Non-interest income : the role, scope and strategic financial importance to Maltese retail banks

Abstract

Over this last decade various factors have forced banks to follow strategies to boost non-interest income streams, both in absolute terms and as a proportion of total income. Traditionally the business of banking has consisted in making long-term loans and funding these by issuing short dated deposits whilst non-interest income was a small part of most banks' earnings streams. However fundamental economic forces have undercut the role of traditional banks in financial intermediation, and the profitability of traditional banking activities has diminished in recent years. This led to a change in the traditional structure of banks' income, which used to rely heavily on net interest margin. In response to this changing financial environment, banks have increasingly turned to new, non-traditional, financial activities as a way of maintaining their position as financial intermediaries. This has enhanced the role of non-interest income. This thesis analyses the extent of this development, and its reality in the Maltese context. The analysis determines how the local banking industry has not been isolated from this development, and how the general increase in non-interest sources of income was important for Maltese retail banks sector to pursue with their strategic development, and to maintain their profitability in the country's changing financial environment.