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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-
ability of banks since the degree to which banks optimize their vault cash hold-
ing has revenue and cost implications. These seasonal effects have been tested
using the one-way ANOVA technique, and the findings revealed that the de-
mand for general cash among Malaysian banks has been on the decline
throughout the years due to the introduction of new channels of delivery. There
was also sufficient statistical evidence, though to varying extent, that indicates
the 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:
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2002 by The Haworth Press, Inc. All rights reserved.]

KEYWORDS. Cash management, vault cash, 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) 2002
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Ó 2002 by The Haworth Press, Inc. All rights reserved. 69
70 JOURNAL OF ASIA-PACIFIC BUSINESS

INTRODUCTION
Malaysia is still far away from the notions of a cashless society. Conse-
quently physical cash becomes the most fundamental resource necessary
for the successful and continued operations of banks. However, as pointed
out by Daniel and Baxter (1999), most banks in Malaysia and in Asia have
paid very little consideration to cash management. Thus, while banks
were 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 does
not take into account factors such as location of the branches and
day-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 the
degree to which banks optimize their vault cash holding has revenue and
cost implications.
This study is basically contemporary in nature rather than futuristic and
hence 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 stumbling
blocks 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’ cash
management issues. Second, trends in the demand for cash at Malaysian
banks 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 has
placed with other banks and the bank’s reserve accounts held with the
Central Bank are often referred to as primary reserves. As argued by
Wrase (1998), excess reserves may be handy, as such reserves can guard
against unexpected payment outflows. These cash assets are a bank’s first
Balachander, Santha, and Shanmugam 71

line of defense against deposit withdrawals and the first source of funds to
turn 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 the
banks’ liquidity needs. In the case of automated teller machines (ATMs),
there would also be the loss of interchange fees. Thus, inadequate cash
availability in a bank would not only have implications for bank costs but
also bank revenues. However, though a 100% availability would imply
never running out of cash, the cost of maintaining such high levels of cash
can be prohibitive. In short, there is a trade-off between liquidity and prof-
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, the demand patterns may be quite erratic
due 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 optimal
cash to be held at each bank on a daily basis. In this context, a general rule
of 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 observed
amounts 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 as
well 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 banks in the Eighth District (U.S.) have not been manag-
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, carrier parameters, demand patterns and other physical constraints needs
72 JOURNAL OF ASIA-PACIFIC BUSINESS

to be developed. Whether cash holding costs are minimized depends a great


deal on the quality of the modeling (Ashford, 2000).
To this extent it is worth noting that the major cost drivers in any cur-
rency management environment relate to cash holding, carrier activity
and general cash handling. These are competing costs and the aim is to
find the right cash ordering and clearing strategies that minimize the total
costs.
Baxter and Daniel (1999) indicated that establishing a cost to holding cash
was important because it provides a benchmark for bankers and other cash in-
tensive organizations to reengineer their processes. To this extent, they identi-
fied the following as the main cost elements of cash holding.

i. interest rate lost (cost of storage)


ii. transport cost of replenishments (cost of ordering)
iii. security (cost of storage)
iv. cost of insurance/fraud (cost of storage)

TRENDS IN MALAYSIAN DEPOSITORS’


DEMAND FOR CASH

Allen (1998) had used the ratio of commercial bank vault cash to de-
mand deposits as a proxy for the depositors’ or public demand for cash.
High values of this ratio may indicate either high depositors’ demand for
currency or a conservative cash management policy on the part of the
commercial banks. On the other hand, low values of this ratio may either
indicate low depositors’ demand for currency or a more prudent cash man-
agement policy on the part of commercial banks.
As can be seen from Table 1 and subsequently illustrated in Figure 1,
the vault cash of Malaysian commercial banks as a percentage of demand
deposits appears to indicate a downward trend. This may indicate a de-
cline in the demand for cash or currency on the part of the Malaysian pub-
lic or an increasingly prudent cash holding policy on the part of
commercial banks. The former would appear to be a more plausible expla-
nation, in view of the developments which have been taking place in the
Malaysian economy. Research by Budhiraja and Latiff (1998) stated the
growing importance of information technology in the banking industry
has helped to reduce the need for carrying much cash and for banks to
maintain a large vault space. Technological advancements and innova-
tions in the area of information technology and telecommunications are
reshaping consumer behaviour and payment systems, which tend to devi-
Balachander, Santha, and Shanmugam 73

TABLE 1. Vault Cash as a Percentage of Demand Deposits

Year Cash at Demand Vault Cash Year Cash at Demand Vault Cash
Commercial Deposits as a Commercial Deposits as a
Banks (RM (RM Percentage Banks (RM (RM Percentage
million) million) of Demand million) million) of Demand
Deposits Deposits
(%) (%)

1959 51.3 465.7 11 1980 346.7 5326.2 7


1960 56.8 476.5 12 1981 393.3 6234.8 6
1961 48.7 497.3 10 1982 403.0 7223.5 6
1962 59.9 520.0 12 1983 532.5 8062.5 7
1963 54.6 556.5 10 1984 587.0 8088.3 7
1964 68.5 664.7 10 1985 553.2 7950.4 7
1965 82.6 713.8 12 1986 565.6 7598.2 7
1966 84.3 795.0 11 1987 607.0 9017.3 7
1967 87.6 791.8 11 1988 660.8 10032.9 7
1968 92.2 920.3 10 1989 729.7 12762.1 6
1969 89.8 991.4 9 1990 1164.7 15024.8 8
1970 96.3 1068.1 9 1991 1025.3 16650.5 6
1971 84.0 1077.6 8 1992 1031.6 19068.4 5
1972 90.6 1485.9 6 1993 1115.2 29279.9 4
1973 110.4 2030.3 5 1994 1248.4 31777.4 4
1974 151.2 2081.8 7 1995 1434.1 36300.5 4
1975 152.9 2197.4 7 1996 2032.9 44534.8 5
1976 161.8 2728.3 6 1997 3098.5 45800.7 7
1977 185.3 3190.6 6 1998 2295.0 36792.5 6
1978 218.5 3801.9 6 1999 2702.9 48413.3 6
1979 267.6 4548.9 6 2000 2814.7 54627.2 5

Source: Money and Banking in Malaysia (1994), BNM Monthly Statistical Bulletin (2000)

ate from extensive use of cash (Suganthi et al., 2001). This is clearly repre-
sented by the increasing use of credit cards, charge or debit cards and, of
late, smart cards by Malaysian consumers.
In addition, businesses’ need for large volumes of cash for salary pay-
ments too have been reduced via the banking services where employee
salaries are credited directly into their accounts and withdrawals are made
based on needs by the employees from automated teller machines
(ATMs). Automated teller machines have also reduced the precautionary
74 JOURNAL OF ASIA-PACIFIC BUSINESS

FIGURE 1

Vault Cash-Demand Deposit (%) Trends in Vault Cash as a Percentage of Demand Deposits

14

12
10

8
6

4
2

0
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
Year

demand for cash since ATMs are widespread and operate almost 24 hours
a day. This finding certainly has implications for commercial banks’ vault
cash management policies. If the demand for cash is actually decreasing,
then the obvious question that arises is whether the cash held at banks are
actually optimal or are they far beyond requirements resulting in idle cash
and hence wasteful utilization of a useful resource.

SEASONAL VARIATIONS
IN BANK WITHDRAWALS AND DEPOSITS
In relation to cash withdrawals and deposits at commercial banks, the
seasonal variations can be classified as day of the week variations, month
of the year variations and time of the month variations. In this context, the
deposits and withdrawals pattern over the week can be expected to vary
according to the day of the week. Furthermore, since Malaysia is a land of
numerous festivities occurring in various months of the year, the banking
business activities can also be expected to vary according to the month of
the year. Finally, the consumer behavioral patterns in relation to deposits
and withdrawals may vary at different periods of the month and thus the
time of the month can also influence these cash flows. The seasonal varia-
tions in the demand for and supply of cash at commercial banks would
certainly have implications for the efficient vault cash management of
these institutions. Each one of these seasonal components will thus be an-
alyzed in the following sections.
Balachander, Santha, and Shanmugam 75

Day of the Week Effect on Bank Withdrawals and Deposits

The day of the week effect on the withdrawals and deposits are ana-
lyzed by using the one-way ANOVA technique. This analysis basically
involves the testing of the following hypotheses for the withdrawals and
deposits, respectively.

Day of the Week Effect on Bank Withdrawals

The result of the one-way ANOVA test on the day of the week effect on
commercial bank withdrawals is presented in Table 2. The results indicate
a p-value of 13.6%, which is greater than the 5% level of significance.
Therefore, the null hypothesis is not rejected and it can be concluded that
there is no evidence of differences in the mean daily withdrawals among
the six days of the week. Thus, the results show an absence of a significant
day of the week effect on the withdrawals at these sample branches.

Day of the Week Effect on Bank Deposits

The results of the one-way ANOVA test on the day of the week effect
on commercial bank deposits is presented in Table 3. The results indicate
a p-value of greater than 5% level of significance. Therefore, the null hy-

TABLE 2. Summary of ANOVA Test Results for the Day of the Week Effect on
Withdrawals

Source Sum of Squares df Mean Square F-value p-value


Between Days 1.90719E+12 5 3.81439E+11 1.696 0.136
Within Days 6.47909E+13 288 2.24968E+11
Total 6.66981E+13 293

TABLE 3. Summary of ANOVA Test Results for the Day of the Week Effect on
Deposits

Source Sum of Squares df Mean Square F-value p-value


Between Days 6.3028E+12 5 1.26056E+12 2.125 0.063
Within Days 1.70832E+14 288 5.93166E+11
Total 1.77135E+14 293
76 JOURNAL OF ASIA-PACIFIC BUSINESS

pothesis is not rejected and it is concluded that there is no evidence of dif-


ferences in the mean daily deposits among the six days of the week. Thus,
the results show an absence of a significant day of the week effect on the
deposits, which is similar to the result obtained in the case of withdrawals
(see Figure 3).
Month of the Year Effect on Bank Withdrawals and Deposits
The month of the year effect on the withdrawals and deposits are also
analyzed using the one-way ANOVA technique. This analysis basically
involves the testing of the following hypotheses for the withdrawals and
deposits, respectively.
Month of the Year Effect on Bank Withdrawals
The results of the one-way ANOVA test on the month of the year effect
on commercial bank withdrawals is presented in Table 4. The results indi-
cate a p-value of smaller than 5% level of significance. Therefore, the null
hypothesis is rejected and it can be concluded that there is evidence of
monthly seasonal effects on withdrawals.
Since the null hypothesis was rejected, then according to Levine et al.
(1999), the Tukey-Kramer procedure is used to determine exactly which
of the monthly means were significantly different from one another. The
findings are presented in Table 5.
The entries in Table 5 are the mean differences between all possible
pair-wise combinations of the mean monthly withdrawals. The results in-
dicate that the mean monthly demand is maximized in May and mini-
mized in November. The pattern of variations in the mean monthly
withdrawals is illustrated in Figure 2. The largest amount of withdrawals
in May could be due to the long vacation granted to schools and colleges.
Holiday makers would no doubt withdraw their savings to go on spending
sprees. Meanwhile, withdrawals are smaller in November indicating that

TABLE 4. Summary of ANOVA Test Results for the Month of the Year Effect on
Withdrawals

Source Sum of Squares df Mean Square F-value p-value


Between Months 2.74458E+13 11 2.49508E+12 17.925 0
Within Months 3.92523E+13 282 1.39192E+11
Total 6.66981E+13 293
TABLE 5. Summary of the Tukey-Kramer Analysis

Months January February March April May June July August September October November December
January 2397544.55 2376509.43 244316.68 272838.64 152406.22 224944.13 2473355.07 2382695.05 2458815.60 2512275.37 2334579.42
February 397544.55 21035.12 641861.23 670383.19 549950.77 622488.68 275810.52 14849.49 261271.05 2114730.82 62965.12
March 376509.43 221035.12 620826.11 649348.08 528915.65 601453.56 296845.64 26185.62 282306.17 2135765.93 41930.01
April 2244316.68 2641861.23 2620826.11 28521.96 291910.46 219372.55 2717671.75 2627011.74 2703132.28 2756592.05 2578896.10
May 2272838.64 2670383.19 2649348.08 228521.96 2120432.42 247894.51 2746193.71 2655533.70 2731654.24 2785114.01 2607418.07
June 2152406.22 2549950.77 2528915.65 91910.46 120432.42 72537.91 2625761.29 2535101.28 2611221.82 2664681.59 2486985.65
July 2224944.13 2622488.68 2601453.56 19372.55 47894.51 272537.91 2698299.20 2607639.19 2683759.73 2737219.50 2559523.55
August 473355.07 75810.52 96845.64 717671.75 746193.71 625761.29 698299.20 90660.01 14539.47 238920.30 138775.65
Septem- 382695.05 214849.49 6185.62 627011.74 655533.70 535101.28 607639.19 290660.01 276120.54 2129580.31 48115.63
ber
October 458815.60 61271.05 82306.17 703132.28 731654.24 611221.82 683759.73 214539.47 76120.54 253459.77 124236.18
November 512275.37 114730.82 135765.93 756592.05 785114.01 664681.59 737219.50 38920.30 129580.31 53459.77 2177695.94
December 334579.42 262965.12 241930.01 578896.10 607418.07 486985.65 559523.55 2138775.65 248115.63 2124236.18 2177695.94
significant at 5%

77
78 JOURNAL OF ASIA-PACIFIC BUSINESS

FIGURE 2

Withdrawals Deposits

H0: mW, Monday = mW, Tuesday = ... = mW, Saturday H0: mD, Monday = mD, Tuesday = ... = mD, Saturday

H1: Not all mW's are equal H1: Not all mD's are equal

Where Where

mW = average daily withdrawals mD = average daily deposits

FIGURE 3

Withdrawals Deposits

H0: mW, January = mW, February = ... = mW, December H0: mD, January = mD, February = ... = mD, December

H1: Not all mW's are equal H1: Not all mD's are equal

Where Where

mW = average monthly withdrawals mD = average monthly deposits

people are spending less in order to save for the coming festive seasons of
Christmas, New Year, Chinese (Lunar) New Year and the Hari Raya
(Muslim) festivals in December and January.

Month of the Year Effect on Bank Deposits

The results of the one-way ANOVA test on the month of the year ef-
fects on commercial bank deposits are presented in Table 6. The p-value
of smaller than 5% level of significance indicates that there is evidence of
significant monthly seasonal effects on deposits.
This result can also be seen in the time series plot of the mean monthly
deposits in Figure 5.
A comparison of Figure 4 and Figure 5 reveals a great deal of similarity
between the pattern of mean monthly withdrawals and mean monthly de-
posits which is maximized in May and minimized in November.
Balachander, Santha, and Shanmugam 79

TABLE 6. Summary of ANOVA Test Results for the Month of the Year Effect on
Deposits

Source Sum of Squares df Mean Square F-value p-value


Between Months 1.41181E+14 11 1.28347E+13 100.668 0
Within Months 3.59535E+13 282 1.27495E+11
Total 1.77135E+14 293

FIGURE 4

Mean Monthly Withdrawals

1400000

1200000

1000000
800000
RM

600000

400000
200000

0
Dec-97 Jan-98 Feb-98 Mar-98 Apr-98 May-98 Jun-98 Jul-98 Aug-98 Sep-98 Oct-98 Nov-98
Month

FIGURE 5

Mean Monthly Deposits

3000000

2500000

2000000
RM

1500000

1000000

500000

0
Dec-97 Jan-98 Feb-98 Mar-98 Apr-98 May-98 Jun-98 Jul-98 Aug-98Sep-98 Oct-98 Nov-98
Month
80 JOURNAL OF ASIA-PACIFIC BUSINESS

Time of the Month Effect on Bank Withdrawals and Deposits

Finally, the third seasonal effect to be investigated in this study is the


time of the month effect on cash withdrawals and deposits. Each month is
divided into three time periods as shown below:
Since salaries and most bills are paid at the beginning of the month
(first 10 days) large withdrawals can be expected at this time of the month.
Similarly the deposits can also be expected to be high during the start of

Start Middle End


First 10 days Next 10 days Last 10 days

the month as a result of receiving incomes during this period of time.


By the end of the month, individuals would have gradually exhausted
their funds and hence banking activities can be expected to be low. In view
of this intuitive behavioral pattern the time of month effects on cash with-
drawals and deposits are examined.

Time of the Month Effect on Bank Withdrawals

Table 7 presents the results of the ANOVA test for the time of month
effect on bank withdrawals. The results indicate a significant time of
month effect on withdrawals. The plot of the mean withdrawals for the
three time periods in Figure 6 indicates a sharp decline in withdrawals dur-
ing the middle of the month. The withdrawals are high during the end of
the month because it is the period in which salaries are credited into one’s
account. However, the withdrawals would be much higher at the begin-
ning of next month because the salaries are only credited towards the very
end of the month.

Time of the Month Effect on Bank Deposits

Table 8 presents the results of the ANOVA test for the time of the
month effects on bank deposits. The results indicate a significant time of
the month effect on deposits. The plot of the mean deposits for the three
time periods, which is shown in Figure 5, indicates a sharp decline in de-
posits during the middle of the month. This might imply that deposits are
made basically at the start and end of the month when salaries and receiv-
Balachander, Santha, and Shanmugam 81

TABLE 7. Summary of ANOVA Test Results for the Time of the Month Effect
on Withdrawals

Source Sum of Squares df Mean Square F-value p-value


Between Months 3.91672E+12 2 1.95836E+12 9.077 0
Within Months 6.27814E+13 291 2.15744E+11
Total 6.66981E+13 293

FIGURE 6

Time of the Month Effect on Withdrawals

1200000

1000000

800000
RM

600000

400000

200000

0
Beginning Middle End
Time of the Month

ables are collected. This is similar to the pattern observed for withdrawals
(see Table 8 and Figure 7).

CONCLUSIONS AND RECOMMENDATIONS

In line with developments taking place in Malaysia in relation to infor-


mation technology and telecommunications, the behavioral patterns of
consumers are changing towards being less cash oriented. This is clearly
indicated in the declining ratio of cash to demand deposits, which is used
as a proxy to measure the general demand for cash in the Malaysian econ-
omy.
The study shows no significant statistical evidence to indicate that bank
withdrawals and deposits vary according to the day of the week. This basi-
cally indicates that withdrawals in each day are rather similar. This is also
82 JOURNAL OF ASIA-PACIFIC BUSINESS

TABLE 8. Summary of ANOVA Test Results for the Time of the Month Effect
on Deposits

Source Sum of Squares df Mean Square F-value p-value


Between Months 4.57811E+12 2 2.28905E+12 3.86 0.022
Within Months 1.72557E+14 291 5.92978E+11
Total 1.77135E+14 293

FIGURE 7

Time of the Month Effect on Deposits

1800000
1600000
1400000
1200000
1000000
RM

800000
600000
400000
200000
0
Beginning Middle End
Time of Month

true in the case of deposits. With regards to the month of the year effect,
both the withdrawals and deposits were found to exhibit similar signifi-
cant trends with the largest amount of both withdrawals and deposits oc-
curring in May. This coincides with the school holidays which appear in
this month.
Finally, in relation to the time of the month effect, both withdrawals
and deposits appear to be high at the beginning and end of the month.
Moreover, these variations were found to be significant for both the cases
of withdrawals and deposits. The above findings imply that commercial
banks’ daily cash flows are not uniform but do indicate systematic and
regular fluctuations which can be traced and hence be used for predictive
purposes.
Now, the paper commenced with the assertion that rule of thumb blan-
ket vault cash management policies would not be optimal, especially if the
commercial banks’ withdrawals and deposits are uncertain and exhibit
systematic variations or seasonal effects. In the presence of such seasonal
variations, a more dynamic forecasting model will be required for effi-
cient vault cash management. Thus, by analyzing the seasonal variations
Balachander, Santha, and Shanmugam 83

in commercial banks’ withdrawals and deposits, this study has high-


lighted the inadequacy of simple rule of thumb blanket vault cash manage-
ment policies.

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