An assessment of the role of commercial banks in promoting trade in rural areas: case study BPR S.A Kaduha sub-branch

2.1.3. Internal and external factors affecting the earning of commercial banks

2.1.3.1. External factors

The rate of return earned by commercial banks is affected by numerous factors. These factors include elements internal to each commercial bank and several important external shaping earnings performance. These factors are: changes in the technology of service delivery, competition from banks and non bank institutions, laws and regulations applying to financial institutions, government policies affecting the economy and financial system. Management cannot control these external factors. The most it can do is anticipate future changes in these outside influences and try to position the institution carefully choosing the optimal composition of its assets and liabilities in order to take advantages of expected developments.

2.1.3.2. Internal factors

Although management of commercial banks may have difficult to external pressures on the institution's earnings, it can change many internal factors to move the organization closer to its goals. Such factors are: efficiency in use of resources, control of expenses, tax management policies, liquidity position and risk position.

2.1.4. Activities of Commercial Banks

Commercial banks today offer more services from one location than the majority of other financial institutions. The most important of these services are the following:

· Processing of payments by way of telegraphic transfer, internet banking, or other means

· Issuing bank drafts and bank cheques

· Accepting money on term deposit

· Lending money by overdraft, installment loan, or other means

· Providing documentary and standby letter of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet exposures

· Safekeeping of documents and other items in safe deposit boxes

· Sale, distribution or brokerage, with or without advice, of insurance, unit trusts and similar financial products as a «financial supermarket»

· Cash Management and treasury services

· Merchant Banking and private equity financing

· Traditionally, large commercial banks also underwrite bonds, and make markets in currency, interest rates, and credit-related securities, but today large commercial banks usually have an investment bank arm that is involved in the mentioned activities.

2.1.5. Commercial bank credit

Credit is individual's or business' borrowing capacity, his debt potential. Debt is an obligation to pay in the future. Because money is normally used as a standard of deferred payment, debt is usually an obligation to pay a fixed sum of money. Debt comes into existence through the granting of a credit. Credit serves as a type of money; it is an exchange of goods, services or money based on faith in borrower's promise to repay with some form in security held by the lender.

Serrano C. (2001:39) argues that bank lending is directly constrained by monetary policy actions. He continues saying that monetary policy works through bank credit, in this view, monetary policy directly constrains the ability of banks to make new loans, making credit less available to borrowers who are dependent on bank financing. Thus, in the credit channel, restrictive monetary policy works not only by altering interest rates, but also by directly restricting bank credit. Restrictive monetary policy would cause banks to directly reduce the supply of loans, forcing business to cut back their investment and lending.