FINA 2003 – Information Technology for Banking & Finance

Course Assignment – The Transformation of Baruba Bank

Overview of Commercial Bank in Baruba

Baruba’s banking system remains underdeveloped. There are currently 17 banks that were
active in 2006: 13 commercial banks (one state owned, 3 foreign bank branches and 9 locally
incorporated banks); and 4 specialized banks (one state owned and 3 privately-owned). In
addition to those 17 banks, there are 3 licensed micro-finance institutions are also active in
providing financial services in Baruba in 2006.

Law on Banking and Financial Institutions

Commercial Banking Activities: Pursuance to the Article 2 of the Law on Banking and
Financial Institutions a bank can do full banking activities as follows:
a. Credit operations for valuable consideration, including leasing, guarantees and
commitments under signature;
b. The collection of non-earmarked deposit from the public; and
c. The provision of means of payment to customer and the processing of said means of
payment in national currency of foreign exchange

Introduction of Baruba Bank

Baruba Bank was established in January 2001, as a national NGO for Micro and Small
Enterprises Development and Credit. From the earliest days Baruba received the support of a
number of major international development agencies. Two factors, namely expansion of the
network to cover 14 of Baruba's 21 provinces and the ability to operate at a profit to ensure
the sustainability, led both the Board and the international partners to conclude that
BARUBA should be transformed into a bank. This would not only provide a secure
regulatory framework lacking under the previous status but would enable us to enlarge the
range of funding options (e.g. equity injection, taking public deposits, obtaining commercial
inter-bank loans) to support expansion of the core micro-finance business. This was achieved
in August 2000 when Baruba Bank got its banking license.

Mission/Vision of Baruba Bank

The mission and vision of Baruba Bank is to market a superior nationwide delivery of high-
quality bank products and services at premium prices to meet the needs of the financial and
commercial sector and the general public throughout Baruba in a context where such
products and services are presently of indifferent quality and limited to only a very few major
towns.

Baruba Bank at the Transformational Stage

In Baruba Bank's experience, there are three criteria, which we had to meet before taking this
step of transformation. BARUBA needed to be fully sustainable in a number of aspects:
* Programming - having the right products and Business plan.
* Technical - having the right skills and training to meet the business plan.
* Organisational - having the right management structure and network and
* Financial viability - controlling costs, ensuring portfolio quality and repayment
regularly, and pricing loan products to cover administrative and funding costs.
Network of Baruba Bank
Outreach Structure: Geographically, Barubaa Bank has expanded to have the largest
network of branches in Baruba, which initially served as a key benefit to savings, transfer,
and other financial services. More district offices and service posts got established in order to
be close to the customers and be more convenient and serve them quickly. There are 21
provinces in Baruba, of these 21 provinces; Baruba Bank has operated in 15 provinces and
towns with 76 provincial branches and district offices. Management of Baruba Bank believes
that by having offices close to the customers, Baruba Bank can serve the customers better and
faster. It is more convenient to both Baruba Bank and customers. This served as a
competitive advantage of Baruba Bank whereby the other commercial banks were unable to
do the same. However, there has been an increase in competition and this process has
become costly to maintain in addition there have been efficiency losses in some of the
processes such as the posting of deposits using the mail system. (See the “Deposit Process”
for a full description)

Baruba Bank Customers and Their Benefits

All of Baruba Bank’s target groups are the entrepreneurs of micro and small businesses, and
medium sized enterprises; and the general public who are living in both urban and rural areas
including the farmers in Baruba. The customers of small and micro businesses and a plus can
have the place where they can depend on in terms of financial services: they can either
borrow or deposit with the Baruba Bank.

List of Bank Employees

By the end of March, 2003, BARUBA Bank employed 961 employees (771 males, and 200
females) detailed below:

Management : 52
Credit officers : 381
Accountants : 97
Cashiers : 164
Marketing staff : 41
Information Technology : 3
Internal Audit staff : 29
Loan recovery officer : 33
Saving Account officer : 8
Legal officer : 3
Administrative officer : 60
Security officer : 90
Total staff : 971

Institutional Achievements

Description 2006 2007 2008

No. of branches 28 66 75
No. of Professional Staff 463 662 874
No. of Active Borrowers 60,860 81,453 82,976
Ave. Loan size (in Baruba $) 147 177 132
Ave. Number of Clients per Staff 131 123 96
Summary Financial Information

BALANCE SHEET 2006 2007 2008

Assets
Total Current Assets 21,726,817 25,578,843 29,503,409
Total Assets 22,294,714 27,341,129 30,970,095
Liabilities & Equity
Total Current Liabilities 915,219 4,167,692 7,404,156
Total Liabilities 18,720,722 20,250,444 21,414,222
Total Equity & Reserves 2,658,773 2,922,993 2,151,717

Net Profit and Performance Ratios

2006 2007 2008

Loan Loss Provisions/Average Loan Portfolio 4.13% 7.22% 9.38%
Non-performing Loans/Total Loans 6.59% 8.45% 8.99%
Return on Assets (annualised: pre-tax) 30.4% 2.1% (0.4%)
Ave. Commission Charges 0.05% 0.19% 1.59%
Liquid Assets/Total Assets 244.2% 35.3% 30.1%
Admin Costs/Total Operating Costs 82.6% 92.6% 94.1%
Staff Costs/Total Operating Cost 44.6% 59.4% 63.1%
Net Profit 1,450,994 260,032 (771,276)

Impact on the Customers

There has been no major impact survey or study to determine if the customers become better
off after having access to Baruba Bank’s financial services. But Baruba Bank is seeking all
avenues to guarantee that the customers can always have access to its financial services in
both rural and urban areas. Baruba Bank has noted that financial intermediation is a vital
element in developing local economies and reduces the relative dependence of the country on
foreign capital by utilising domestic savings for investments.

Experience has shown that providing access to financial services to people raises income and
creates employment, allows people to improve their liquidity management and increases the
efficiency of the use of available capital. Therefore further growth and development of banks/
multilateral financial institutions (MFIs) will stimulate local economies which are one of the
most effective ways to alleviate poverty.

Challenges

Baruba Bank still maintains centralised management system for the branches and at times it is
difficult to make quick decisions regarding customers’ needs. In addition, the establishment
of many branches is proving cumbersome, costly and difficult to maintain. This may require
a review of the current operations.

Running rural financial service where there is limited infrastructure need strong and full
commitment of staff of all levels. With respect to lending to agricultural activities, many
banks refrain from providing services to this sector. They think about high risk sector and
less return. However, for Baruda Bank by extending its branch network, it has found a
creative method to maintain this captive market, and where it can offer a number of services.
There are risks specifically the volatility of the income arising from agriculture (which can
impact on liquidity and credit), as well as certain operational risks and cost from operating
numerous rural branches or outposts.

Another challenge relates to information technology since many, though not all, of the staff is
IT or computer literate. There is training for staff and customers, but the training is very
simple whereby the customers can bring their literate relative with them to help them with the
reading and the writing, and calculation for those who are illiterate. This is a major issue
especially in the rural areas (constitutes 30% of Baruba Bank’s customer base).

In order to survive and compete in an increasingly sophisticated environment Baruba Bank

requires more sophisticated IT and MIS systems. The IT demands a more disciplined
approach to managerial responsibilities in particular the use of management reports. With the
sophisticated system, Baruba Bank’s executive management can track down the deficiencies
and solve them in time enough before the problems become bigger. The bank is faced with
the dual pressure of maintaining its clientele, providing new services and ensuring that staff
work much more productively.

The Deposit Process

In the rural areas, deposits can be mailed using the Baruba Postal Service (BPS). Savings
resulting from the lack of branches and tellers were passed along to the customer in the form
of higher rates, free services, etc.

However, customer focus groups and surveys indicated that the process of making a deposit
is of critical importance to a customer. The process from the customer's viewpoint is very
straightforward - they sign a check, fill out a deposit slip, and mail both to the bank. Deposits
were the second largest driver of inquiries to the customer call centre (33% of all calls).
Customers expressed frustration in mailing delays and couldn't understand why their deposits
took so long to post to their account.

The bank's mission therefore is to receive the deposits as quickly as possible and begin the
deposit and cheque clearing cycle. When the bank originally set up the processes as a
competitive tool, a decision was made to establish 'local' deposit locations and branches
around the Baruba. These local deposit locations received the deposits and overnight express
reshipped them to a central processing location daily.

This local receipt and express reshipment to a central location was done for two main
reasons:

1. A deposit being mailed to a local location would take less time than mailing to a
centralised, national location.
2. Customer input indicated that mailing within a state or to a neighbouring state would
make customers more comfortable than mailing to a centralised, national location
somewhere across Baruba.

Data surrounding the deposits was collected and the analysis phase began to yield some
alarming results. Baruba Bank led all banks in the set up of a system that locally collected
deposits for express reshipment to a centralised, national location for processing.

Data and Root Causes

Data collection, however, revealed a few flaws that weren't originally identified:

• The express shipment postal process from the local branches to the main bank was
manual. Manual processes that are not reinforced daily and that do not have adequate
control plans tend to break down. That is exactly what occurred with the local deposit
locations. Some locations wouldn't receive deposits on a daily basis. When deposits
were received, they sometimes wouldn't be express reshipped that night because of a
lack of engrained process.

• For deposits that were received during the week, the express reshipment process
functioned properly. On the weekend, however, express reshipment wasn't possible,
so deposits arriving on Saturday were not express reshipped until Monday evening.

• Because of BPS processes, some deposit mailings to 'local' deposit locations took as
long as three days. Some 'local' deposit locations may take longer than five days just
to be received by the bank.

Additional Findings

• Mailing directly to a centralised, national process is faster (2.6 average days) than the
local express reshipment process (4.6 average days).

• An additional survey conducted with focus groups indicated that the deposit mailing
location is not a significant factor for a majority of respondents. As an aside, the
original data indicating that customers were more comfortable mailing deposits within
their state could not be found.

• A benchmarking analysis of direct competitors indicated that all utilized a centralized,

national deposit process.

The Baruba Bank served as a pioneer in offering multibranch banking to its rural customers.
However, as new competitors entered the market, Baruba Bank wanted to completely
transform the way in which it provided these services. Baruba Bank wants to leverage its
strong customer base to create additional revenue streams, while offering customers extended
services. With the availability of multiple channels for interaction with customers, it may be
necessary to have a common platform for seamless flow of information. This is necessary
since it is becoming increasingly difficult, to the existing system based on legacy technology
and architecture.

There is a new system Accelerant Systems 104 at a cost $6.5 million and $500,000 annually
to maintain. Initially, training for the new system is slated to cost $250,000. However, with
ready access to a large customer base, it is believed that the bank is in an ideal situation to
introduce the Electronic Bill Presentment and Payment Services – the first to do so with the
passage of the new Electronic Signatures Act. Other functionalities include portfolio
Management, Payments, File Transfer and Security Trading functionalities. In addition, this
would architecture would appeal to corporate customers by enabling them to deal with
thousands of payments together and route them online to the bank, much quicker.

Student Task
Review the Baruba Bank case, should Baruba Bank seek to restructure the existing
application architecture. How could mailing to a centralised, national location be
quicker than mailing locally? Why wouldn't customers feel more comfortable mailing
locally than to a centralized, national location? Or is this the best solution? Should the
bank maintain this system or should they seek another solution. Or should the bank
develop applications on a Multi-Channel infrastructure, which would cater to several
channels, including the Internet. Should a phased approach be chosen and the online
Banking service be introduced or should it be completed within one process? What are
your thoughts?