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Cash Management of Malaysian Banks_ K. G. Balachander and Santha

Cash Management of Malaysian Banks_ K. G. Balachander and Santha

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Published by AzizHamzaev
Cash Management of Malaysian Banks
K. G. Balachander V. Santha Bala Shanmugam

ABSTRACT. This study aims to identify seasonal variations in the form of day of the week, month of the year, and time of the month effects on the demand and supply of cash based on daily cash data obtained from a sample of banks in Malaysia. This information would increase the efficiency of vault cash management policies of banks, which would in turn increase the profitability of banks since the degree to which banks
Cash Management of Malaysian Banks
K. G. Balachander V. Santha Bala Shanmugam

ABSTRACT. This study aims to identify seasonal variations in the form of day of the week, month of the year, and time of the month effects on the demand and supply of cash based on daily cash data obtained from a sample of banks in Malaysia. This information would increase the efficiency of vault cash management policies of banks, which would in turn increase the profitability of banks since the degree to which banks

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Published by: AzizHamzaev on Dec 20, 2009
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Cash Management of Malaysian Banks
K. G. Balachander V. Santha Bala Shanmugam 
ABSTRACT.
This study aims to identify seasonal variations in the form of day of the week, month of the year, and time of the month effects on the de-mand and supply of cash based on daily cash data obtained from a sample of banks in Malaysia. This information would increase the efficiency of vault cash management policies of banks, which would in turn increase the profit-abilityofbankssincethedegreetowhichbanksoptimizetheirvaultcashhold-inghasrevenueandcostimplications.Theseseasonaleffectshavebeentesteusing the one-way ANOVA technique, and the findings revealed that the de-mand for general cash among Malaysian banks has been on the declinethroughouttheyearsduetotheintroductionofnewchannelsofdelivery.Therewasalsosufficientstatisticalevidence,thoughtovaryingextent,thatindicatesthe presence of month of the year and time of the month effects on bank’s de-mand for and supply of cash.
[Article copies available for a fee from The Haworth Document Delivery Service: 1-800-HAWORTH. E-mail address:<getinfo@haworthpressinc.com> Website: <http://www.HaworthPress.com> ©2002 by The Haworth Press, Inc. All rights reserved.]
KEYWORDS.
Cashmanagement,vaultcash,Malaysia,banking,demand and supply of cash
K. G. Balachander and V. Santha are Lecturers, Center for Multimedia Banking, Mul-timedia University, 63100, Cyberjaya, Malaysia.Bala Shanmugam is Director, Banking and Finance Research Unit, Monash Univer -sity Malaysian Campus, No. 2, Jalan Kolej, Bandar Sunway, 46150 Petaling Jaya,Selangor, Malaysia (Email: bala.shanmugam@busit.monash.edu.my).Address correspondence to Bala Shanmugam.Journal of Asia-Pacific Business, Vol. 4(3) 2002http://www.haworthpressinc.com/store/product.asp?sku=J098
Ó
2002 by The Haworth Press, Inc. All rights reserved.
69 
 
 INTRODUCTION 
Malaysiaisstillfarawayfromthenotionsofacashlesssociety.Conse-quently physical cash becomes the most fundamental resource necessaryforthesuccessfulandcontinuedoperationsofbanks.However,aspointeoutbyDanielandBaxter(1999),mostbanksinMalaysiaandinAsiahavepaid very little consideration to cash management. Thus, while bankswere willing to spend millions of dollars for the latest technology and business process reengineering to augment revenues and minimize costs,they have obviously turned a blind eye toward issues relating to minimiz-ing costs of holding cash (vault).The general practice among banks in Malaysia is for the head office of each bank to specify a blanket vault cash management policy, which doesnot take into account factors such as location of the branches anday-to-day variations in the supply and demand for cash into account (Hamid, 1998). Thus, there is great likelihood that the vault cash manage-ment policy of these banks may be far from optimal and hence wasteful.This practice would, no doubt, affect the profitability of banks since thedegree to which banks optimize their vault cash holding has revenue and cost implications.Thisstudyisbasicallycontemporaryinnatureratherthanfuturisticanhence focuses in analyzing seasonal variations and trends in the daily de-mand for and supply of cash at commercial banks. To this extent, it must be appreciated from the beginning that one of the greatest stumblingblocks to research of this nature is the availability of data.This study is thus based on data from a small sample of ten bank branches located in the Klang Valley–a region not atypical of urban Ma-laysia. The paper first provides a discussion of the Malaysian banks’ cashmanagement issues. Second, trends in the demand for cash at Malaysianbanks are analyzed. Third, the seasonal variations in the withdrawals and deposits of these banks are analyzed. The final section presents the con-clusions and recommendations.
THE VAULT CASH MANAGEMENT ISSUE 
The cash held at a bank’s vault together with any deposits the bank hasplaced with other banks and the bank’s reserve accounts held with theCentral Bank are often referred to as primary reserves. As argued byWrase (1998), excess reserves may be handy, as such reserves can guard against unexpected payment outflows. These cash assets are a bank’s first 
70 JOURNAL OF ASIA-PACIFIC BUSINES
 
lineofdefenseagainstdepositwithdrawalsandthefirstsourceoffundstoturn to when a customer comes up with an unexpected request for cash(Glaze, 1999).In the banking business, availability of cash is an extremely important aspect of customer service. Inadequate cash availability can lead to cus-tomer dissatisfaction and hence loss of customer goodwill (De La Rue,1999). There would also be the costs of inter-bank borrowings to meet thebanks’ liquidity needs. In the case of automated teller machines (ATMs),there would also be the loss of interchange fees. Thus, inadequate cashavailability in a bank would not only have implications for bank costs but also bank revenues. However, though a 100% availability would implynever running out of cash, the cost of maintaining such high levels of cashcanbeprohibitive.Inshort,thereisatrade-offbetweenliquidityandprof-itability for banks.The demand for cash at any bank or branch or even service center would be unique depending on its geographical location and customer base(GMT,1999).Furthermore,thedemandpatternsmaybequiteerraticdue to trends, seasonal effects, structural shifts, public holidays and spe-cial events. Thus, there is a need for dynamic demand forecasting that takes these factors into consideration in an effort to determine the optimalcash to be held at each bank on a daily basis. In this context, a general ruleof thumb blanket policy for all banks would certainly be inappropriate(Tan, 1998).Allen (1998) examined the daily vault cash holdings in the Eighth Dis-trict banks in the United States to determine whether the observeamounts of vault cash held by these banks are consistent with the funda-mental assumptions of a one-sided (S,s) inventory decision rule. The (S,s)model first developed by Scarf (1960) simply represents an upper limit of vault cash (S) and a lower limit or replenishment signal (s) which are de-termined based on the intra-day profile of withdrawals and deposits aswell as the costs associated with shipments and the opportunity costs of stocking out. Allen’s (1998) findings based on 1997 data appeared to sup-port the idea that banksinthe EighthDistrict (U.S.)have not beenmanag-ing vault cash holdings very closely. Within the context of the (S,s)inventory model, the variance of net withdrawals and/or the penalty asso-ciated with running out would have to be very high to justify the levels of vault cash balances held by these banks.When deciding how much cash to order or to clear, a model which is cus-tomized for each location and takes account of information such as cost fac-tors,carrierparameters,demandpatternsandotherphysicalconstraintsneeds
 Balachander, Santha, and Shanmugam 71

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