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IMPACT OF ASSET MEASUREMENT AND MANAGEMENT ON CORPORATE PERFORMANCE..

CHAPTER ONE

INTRODUCTION

1.1             Background to the Study

Banks are very important organizations which aid in the execution of socioeconomic activities undertaken by individuals, business organizations and even sovereign states. They serve primarily as a medium which bridges the gap between surplus and deficit units in an economy. This fundamental function of banks generate interest income which has over the years being their major source of revenue, since loans form a greater portion of the total assets of banks. These assets generate huge interest income for banks which to a large extent determines their financial performance (Mabvure, T. J., Gwangwava, E., Faitira, M., Mutibvu, C. & Kamoyo, M., 2012). In recent times however, advancements in information and communication technology, increased competition among banking companies as well as the diversity and complexity of businesses and their demands for financial services have compelled banks to consider other banking activities which offer diverse services to clients and beef up revenue via fee income generation.

The term non-interest income refers to income earned from sources other than returns on advances or loans to bank clients. They are usually fee or commission generating activities which range from underwriting activities to cash management and custodial services as well as derivative arrangements. As part of total bank earnings, non-interest income is gaining prominence in recent times particularly in the US and Europe, as competition intensifies in the traditional banking business of deposit mobilization and loan making.

On the other hand, asset liability management (ALM) is a dynamic process of planning, organizing, coordinating and controlling assets and liabilities – their mixes, volumes, maturities, yields, and costs in order to achieve a specified business objective. The ALM system has various functions to manage risks such as liquidity risk management, market risk management, trading risk management, funding and capital planning, profit planning and growth projection (Kosmidou & Zopounidis, 2004).  It enables the banks to take business decisions in a more informed framework through considering risks.  It is an integrated approach that covers both types and amounts of financial assets and liabilities with the complexities of the financial market.

1.2             Statement of the Problem

The theoretical rationale of this study is strong competition among banks in the banking industry and its effect on asset-liability management. If a bank is not competitive at matching duration of assets and liabilities, it is exposed to more risk.  Does this make this bank more likely or less likely to focus on fee income generation?  If a bank is competitive at matching duration of assets and liabilities, it is also exposed to risk. 

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