Introduction
AffinBank Berhad[1]
Affin Bank Berhad
(AFFINBANK) was listed in Bursa Malaysia and part of wholly-owned subsidiary of
Affin Holdings Berhad. The bank started
on January 2001 from a merger between the former Perwira Affin Bank Berhad and
BSN Commercial (M) Berhad in August 2000. With continues merging efforts, Affin Bank
Berhad also merged with the former Affin-ACF Finance Berhad in June 2005 (Affin Bank Berhad, 2011). Currently,
Affin Bank Berhad has a network of 82 branches nationwide. Actually these merging efforts enable the bank
reach their customers to offer excellent banking services. Currently, Affin
Bank Berhad was still looking for more strategic locations for the existing
branches and to relocate if deemed appropriate (Affin Bank Berhad, 2011).
The Bank serves
both retail and corporate customers. The business units of the Bank comprise
Enterprise Banking, Consumer Banking, Debt and Capital Markets and Hire
Purchase. Consumer Banking provides credit cards, personal loans, mortgages and
deposit taking services to individuals (Affin Bank Berhad, 2011).
Enterprise Banking offers corporations, institutional clients and SMEs services
in corporate banking, contract financing and trade finance. Enterprise Banking
serves as an important feeder to the other business units by way of contacts
and opportunities (Affin
Bank Berhad, 2011).
Banking Without
Barriers™ signifies the removal of boundaries within the processes of the Bank
as well as in its attitude in servicing its customers. The latter means
reaching out to the customers, improving relationships with them, making each
one of them, and not just a select few, feel privileged and enhancing services
to them. Simply put, AFFINBANK is embracing a new approach to banking and
changing the face of conventional banking (Affin Bank Berhad, 2011).
AFFINBANK's Islamic
banking subsidiary Affin Islamic Bank Berhad (AFFINISLAMIC) commenced
operations on 1st April 2006. As a full-fledged Islamic bank, AFFINISLAMIC
offers a complete range of Islamic Banking products and services encompassing
the areas of Enterprise and Consumer banking (Affin Bank Berhad, 2011).
Economic
Theory Applied in AffinBank Berhad
Every businesses,
industries, nations or countries have their own strategy on how to improve and
enhance their economic status. In Malaysia, economy is very important because
this is where the survival of the country lies. The progress of the economy
depends on the abundant resources or source of natural products and those
people who are running it or manipulating it. Basically, methods of economic
analysis have been increasingly applied to fields that involve people including
the officials to make choices in a social context, such as a crime, education,
the family, health, law, politics, religion and social institutions and war.
With this information being given, these are the reasons why there are lots of
theory evolves where there is only the same purpose which is to boost and
enhance the economy.
The discipline of economics
as we understand it today is a relatively recent development. Economic theory
provides an outlet for research in all areas of economics based on rigorous
theoretical reasoning and on topics in mathematics that are supported by the
analysis of economic problems. Economic theory surveys for particular areas of
research that clearly set forth the basic underlying concepts and ideas, the
essential technical apparatuses, and the central open questions. The help of
economic theory the economist have already a guide on how to manage and boost
the economy. Modern economic thought emerged in the 17th and 18th
centuries as the western world began its transformation from an agrarian to an
industrial society. With this economic thought there are many of theories
emerge for the reason that in economic theories are constantly changing.
In business, particularly
in financing business such as banks like AffinBank Berhad, economic theories plays crucial role
for their competitiveness and success. Considering that every bank organisations
and their associates are expected to understand the different business cycle
within the Malaysian banking industry. They are also expected to comprehend the
complexity of the business world and the interactions within the relationship
ties and their connections. Every part of the business world plays an essential
role and business leaders often forget the how to fidget these parts. In reviewing the practices of AffinBank
Berhad, the organisation was considering the economic theory concerning capital
market and market structure theory.
The capital market and market structure theory are
part of the mundane business cycle, although different in applied term still,
these two shares the idea of financing. Capital market is a term applied which
refers to the broad range of products and services which is connected with the
investments and provided finances of the organisation. It has many components
where the debt and equity securities are ideally can be bought and sold. The
nature of capital market deals with the creation of strategies as an approach
to either long-term fund raising or short-term funds. Capital markets fulfil
its role at a typical kind of financial transactions such as buying and selling
the securities and commodities. Moreover, capital market established operations
and support organisations on the process of trading. This broad structure of
the capital market, many investors in different type of business environment
seeks opportunity to participate in financial strategies to create business
stability and financial security. Investors believe that their focus on
investing will lead them to witness the return of various offerings which are
all according to their favour, such as realising the larger return of their
investment.
Capital markets are best partner of the financial
intermediaries and most of the large corporations or well-founded organisation
turn to them and acquired as the most dominant sources of finances. In truth,
capital markets totally dominated the future of corporate financing, although
it is delivered outside the companies, it continues to support the developed
and developing business firms and countries (Megginson & Boutchkova, 2000).
On the other hand, the market structure theory is
related in the equity of the traders and investors. This theory tells the idea
that every stocks available in the market are always in the state of
equilibrium and the impossibility for the investors to beat the market (Brigham
& Gapenski, 1997, p. 319). Actually, the market structure theory maintains
the price of a stock which is fully reflects all information on the value of
the same stock as regarded to the idea of “beat the market” (Lo, 2007). It is
possible if the organisation gained earnings more than the expected value and
advised that the leaders should immediately reflect the current stock price.
This leads the stocks to be trade at the fair value on exchange of stocks that
in return, prevents the investors to purchase or sell the stock in inflated
prices. The proposition of the market structure theory is to reflect the
securities all the known information which is available to investors and no one
room for fooling the investors (Brigham & Gapenski, 1997). In return, all
the investments in efficiency markets are fairly priced. Market Structure
Thoery, with accordance to the capital market theory, the price of the security
includes the measurement of risks in future cash flows, such as volatility,
liquidity, and bankruptcy (Brigham & Gapenski, 1997).
The concept of the informational efficiency within the
market structure theory creates as more random sequence of price changes
produced in the market. The same market makes itself efficient in which price
subject for changes are unpredictable that ideally placed to limitations if the
economic uncertainties appeared (Lo, 2007).
The principle of market structure theory highly
influenced different academics and studies but the practitioners or regulators,
as well as the business propellers are still unconvinced (Bloomfield, 2002).
The idea of an efficient market can be easily adjust as far as trading is
available with the existence of market inefficiencies (Dimson & Mussavian,
2000). Business experts search for the suitable information where they ignore
the information the data already served for them.
Apparently, in traditional
model, capital structure is related to the value of the company and it assumes
that the weighted average cost of capital can be minimised (Mcmenamin
1999). It argues that the value of the
firm is independent of its capital structure that can be proved by simply
capitalising the expected return appropriate to each risk class (Mcmenamin
1999). For example, two different firms
have a capital structure or debt-to-equity ratio of 90:10 and 10:90
respectively. With this argument, the
value of the firm is reflected by its earnings before interest and taxes (EBIT)
and the variability or risk of the EBIT while the average cost of capital
serves as the discount rate that will capitalise EBIT. As a result, the cost of capital of the
un-geared firm will also be equal to the geared firm because the cost of debt
capital is eliminated. In this
proposition, cost of equity capital is a linear function of capital structure
that cancels the yield in equity due to capitalisation rate and financial risk
premiums. As a result, increases in
gearing also increases the risk of equity capital that will positively push the
required rate of return upwards. In
addition, the use of cheaper debt is trade-off by increasing the cost of equity
In AffinBank Berhad (With Tax) context which
is also known to be is a refined version of “without taxes” considering that it
adapts to real corporate situations, posits that tax shields that benefit a
highly geared firm is misleading and with questionable effects (Mcmenamin
1999). The benefits are initially
apparent because the highly geared firm has tax allowable interest payments to
creditors that will make their earnings after interest and taxes (EAIT) greater
than un-geared firm. When capitalising
method in “without tax” version is applied, appropriate discount rate will be
applicable to interest payments on debt which produces the tax shield making
interest and tax shield on the same class of risk. In this regard, the value of the geared
company and the un-geared company plus the present value of the tax shield will
be equal. Finally, as debt-equity ratio
increase, the firm’s financial risk is also increased which cause its cost of
equity to rise. In contrast, the impact
of corporate taxes cancels the cost of debt and therefore cost of equity where
trade-off is the obvious situation.
Upon reviewing the case of AffinBank Berhad and in
accordance to market structure theory, it shows that their aim was to keep
their effective financing strategies for a variety of reasons. The best part is
to consider that AffinBank Berhad is planning to win big in their entry to the
new business activity. As seen AffinBank Berhad success is not founded by the
sole investments of the proprietors but with the participation of different
financing sources. And since AffinBank Berhad settles the idea of acquiring
additional funds, the first step that requires them is to find then evaluate
the potential sources of capital. Actually, AffinBank Berhad financial managers believe that the most important
thing to consider is the availability than the cost more specifically during
those financial crisis or unexpected challenges (Affin Bank Berhad, 2011). The
credit ratings on finance matter much, because of the impact on the cost of
capital during good economic times. And it is contrast when there is a
turbulent economic times, the credit ratings can impact whether capital is
available at any price (Affin Bank Berhad, 2011).
AffinBank Berhad as they already faced some financing
complications from the past recognises the importance of effective risk
management in a more holistic way than before (Affin Bank Berhad, 2011). AffinBank
Berhad’s primarily action is to mix all the financial structure and elements,
which includes the organisation’s target capital structure, conditions in the
debt and equity market, and the restrictions imposed in the debt agreement
(Affin Bank Berhad, 2011).
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