THE CAUSES OF BANK-RUNS ON BANKING INSTITUTIONS AND ITS IMPACTS ON MANAGEMENT OPERATIONS

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THE CAUSES OF BANK-RUNS ON BANKING INSTITUTIONS AND ITS IMPACTS ON MANAGEMENT OPERATIONS

ABSTRACT

Acknowledging that bank-run is one of the most dangerous thing to happen to a bank as banks in our society continuously face such problems as a result, at times leads to a fall of the bank, causing problems for the government to control the monetary policy of the economy and also loss of confidence and trust in the country’s banking system. The main objective of this study was to find out the extent to which insolvency can lead to bank-run. The research was also to find out the effect of loss of customer’s confidence on the bank and the effect of rumors from the general public on the bank. Considering the problem, some suggestions were provided in chapter six. The work is presented in six chapters. Chapter one is the general introduction, chapter two is all about related literature and chapter four is the background of study area FIFFA SA KUMBA and research methodology. Chapter five is presentation and data analysis and chapter six is summary of findings and recommendations. It was noticed from the research conducted that loss of customer’s confidence on a bank has a negative effect on the bank as 90.7 accepted the view. It means that if customers lack confidence on the bank, they may demand rapidly for their cash hence leading to bank-run. Banks should keep adequate liquid as a way of meeting customer’s needs at all times thereby maintaining the trust of the customers on the bank. Actually, most banks do not like to hold mush cash because it conflicts with profitability which is the principal objective of most banks as they want to maximize profits at all cost. Key words Banking, bank-runs, customer’s confidence, insolvency, liquidity.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Bank run occurs when huge numbers of customers holding deposits in a bank being afraid that their bank would not pay their initial deposits in full and also in time, would actually try to withdraw their initial deposits quickly before the situation gets out of hand. Banks usually face such problems because due to the fact that they are profit seeking organizations, they keep just a porting of deposits and use part for lending and other investment purposes. Some banks because of huge appetite for profits principally invest this money in long term assets or securities such as the purchase of government bonds and shares. When banks notice they have rapid demands for cash with very little deposits, they must quickly increase their cash to meet corresponding demands and this can be done either by borrowing from other prudent banks.

Bank-run has been looked upon as a very dangerous crisis to be faced by a bank. Some people hold the view that bank run is unlikely to lead to an insolvent situation faced by the bank. But the fact is that when depositors and die heart lovers of a bank fear that their bank is unreliable or their financial situation is not stable, they may start withdrawing their cash to deposit in more trust worthy banks. When there is a generally destabilized monetary policy in the economy,

bank customers turn not to trust even banks regarded as prudent banks and would prefer to save their money abroad or invest in some kinds of businesses. This is due to the fact that customers believe that the destabilized monetary policy of the government must affect the banks in the economy and even god banks may be affected as well therefore they would prefer to withdraw their money and invest or deposit it in international reliable banks.

A real serious potential issue is goes to other financial institutions. The possibility of this happening holds on what the “running” customers do with their funds. The customers have many choices such as: they can redeposit their funds in banks that they believe are prudent, called direct redeposit, if they think no bank or financial institution to be safe, they can buy short term securities from the government such as treasury securities from the government as a method to safe guard money. But what do people who sell the securities do? If they deposit the profits in banks they know are safe, as is likely, this is an indirect redeposit, if none of the depositors or customers nor the sellers of the treasury securities know that any bank is safe, they hold the money as currency out of the banking system. The bank run on a single bank would then be moved into a run on the whole banking system.

When a bank run occurs, the bank must quickly increase its cash to meet depositors demand, which means if they do not increase cash, they will breach the contractual debtor-creditor relationship between the bank and its customers where the bank act as a debtor to a creditor being the customer.

The banks usually can increase their cash by giving away securities or assets normally at prices below its real value if held till their maturity (sales at fire prices). Due to the huge drive by banks to make profits, they would prefer to hold little capital and invest more as such when they start selling assets at fire prices, it pushes them into an insolvent situation. Tegwi (2010)Posits that a bank run is simply a rapid cash withdrawals of initial deposits of a bank.When

customers build a lack of confidence on the bank, they are likely to start withdrawing their deposits, reason being that they know that the bank may fail them at some point in time, which equally leads to bank-run but if the bank builds a good relationship with the customer which is one of the contractual relationship of fiduciary relationship which is based on trust has to exist between the banker and the customer. The point here is that, the bank has to always boost the confidence and trust of the customers in...

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THE CAUSES OF BANK-RUNS ON BANKING INSTITUTIONS AND ITS IMPACTS ON MANAGEMENT OPERATIONS

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