue public shares within three (3) years The minimum shareholding stake of each sponsor shall be Taka 1.00 crore and the maximum shall be 10% of the proposed banks total share capital. The sponsors' shares shall not be transferred within a period of three (3) years 5. Fit and Proper Test for Sponsors/Directors Competence, integrity and qualifications of the Sponsors: criteria include: (i) skills and experience in relevant financial operations (ii) no record of criminal activities or adverse regulatory
McGraw-Hill/Irwin Bank Management and Financial Services, 7/e 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

16

Establishing A New Bank Guidelines To Establish A Banking Company In Bangladesh

6. Management of the proposed bank: Multi directorship is not allowed The Member of Board of Directors shall be restricted to 13 Not more than two members from a family Experience of CEO: at least 15 (fifteen) years in banking 7. Operation of the proposed bank: The ratio of urban and rural bank branch has to be 1:1 New Bank has to ensure finance at least 5% of its total lending into agricultural sector Proposed bank should take part in Corporate Social Responsibility (CSR) activity.
The new bank should spent 10% or more of its previous years 2008 The McGraw-Hill Companies, Inc., McGraw-Hill/Irwin net income to CSR. All Rights Reserved.
Bank Management and Financial Services, 7/e

17

Establishing A New Bank Guidelines To Establish A Banking Company In Bangladesh 8. Required documents/ information/ analysis to be submitted to Bangladesh Bank
A bank draft in the amount of Taka 10 (Ten) lakh Name and address of the Applicant; Name, address, telephone number of the contact person; Feasibility Report on the proposed banking company (see Annex II), Biographical Reports (see Annexes III and IV) Proposed compensation package and other terms of contract of the CEO; Minutes of the shareholders (sponsors) meeting; Written agreement by the shareholders to organize the banking company; Sponsors have to submit a business plan Draft Memorandum and Articles of Association; Joint Venture agreement, in case of foreign equityCompanies, Inc., 2008 The McGraw-Hill participation. McGraw-Hill/Irwin
Bank Management and Financial Services, 7/e All Rights Reserved.