Fundamentals of Banking Operations
The banking sector plays a central role in economic development by mobilizing savings, allocating capital, facilitating payments, and supporting financial stability. In both developed and emerging economies, banks act as financial intermediaries that channel funds from surplus units (savers) to deficit units (borrowers), thereby promoting investment, trade, and economic growth.
This book, Fundamentals of Banking Operations, provides a structured and practical introduction to the core operational, managerial, and regulatory aspects of banking. It is designed for undergraduate students in Banking and Finance and serves as a foundational learning resource within a Learning Management System (LMS) environment.
The text is organized into three progressive chapters:
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Chapter One examines the structure of the banking system, distinguishing between commercial banks, central banks, microfinance institutions, and investment banks.
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Chapter Two focuses on deposit mobilization and credit management, explaining how banks generate funds and evaluate lending decisions.
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Chapter Three analyzes banking risks and the regulatory frameworks that ensure institutional stability and systemic resilience.
Throughout the book, emphasis is placed on practical banking concepts such as credit appraisal, risk mitigation, liquidity management, and compliance with international standards like the Basel framework. The content integrates theoretical foundations with real-world banking operations to enhance analytical understanding and professional competence.
By the end of this book, learners should be able to:
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Explain the institutional structure of the banking system.
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Analyze deposit and lending mechanisms in commercial banks.
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Evaluate major banking risks and regulatory controls.
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Apply foundational banking principles to practical financial scenarios.
This book provides the conceptual grounding necessary for advanced studies in banking regulation, financial markets, corporate finance, and risk management.
1. Structure of the Banking System
1.2. Types of Banks
The banking system is composed of different institutions that perform specialized financial intermediation roles. Each category operates under distinct regulatory mandates and risk profiles.
1. Commercial Banks
Commercial banks are profit-oriented financial institutions that accept deposits and extend loans to individuals, businesses, and governments.
Core characteristics:
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Accept demand and time deposits
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Provide credit facilities
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Facilitate payment systems
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Offer trade finance services
Examples globally include institutions such as JPMorgan Chase and Barclays.
2. Central Banks
A central bank is the apex monetary authority of a country responsible for monetary policy, currency issuance, and financial system stability.
Functions include:
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Controlling inflation
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Regulating commercial banks
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Managing foreign exchange reserves
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Acting as lender of last resort
Examples include Central Bank of Kenya, Federal Reserve System, and European Central Bank.
3. Microfinance Banks
Microfinance institutions (MFIs) provide financial services to low-income individuals and small enterprises that lack access to conventional banking.
Services:
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Small loans (microcredit)
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Savings products
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Group lending models
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Financial literacy programs
They promote financial inclusion and poverty reduction.
4. Investment Banks
Investment banks specialize in capital market activities rather than retail banking.
Functions:
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Underwriting securities
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Mergers and acquisitions advisory
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Asset management
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Trading and market-making
Examples include Goldman Sachs and Morgan Stanley.