Banking

A free market is a market that is free from government interference, prices rising and falling in accordance with supply and demand. (Oxford Dictionary of Finance and Investment, 2005) In a free market individuals are free to make their own economic decisions. Consumers are free to decide what to buy with their incomes: free to make demand decisions. Firms are free to choose what to sell and what production methods to use: free to make supply decisions. The resulting demand and supply decisions of consumers and firms are transmitted to each other through their effect on prices, through the price mechanism.

(Sloman & Hinde, 2007) One of the most influential economists that adhered to the policy of free market capitalism was Milton Friedman (1912-2006). He was a United States economist, statistician and a public intellectual. He got the Nobel Memorial Prize in Economics Sciences in 1976 and is best known among scholars for his theoretical and empirical research, especially consumption analysis, monetary history and theory, and for his demonstration of the complexity of stabilization policy. (Nobelprize. org, 2009) Milton Friedman came to visit Iceland in the 1980s.

He, among others, influenced the president of the independence party and the Prime Minister of Iceland (1991-2004), Davi?? i?? Oddsson, and his co-workers to great extent. (i?? lafsson, 2008) Under the control of Oddsson and his government the Icelandic banks were privatized. As with the free market capitalism of Oddsonsi?? s government, the supervision and control was weak. This can be considered as financial deregulation, but it is widely understood to have important economic benefits for microeconomic reasons.

Since Adam Smith, economists have argued that unfettered private markets yield outcomes are superior to public sector alternatives. But financial regulations, specific rules and overall structures are sometimes justified on macroeconomic grounds. (Goodhart & Illing, 2002) The Central Bank Goodhart & Illing (2002) have defined that a central bank serves two very different functions. First, central bank functions as monetary authorities, managing high-powered money to influence the price level and real activity. Second, central banks engage in regular and emergency lending to private banks and other financial institutions.

Goodhart & Illing (2002), argue that just as private lenders must restrict and monitor individual borrowers, a central bank must regulate and supervise the institutions that borrow from it. In the case of the Icelandic banks, this was not working since the banks collapsed and the control of monetary policy with high interest rates was not impacting the high inflation as will be mentioned later on. Oddsson was appointed the chairman of the central bank in Iceland in 2005, after having been the Prime Minister of Iceland for thirteen years and then Foreign Secretary.

It is not common that a politician takes place as the chairman of a central bank’s country, since the bank should be an independent institution. “This interplay between government ministers and central bankers is the heart of every national economic crisis. ” (Times Online, 2009b) In 2001 the central bank presented its inflation target, 2. 5%, as part of its monetary policy. Following the inflation target, the central bank started to raise interest rates. In 2003 the interest rate was 5. 3% but in 2007 it was 15. 25%. Today the interest rate is 18%.

Figure 3: Interest rates 1994 – 2008. Source: Central Bank of Iceland, 2009 The inflation targeting, failed in lowering inflation, but the resulting interest rate rise both motivated domestic households and firms in order to borrow in foreign currency and attracted foreign speculative capital, carry traders. The amount of hot money inflows is not publicly known, but it appears to have exceeded 50% of GDP. It is unclear why this did not raise concerns with the authorities. (Dani?? elsson ; Zoega, 2009) This is better addressed and analysed with the IS/LM model in Appendix A.

The reasons for the failure of inflation targeting are not completely clear, but it seems to be that the massive currency inflows effectively became a part of the local money supply. As can be seen in figure 4, the money supply has increased dramatically in recent years. Figure 4: Increase in money supply in the Icelandic economy from 1994 – 2007. Source: Hagstofa i?? slands, 2009 Because of the central bank’s lack of credibility and firm’s willingness to borrow in foreign currencies, interest rate changes had a very limited effect on long-term interest rates and investment activity.

About the only visible effect on inflation was that import prices were reduced when the exchange rate appreciated. (Dani?? elsson ; Zoega, 2009) The central bank in Iceland has remained weak, it had foreign exchange reserves of around 375 billion kronas just before the collapse of an economy with GDP around 1,300 billion kronas, just under 30% of GDP. This ratio, nonetheless, is very high; however the short-term liabilities of Icelandic banks in proportion to Iceland’s GDP were a staggering 211% at the beginning of 2008. (Dani??

elsson & Zoega, 2009) Consequences On 29th of September 2008 the first signs that the financial crisis was going to hit the country hard. The central bank came out with the fact that the smallest of the three big banks, Glitnir, had asked for a loan from the central bank, the lender of last resort. The central bank didn’t like the collateral behind the loan and decided to nationalize the bank, by buying 75% of its equity. The government expected by that action, the credit default swap would recover, but the contrary happened and it got a lot worse.

The action of nationalizing Glitnir seems to have undermined the trust of the Icelandic banking system and Icelandic government. The government and the Icelandic banks had always claimed that the banks had no liquidity problems and were in no chance of defaulting. But, by nationalizing Glitnir, that undermined the ability for the central bank to deal with the situation. (Dani?? elsson ; Zoega, 2009) At 16:00 on Monday 6th of October were the first minutes of the breakdown of the Icelandic banking system and the economy. Prime Minister, Geir H.

Haarde, had a live speech on the national television clarifying in how bad situation the banking system was, and therefore the economy as a whole. He said: “Dear Icelanders, there is a possibility, if the worst will happen, the nation will go bankrupt… “. That was the first time the public got to know that the situation of the banking system was not that good as had been indicated. The speech ended in these words: “God, bless Iceland”. It was clear; the financial crisis had hit Iceland severely and, in fact, was turning into a major economic crisis.

The Icelandic government agreed on a new law which allowed the government to take over any financial institution in the country. That was done in order to keep the domestic banking sector functioning in these turbulent times. The law allowed the government to create “new banks” on the ruins of the “old ones”, which had domestic deposits and loans. The international activity was left over in the “old banks” and they were heading into technical bankruptcy. A common definition of a systemic crisis is when the payment system fails. That is what happened to the Icelandic payment system following the collapse of the Icelandic banking system.

International part of the payment system shut down and part of the domestic system had difficulties. (Dani?? elsson ; Zoega, 2009) For an economy as dependent on import and export it had major influences. Firms had difficulties in paying for their imported goods and there was a major threat of a shortage of necessities, like food and fuel, but it never reached that far. Within a week after the collapse of the banks, the Icelandic currency, krona, had dropped by more than 70% in value. With the firms, as well as the households in Iceland with so much foreign debts it made things a lot worse than they already were.

The households as well as the firms in Iceland are heading into very difficult times which will eventually lead to bankruptcy for many of them. In a recent press release from European Small Business Alliances (ESBA) it is stated that up to 80% of firms in Iceland have gone technically bankrupt following the British government using anti-terrorist law in order to take over Icelandic assets. For any economy it’s a major shock and it will take a long time for Iceland to recapture trust from governments and investors around the world.

(Vi?? sir, 2009) In the following weeks Iceland was the first Western country to have approached the International Monetary Fund (IMF) for aid since 1976. (BBC News, 2008) The agreement with IMF is to restore confidence in the Icelandic banking system and stabilise the Icelandic krona. External pressures to unwind krona positions were mounting, and there were significance risk that domestic depositors and investors could lose confidence in the krona, despite the government’s guarantee on domestic deposits.

These pressures, coupled with low level of reserves, meant that a fixed foreign exchange regime would not be credible, so IMF opted for a combination of interest rate policy, liquidity management, foreign exchange intervention and restriction on capital flows. (International Monetary Fund, 2008) On top of the aid from the IMF, few nations have agreed to lend Icelandic government in order to fulfil foreign debts of the collapsed banks. This dramatically increase in debt burden has already lead to cutback in government spending in order to meet its obligation.

SWOT ANALYSIS of Soneri Bank Limited

Profile of Sbl
Soneri Bank Limited established in 1992 and listed on all stock exchanges in the country, has gradually extended its network to 233 (at end Jun-13) branches, Feerasta family, owners of the Ruplali group, with main interests in synthetic textile industry, holds the controlling stake (~57%) in the bank through three trusts of the family. Feerasta family has nominated two directors on board while Amin A. Feerasta, also a family member holds key position in bank’s management. The eight-member BoD of SBL, with diversified experience, is a key source of guidance for the management. SBL, during recent years implemented a bank-vide organizational restructuring to strengthen itself against ensuring challenges. Mr. Aftab Manzoor, a season banker, is the chief executive officer. A diverse team of SBL’s veterans and young individuals assist CEO. There are following strength weakness opportunity and threats for SBL.

STRENGTH

Growth in system share, increasing outreach & improving profitability. The Pakistan Credit rating Agency Limited (PACRA) has maintained banks credit rating. SBL has been awarded an “AA-” for long term and “A1+” for the short term and “A+” for the Term Finance. Certificates reflecting bank’s well maintained risk profile with preserved sound asset quality. In order to maintain an effective communication of information regarding the need of valued client bank has designed its website to be user friendly as possible, SBL collaborates with different cellular companies to provide mobile banking on their customers’ cell phone. Loyal workforce and satisfied Customers.

Excellent Alternate Delivery Channel (ADC) Services e.g. internet banking, mobile banking, VISA debit card etc.

WEAKNESS
As per bank policy, advertising and publicity is not extensively emphasized. Through advertisement customers could be kept abreast with the product and services. The main focus of SBL is major cities of Pakistan. It is strongly needed to extend its network and people should be educated about the functioning of bank. Poor employee development and promotion.

Defensive approach in lending.
No branches of Soneri bank are in any other country. So the bank has to incur additional cost for correspondent banking. Core Banking Software and Bank Operations are not up to the mark i.e. branch banking oriented rather than branchless banking.

OPPORTUNITY
The life cycle of an organization is comprised of threats as well as opportunities. If we say, today the rates of challenges are too high but simultaneously the rate of opportunity is also too high. It is obligatory to try to make progress with consistency as well as to adapt changes with the need of time, in order to cope up with both conditions. In the prevailing scenario, SBL should penetrate further and capture various corporate customer as well as retail customer by expanding their network. In addition to the excellent routine banking, it has earned a good name by offering special products like Soneri car finance, Ghar finance and personal finance. So the penetration of these products could enhance the market share. SBL has launched another division know as Islamic Banking. This new aspect will also attract a large number of people, who don’t want to deal with interest bearing bank. If SBL keep focusing on advertisement it would be good for organization, because promotions make people know about the products of SBL. Management should also open new branches is rural areas to capture market share. SBL can enjoy handsome return its funding base by investing in capital markets in the foreign countries.

THREATS
In our country, the rate of inflation is increasing along with unemployment. So due to increase in price of the products, the saving of the people is decreasing with passage of time. So it is threat for banking sector. In future the deposits of the bank will decreases. The number of banks in Pakistan increasing with passage of time. Foreign bank like to open their branches in Pakistan. So it would be threat for SBL. SBL has also threat with different bank who are offering the same product like Home finance

Car Finance
Self Finance
Education Loan
So management may face problem.
Uncertainty in political and economical environment.
Mergers and Acquisitions are other threat to bank.
Decreasing interest/profit rate on saving products will make customers to explore other ways for higher return on savings.

Since SBL has decent strengths and opportunities in the market, its market share is increasing and it is expanding its branches rapidly. So I concluded that SBL is adopting and implementing on Growth Strategy.

Banking is one of the most influential factors on the economies of today”s society. As with everything these days, technology is changing where, when and most of all, how we do things, specifically banking and other related financial transactions and arrangements such as mortgages, etc.

Recently, in Toronto, the very city we live in, we were in the midst of two possible bank mergers, which would have changed banking and on a larger scale the entire economy, in many ways.

In comparison to the larger banks of the world, Canada”s most major banks are not even close to the size and caliber of international banks like ING Direct, for example. This would not typically be a problem for Canadian banks, however when these international banks move into Canada, which has happened already, and is bound to happen even more as time passes and Canada becomes a more prosperous country, it quickly becomes a very large problem. Banks are an extremely affluent business. Regardless of where you are in the world banks are right at the top of the list when it comes to capital, equity and earnings. Canada fits right in, in comparison to the rest of Canada. But when we compare Canada”s banks to those of other countries, or even better, international banks, they are simply insignificant.

For example, hypothetically speaking, if the entire world were opting whether or not to adopt a single currency, most deciding factors would be made by the banks of each individual country. Canada, although it is a major world leader in many other categories, would not be looked upon as a country that knew much about international stature, in terms of banking. In this essay I will try to prove how banking is one of the most influential factors on the economy by using factual cases from recent times.

What does better customer relations” mean? Increasingly, customers are demanding more convenient ways to do their banking. An Ernst and Young study (Technology in Banking Report) concluded, “nothing changes in the banking world if customers cannot get financial services when and where they wish…this means anywhere, at any time. ” Statistics show that ATM”s telephone banking, and home banking account for over fifty percent of all banking transactions today, and total non-branch activity is growing at fifteen percent a year. In one survey (Web-Tech, Inc., May 17, 1995), eighty-two percent of 18- to 34-year olds polled preferred banks with 24-hour service.

Customers are also demanding a more sophisticated mix of products tailored specifically to their financial needs, and non-bank competitors are better fulfilling these needs. Banks today hold only 20% of household financial assets, versus 34% twenty years ago; they have 30% of business deposits, versus 42% only seven years ago. Non-bank credit card providers have gained inroads against banks, holding a 25% market share versus 5% in 1986 (WebTech, Inc., May 17, 1995).

Internet banking offers an attractive solution to this redesigned products and services. Customers have 24-hour graphical-interface access to their accounts and appreciate that their bank is doing something to make banking easier for them.

A country, like a business or a person, is constantly doing anything in its power to better itself. A business, like a society, is either growing or declining; the competitive world allows no other options. Human nature will allow no state of rest. Economics is the study of production, distribution, exchange, and consumption of goods and services (Ammer, pg. 186), all of which, if stopped, would cause a business or a country to grind to a halt. From these statements we realize that change is an integral part of the world of economics.

Not necessarily a change in what we create, rather the way we do it. Technology, that is, the development of new materials, products, machinery, and processes can create new products and concepts as well as improve production and efficiency for existing products a few key factors that determine economic growth. As a result, new jobs are created, existing ones are made easier and more efficient, and the in the end there is a greater profit margin (Thurow, pg. 69, 304). To understand this topic I will look at the effects of technology on economic growth compared to those of the other four factors,

There are five factors, which affect a country’s economic growth,

Each factor has its own effect on economic growth, however together they produce a greater overall effect.

Picture a bank without any branches. No tellers. No rows of desks. No racks of brochures, no automated teller machines outside. Picture, in fact, a virtual bank, one that for the customer exists only in his or her office or home, as images on a computer screen. US financial institutions are moving towards “virtual banking.” This strategy is about making bank products and services available to customers any time and any place they want them. As virtual banking becomes more popular, it is very likely that more customer service will be seen while the number of traditional teller-staffed branches will decline.

Bank customers will move away from traditional banking and will become more dependent on electronic transactions using ATMs or PCs (Britt, Savings&Community Banker, February 1995, p.9). Thanks to this “technical revolution”, financial institutions are using software programs, online services, and even the Internet to allow customers to check balances, pay bills, and transfer funds among accounts. Bankers promise that, in the near future, we will also be able to more easily buy certificates of deposit, mutual funds, and other investments, and even apply for loans electronically.

For most people, today’s best option may be plug into their bank through one of three leading home-budgeting software programs, these programs are:

By charging $5 to $20 a month for such services, banks are sure to cash in on the high-tech superhighway. This would make everything much easier for customers. All that is required is a personal computer, software and a modem, all of which the majority of people in today”s society have. On-screen instructions, filled with colorful graphics and pictures, explain how to select and work on various tasks. The system automatically calculates and updates account balances and keeps records of bills. A handful of banks have already set up home pages on the Internet to provide information to their existing and potential customers about upcoming services. They started their transactions.

Internet banking differs from the traditional PC banking model in several ways. In most home banking ventures, the bank sends an application software program to the customer which runs on the customer’s PC. The customer then dials into the bank with their modem, downloads data, and runs the programs that are resident on their computer, perhaps sending back a batch of requests such as transfers between accounts. It demands more and more space and speed from the customer’s computer.

With Internet banking, on the other hand, there are potential customers who already have all the software they need to do their banking, since all they need is a browser. The actual banking software resides on the bank’s server in the form of their home page. This software can be updated at any moment with new information, such as new prices or products, without having to send anything to the customer; it can also continue to expand and become more sophisticated without becoming cumbersome for the customer to operate. Banking with a browser, on the other hand, involves a continuous, interactive session, initiated by a local telephone call to a local access provider or online service. By developing internal expertise today, banks can prepare themselves to react quickly and efficiently to competitive moves and consumer trends as the financial services industry changes.

Employees at Bank of America, Chemical, Wells Fargo, and other large U.S. banks use them to buy lunch and snacks. Smart cards-plastic cards with computer chips-are starting to be used for prepayment, debit, and credit purchases all over the world. In the U.S., smart cards can be only used at a contained group of machines, or for one purpose. “They are part of the broader shift to electronic delivery, to making ATMs more functional, to using PCs and the Internet to do home banking.” says Edgar Brown, senior vice-president of alternative delivery products at First Union, Charlotte, N.C.

One of the advantages of using chips on cards with or instead of magnetic stripes is better security. Microprocessor chips are very difficult to alter or forge. Chips can carry more information than magnetic stripes can. A microprocessor chip can store up to eight kilobytes of data. Smart cards make cheaper and faster payments possible. Money can be deducted from a chip without on-line authorization. This makes for a two-second transaction versus an up-to-two-minutes one, and telecommunications costs are saved (Lunt, P., ABA Banking Journal, September 1995, p.46).

We can plainly see that there are many factors having great importance, when dealing with the economy. There are many things we must take into consideration in order to make any kind of an informed economic decision.

Islamic banking has been adopted at the national level in Pakistan, Sudan, and Iran, and they have decided to Islamize the whole banking system. Islamic banking was established in Malaysia in 1983. Islamic banking products and services should come under the Islamic Banking Scheme (IBS). Kuwait Finance House (KFH) is one of the largest Islamic banks in the world. Headquartered in Kuwait, their business covers corporate, investment, commercial and retail banking. As part of their expansion programmed, they are now in Malaysia with the opening of Kuwait Finance House (Malaysia) Berhad (KFHMB).

Islamic banking and institutions is showing continuous growth and history has not shown any trends to reveal any slow down. Many studies have indicated that the industry should continue to grow at a rapid pace annually over the next few years. There are differences between Islamic banking and conventional banking. The Islamic banking based on the Islamic principles (sharia) and do not allow interest (riba’). The most important difference between Islamic banking and conventional banking is the prohibition of interest.

There are many services and products that Islamic banking provides according to the Islamic Sharia. From these services Mudharabah (Profit Sharing), Musyarakah (Joint Venture), Bai’ Bithaman Ajil (Deferred Payment Sale), Qard (Interest-free Loan), Murabahah (Cost Plus), Wakalah (Agency), Ijarah Thumma Bai’ (Hire Purchase), Hibah (Gift) and other which differ from Islamic banking to another but all should be halal. Islamic banking is rabidly increasing in the world and starts to appear as a competitor to the conventional banking.

Malaysia is one of the countries that provide a good environment for Islamic banking. The purpose of this report paper is to explore the issue regarding Islamic banking institutions and banks in Malaysia. Our group chose Kuwait Finance House (KFH) as our bank to study. The information was gathered by conducting interview session with the manager at head quarter KFH located at Kuala Lumpur and secondary data from researches and websites. Our group chose KFH because this bank doesn’t appear to be well known by the public especially in Malaysia.

In the other hand the bank declares that they are the second largest Islamic bank in the world that have main headquartered in Kuwait. Our group highlights several issues regarding the performance and the current situation that applied in their systems. This issue covers the syariah compliance, the differences between KFH and other bank, location selected and the acceptance by the public. New strategies were recommended to the bank as well to become more competitive in the Malaysian market.

The earliest form of Islamic banking in Malaysia may be traced back to September 1963 when Perbadanan Wang Simpanan Bakal-Bakal Haji (PWSBH) was set up. PWSBH was set up as an institution for Muslims to save for their Hajj (pilgrimage to Mecca) expenses. In 1969, PWSBH merged with Pejabat Urusan Haji to form Lembaga Urusan dan Tabung Haji (now known as Lembaga Tabung Haji). The first Islamic bank in Malaysia was established in 1983. In 1993, commercial banks, merchant banks and finance companies were allowed to offer Islamic banking products and services under the Islamic Banking Scheme (IBS).

These institutions however, are required to separate the funds and activities of Islamic banking transactions from that of the conventional banking business to ensure that there would not be any co-mingling of funds. In Malaysia, the National Syariah Advisory Council additionally set up at Bank Negara Malaysia (BNM) advises BNM on the Shariah aspects of the operations of these institutions, as well as on their products and services. Islamic banking has been adopted at the national level in Pakistan, Sudan, and Iran, and they have decided to Islamize the whole banking system.

Iran enacted a new banking law in August 1983 requiring complete abolition of interest by March 1985. Sudan opted for a total change when a presidential decree was issued in 1984, directing all banks to stop dealing with interest. The Central Bank of Sudan, on 10 December 1984, directed all commercial banks to stop dealing with interest with immediate effect, and to negotiate conversion of existing deposit into investment deposits or any other kind of deposits in accordance with shariah. All outstanding interest bearing advances were either to be settled through repayment or they had to be converted into one of the Islamic modes of financing.

In Paulo Freire”s ‘The “Banking” Concept of Education” the author uses several similes, metaphors and analogies to bring across his main point – the relationship between teachers and students, and the way the teaching process takes place. He feels they way students are taught isn”t as effective as it could be. The main analogy Freire uses, is that teachers “deposit” information into the students” minds, rather than actually having the students not only learn the material, but know that they know and understand the material presented.

He brings about the fact that the majority of what students are taught does not directly involve them or their lives making the material seem almost foreign. To better relate the students to the material, he states the teachers should present the material to students in a way that they understand how it relates to them. Which is very true, considering that when people know that they need to know something that will benefit them in a way apart from taking a test, they tend to retain the information better.

Furthermore he says that the teachers should not just teach, and the students should just learn, but that both teachers and students should go through the process of learning together, eliminating the gap of difference that exists between the two. Not only does this eliminate the boredom that often occurs in classrooms, but actually is motivation for students to speak out sharing what they know, which further increases their knowledge, as well as their peers.

This selection by Freire could be summed up by a very fitting quote by Plutarch, “The mind is not a vessel to be filled, but a fire to be kindled.”

One member of the group is normally appointed to act as the managing or lead bank for the syndicate and it is the role of this bank to coordinate all negotiations, payments and administration between parties once the contract has been executed-it Is a multi bank transaction with each bank acting on a several basis, which means that each ann. acts on its own without responsibility for the other banks in the syndicate.

If a bank fails to honor its obligations as a member of a syndicate, the other syndicate banks have no legal obligation to satisfy them on that bank’s behalf. Syndicated loans are normally used to finance the purchase of capital assets or the acquisition of another business line or company. The syndicated credit market is one of the largest and most flexible sources of capital in the international market place. Loan syndication do happen In Zanzibar but are not very common. PROJECT LOANS – project loans has been used to describe all types of financing of projects, both with and without recourse. A financing of a particular economic unit in which a lender is satisfied to look initially to the cash flows and earnings of that economic unit as the source of funds from which a loan will be repaid and to the assets of the economic unit as collateral for the loan. Involve loans to finance major capital Investment projects for which the cash flow arising from the project will either be the sole or main repayment source.

Such projects are usually financed by major banks because of the large amounts involved and the need for full technical evaluation for example building a major dam or prospecting for 011. The loan Is usually provided on a medium or long term basis. There are often other side benefits resulting from segregating a financing as a project financing which may have a bearing on the motives of the company seeking such a structure. These benefits include: – Credit sources may be available to the project that would not be available to the sponsor.

Guarantees may be available to the project that would not be available to the sponsor. – A project financing may enjoy better credit terms and interest costs in situations In which a sponsor’s credit is weak. – Higher leverage of debt to equity may be achieved. Legal requirements applicable to certain investing institutions may be met by the project but not by the sponsor. C) LEASING -A lease is a contract wherein, over the term of the lease, the owner of the equipment permits another entity to use it in exchange for a promise by the latter to make a series of payments.

The owner of the equipment is referred to as the lesser. The entity that is being granted permission to use the equipment is referred to as the lessee. A typical leasing transaction works as follows. The lessee first decides on the equipment needed. The lessee then decides on the manufacturer, the make, and the model. The lessee specifies any special features desired, the terms of warranties, guaranties, delivery, installation, and services. The lessee also negotiates the price. After the equipment and terms have 1 OFF

The Northern Rock Bank was a prestigious establishment well founded in the financial and capital market in the United Kingdome. However in the year 2007, the company fell and as a result the fall of the capital market hit the United Kingdom at an unprecedented level. The bad credit market and an unfavorable credit crunch was made apparent one of the largest mortgage lenders in the United Kingdome officially sought for support from the bank of England. As a result on December 12, 2007 the Northern Rock was “dropped from the FTSE 100 index of leading London-listed blue chips, in the biggest shake-up of the index since the dotcom crash in 2001.

” (‘Timeline: Northern Rock bank crisis’, 2008) The crisis that ensured, prompting the Northern Rock to seek support form the Bank of England was primarily due to the high risks being faced by the company. In the global market place, companies dealing with debt and management of mortgage saw less flow of funds which were casqued by the inappropriate of mortgages made by the US mortgage companies to the subprime market affected the overall global mortgage industry and market by making a shortfall of funds.

The lack of liquidity of funds made the company additionally vulnerable in a market which was facing recessionary pressured since 2006 and resulted in the crisis as depicted in the case. The Northern Rock Crisis Case study depicts that the crisis faced by the company was caused by the business model of the company and the way it was operated which increased its risk to the failing global mortgage markets.

The company used a highly risky business model whereby the company used to lend the mortgages in the market by financing them in majority from loans while a small percentage were financed form the company savings in the bank (‘Northern Rock Crisis – Case study’). As a result when the money lenders sought to retract their money from the company, the company saw a shortfall of liquid cash for business operations which made the company vulnerable to the risks of operating in a business sector facing already recessionary pressures in the United States. Case Analysis Role of Organizational Culture

The role of the organizational culture is of significant importance when dealing with the organization crisis the likes of Northern Rock Crisis. The organizational culture can determine the success and the failure of the crisis management initiatives used to mitigate (Wise, 2003). This is because the employees, management and the board of directors are responsible for managing the crisis and making the company survive though it while the established values and the organizational culture from the guidelines of business practices which can add to or help manage the crisis.

Gerald Lewis highlighted the link and the importance of organizational culture when managing crisis in his book. He mentioned that “if its through cultures that values are determines and expresses, if its through cultures that external events are understood, if its through cultures that external events are understood, if its though cultures that an individual experiences a sense of community and connection, if its through cultures that one derives a sense of sense of sensibility and structure then It is obvious that a crisis management plan must start with an assessment of an organization’s culture” (Lewis, 2006, 23).

The Northern Rock Crisis depicts that the organizational culture of the companies operating in the mortgage industry led to the crisis for the Northern Rock Bank. The US based mortgage companies has the organizational culture to be highly profitable, make sales and increase their customer volume base for overall profit maximization, and the business practices of lending to a subprime market which was unable to pay back the mortgage led to the crisis for the bank when the funds in the market became insufficient for the Northern Rock Bank to operate in its traditionally high risk business model.

Crisis Management Phases and the 7 C’s of Crisis Management The three phases of crisis management are associated with the incubation stage of the crisis, the onset of the crisis and the aftermath that follows the crisis. In these three stages, the crisis is managed through the use of effective decision making, learning and employing of knowledge to resolve the issues (Boin et al, 2005).

In the incubation stage for the Northern Rock Crisis, the organization culture played a main role along with the development of high short terms costs in the face of the US mortgage market crisis of sub prime mortgages. The development and the production of the products and services was limited to focus on the market demands while the contingency planning was also insufficient s the stress tests were not conducted and the liquidity crisis was not forecasted or predicted. Additionally the role of the stakeholders was not taken into account in the communication and the decision making process.

At the onset of the crisis stage the Northern Rock Crisis was triggered and aggravated by the business model of the company which relied on attaining 77 percent of the funds from the wholesale money lenders while only 23 percent from the personal savings in the bank. This resulted in the limited liquidity of funds available to run the high risk business model which was further aggravated by the inadequacy of the company insurance to cover the retail run which in turn effected the retail banking operations of the business as well.

The third stage of the crisis legitimization depicts that the situation and the crisis of the company leaked out and was aired on the BBC television network, in the face of which the company was unable to effectively management the [public relations. Aside form these the management of the company was restructured while the search for a low risk model was made to sustain the company along with the use of turnaround strategies. “The process of crisis management entails that corporate decision makers pay attention to the necessity for turnaround strategies within the planning process.

Whilst turnaround management has been widely discussed in the literature relating to strategic management it has, of yet, been largely restricted to the marketing and financial elements of the company’s activities and has focused on the development of contingency plans rather than organizational change” (Smith and Sipika, 1993). Smith and Sipika highlighted a model for post crisis management with the phases pertaining to the defensive phase the consolidation phase and the offensive phase.

These also incorporated the turnaround strategies for the company. In the defensive phase the company insufficiently managed the stress the unpredicted liquidity crisis at the company. The FSA assigned a crisis decision unit to the company which reported that the crisis was brought on due to the US subprime crisis. In addition the news was leaked to the media about the crisis which was addressed in an inefficient manner by the company which employed no personal and public relations management.

At this stage the Virgin Group also attempted a takeover of the company which was managed by the company through the controlling of the share prices while the bailout was made by the bank of England which made the company go public. In the consolidation phase a bailout plan was made which provided liquidity support along with guarantee arrangements. Moreover the business was restructured along with the management while the balance sheet was made smaller though the recovery made of the loans that existed on the books of the company and though the sale of company assets.

The offensive phase saw the overall restructuring of the organization where the management and the business model were all changes to incorporate organizational learning as well as a focus on long termism instead of the previous short termism whereby the continuity of the business was ensured. The influence of the cultural web or the elements of the organizational culture can also be observed through the 7C’s model for crisis management.

The 7 C’s model includes the elements like contingency planning, the culture of the organization, the control executed, the configurations made, the coupling and complexity involved, communications and costs that have been depicted above for the case. These elements revolve around the stories, symbols, power structures, organizational structures, control systems, and rituals and routines for the paradigm which form the cultural web (Johnson and Scholes, 2001).

These are presented in the following table as they applied to the Northern Rock Crisis. The stakeholder analysis is a analysis strategy employed to determine the stakeholders of the business and what their role should be in the decision making and the operations of a business. “There are two major elements to Stakeholder Management: Stakeholder Analysis and Stakeholder Planning. Stakeholder Analysis is the technique used to identify the key people who have to be won over” (‘Stakeholder Analysis’).

This strategy can be used by the Northern Rock Bank to determine its stakeholders and how best their roles can be used to manage the business interests effectively. For the Northern Rock Crisis case the stakeholders that were associated with the company were the employees, the customers, the management, the shareholders as well as the depositors who had deposited their savings in the bank as well as the media which is an external stakeholder.

The media played the role of an aggregator when it released information about the crisis at the Northern Rock to the general public which alerted the customers and the shareholders. The customers sought to takeout their deposits from the bank all at the same time while the shareholders sought to cash in their investments while still possible which aggravated the crisis. The company has a choice of using multiple strategies for incorporating the stakeholders in the business.

These pertain to the stakeholder interests, and their power. The company should seek to develop a contingency plan which incorporates the interests of the strong power holding stakeholder entities into consideration while also alleviating the fears and the consequences faced by the victims of the crisis which include the customers as well as the employees of the company by taking their interests into account in the process of decision making. Recommendations and Conclusion

Through the stakeholder analysis it has been determine that the stakeholders have a strong influence on the organization and its future continuity, especially where the interests of the stakeholders are concerned. As a result it is proposed that the Northern Rock Bank should take the all the stakeholders including the customers, the employees, the prospective customers, the community, the media as well as the management into consideration when making decisions, devising policies or strategies for business instead of only aiming for pleasing the shareholders with high returns in the form of dividends.

Through CSR (Kotler and Lee, 2004, p3) the company should develop a more comprehensive public relations division which is effective in managing media releases while restructuring the organization to create a long term orientation with effective management to support the new culture of long termism. The CEO of the company should also be changed to someone who has a more sound financial background. References Northern Rock Crisis- Case Study ‘Stakeholder Analysis – Winning Support for your Projects’, Mind Tools, available at http://www. mindtools. com/pages/article/newPPM_07. htm

‘The Cultural Web – Aligning your organization’s culture with strategy’, Mind Tools, available at http://www. mindtools. com/pages/article/newSTR_90. htm 2008, ‘Timeline: Northern Rock bank crisis’, BBC News, available at http://news. bbc. co. uk/2/hi/business/7007076. stm Bion, A. , t’Hart, P. , Stern, E. , Sundelius, B. , 2005, The Politics of Crisis Management Public Leadership Under Pressure, Cambridge University Press Coles, E. , ‘Crisis Leadership: An Academic Perspective’, Work-Based Learning – Leeds University Business School, available at http://74. 125. 153. 132/search? q=cache:8r3CxaXHF34J:www.

thebci. org/reports/EveColes. pdf+smith+and+sipika+1993&cd=4&hl=en&ct=clnk&gl=pk Holmes, A. , 7 Principles of Crisis Management, available at http://anthonyholmes. org/7principles. aspx Johnson, G. , Scholes, K. , 2001, Exploring Public Sector Strategy, Prentice Hall Kotler, P. , Lee, N. , 2004, Corporate social responsibility: doing the most good for your company and your cause, John Wiley and Sons Lewis, G. W. , 2006, Organizational crisis management: The human factor, CRC Press Pearson, C. M. , 2007, International handbook of organizational crisis management, Sage Publications