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.
3. Risk and Regulatory Framework
3.2. Credit Risk, Liquidity Risk & Operational Risk
Risk management is central to banking stability.
1. Credit Risk
Risk of borrower default.
Mitigation:
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Collateralization
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Credit scoring models
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Loan diversification
2. Liquidity Risk
Risk that a bank cannot meet short-term obligations.
Mitigation:
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Maintaining cash reserves
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Asset-liability matching
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Interbank borrowing
3. Operational Risk
Loss arising from internal failures, fraud, or system breakdowns.
Mitigation:
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Internal controls
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Segregation of duties
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IT security frameworks