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.
2. Deposit and Credit Management
2.1. Loan Processing and Credit Appraisal
Loan processing is a structured risk assessment mechanism.
Step 1: Loan Application
Client submits:
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Identification
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Financial statements
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Business plan (if applicable)
Step 2: Credit Analysis
Banks apply the 5 Cs of Credit:
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Character
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Capacity
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Capital
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Collateral
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Conditions
Step 3: Risk Assessment
Financial ratios assessed:
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Debt-to-income ratio
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Liquidity ratios
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Profitability indicators
Step 4: Loan Approval and Disbursement
Approval is based on risk grading and internal credit policy guidelines.