The need to evaluate bank performance

by Dr. Dhanuskodi Rengasamy

Banks play very important roles in the economic development of nations as they, to a large extent, wield control over the supply of money in circulation and are the main stimuli of economic progress.

Economic development is a dynamic and continuous process which is highly dependent upon the mobilisation of resources, investment, and the operational efficiency of the various segments of the economy.

Therefore, a strong banking sector is vital for growth, creating jobs, generating wealth, eradicating poverty, entrepreneurial activity and increasing Gross Domestic Product (GDP) growth.

The sector provides a large portion of the medium of exchange of a country and is the primary instrument through which monetary policy is conducted through their deposit mobilisation and lending operations. Banks facilitate the productive utilisation of ideal funds, thus assisting society to produce wealth.

What is bank performance?

The term ‘performance’ means carrying into execution or achievement; or accomplishment of specific activities, or the performance of an undertaking of a duty. ‘Bank performance’ may be defined as the reflection of the way in which the resources of a bank are used in a form which enables it to achieve its objectives.

Furthermore, the term ‘bank performance’ means the adoption of a set of indicators which are indicative of the bank’s current status and the extent of its ability to achieve the desired objectives.

Importance of the measurement of bank performance

As the banking sector is considered a vital segment of a modern economy, its efficiency is of vital importance. In order to ensure a healthy financial system and an efficient economy, banks must be carefully evaluated and analysed.

While banks help business organisations by rendering a wide range of products and services, the products and services are more or less identical from one bank to another, and there is little scope for differentiating between them. Therefore, it is necessary to measure the banks’ individual performance to determine their contribution to business development.

It is inevitable that banks continue to attract significant attention from the public and scrutiny by financial regulators as there is a growing need to evaluate banks in a more efficient manner. Not only supervising institutions, regulators and bank management bodies, but also clients of banks, are becoming increasingly concerned about the stability and sustainability of these financial institutions.

There are other reasons to evaluate the performance of banks – to determine their operational results and their overall financial condition; measure their assets quality, management quality and efficiency, and achievement of their objectives; as well as ascertain their earning quality, liquidity, capital adequacy, and level of bank services.

Bank performance analysis involves gathering formal and informal data to help customers and sponsors define and achieve their goals. Banks are also expected to provide evidence of their credit operations and financial flows as these influence the growth and economic development of the country.

However, it is to be noted that the performance of banks cannot be easily measured since many of their products and services are of an intangible nature.

Helping enhance efficiencies in the banking sector

In Malaysia, the banking sector includes various private and government banks and some private and government banks have their own branch networks throughout the country. Although the governmental banks have a relatively long-lasting existence, private banks are getting increasingly competitive and more volatile.

As a consequence of economic reforms and mobilisation, different financial institutions have emerged in the market. This has not only created an increasingly dynamic and competitive banking environment, which calls for enhanced evaluation and analysis, but overall, has encouraged greater efficiency in banking services.

Dr. Dhanuskodi Rengasamy is a senior lecturer in accounting at the School of Business at Curtin Sarawak. He has 21 years of teaching experience in India, Ethiopia and Oman. His teaching experience covers subjects such as financial accounting, management accounting, cost accounting, auditing, project management and banking at undergraduate and postgraduate level. He has presented research papers in over 15 national and international conferences as well as published books and online journal articles. He can be contacted by e-mail at dhanuskodi@curtin.edu.my.

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