LECTURE 20

BUSINESS FINANCE

Financial Sector

The financial sector is made up of agencies such as:

 Government financing agencies

 Central bank,
 Commercial banks,
 Mortgage companies,
 Credit unions
 Insurance companies
 Building societies - A building society is a type of financial institution that provides
banking and other financial services to its members. Building societies resemble credit
unions in that they are owned entirely by their members.
 Micro-lending agencies – eg Island Finance
 Unit trust, stock market.
 Development banks (Caribbean Development Bank, Agricultural Development Bank)

A commercial bank- is a financial institution that provides a range of financial services to

individuals and business clients. They accept deposits and give loans. The bank pays a
percentage to the depositor as interest or gain on the deposit. In essence they borrow a surplus of
funds to lend to those who are experiencing a shortage.

Role of Financial Institutions

 Commercial bank accepts money deposits and therefore provides a safe place for saving
money.

 Offering loans and overdraft to persons who need financial assistance.

 Assisting customers to easily make payments through standing orders, current accounts
and debit cards.

 They also offer investment opportunities such as mutual funds, annuities and stocks and
bonds

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Services offered by Financial Institutions

 Commercial banks provide advisory services to clients who wish to borrow a loan to make

investments and persons who wish to purchase securities.

 Safety deposit boxes at the bank are used to store safely items that individuals deem as

highly valuable.

 Selling travellers cheques.

 Credit cards allows persons to purchase items by using funds that the bank makes available.

There is a limit to how much the bank makes available to credit card holders.

 Offer a variety of deposits- Money can be deposited in a current account upon which

cheques can be drawn or a fixed deposit account where a higher interest rate is earned.

Foreign currency can also be deposited.

 Credit facilities (loans) can be provided through deposits where through using a cash ration

a portion of the deposits are kept in the bank while the rest are loaned.

 Money Transfers (remittance services) from depositors account to another account. This
called a standing order. They also facilitate bank drafts and letters of credit.

 Trustee work - Any individual or company who manages assets on behalf of another. For
example, a bank may hire a trustee to distribute funds from a loan to the borrower.

 Offering settlement services such as authorizing credit card payments

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Cheques:

Essential data on a cheque:

 The date, payees name, the amount, the signature, personal cheque account number, other
data (counterfoil, branch number)

Types of cheques:

 Bearer cheques- Paid to the person who bears or presents the cheque.
 Order cheques – Paid to the person that the cheque instructs payment to.
 Open cheque – can be cashed over the counter and can be cashed by the wrong person
 Crossed cheque – can only be paid into a bank account.

Jamaica Deposit Insurance Company (JDIC).

JDIC works in close collaboration with the Bank of Jamaica (BOJ), the regulatory and
supervisory agency for deposit-taking financial institutions. It receives copies of the Bank’s on-
site examination reports as well as all other information relating to the safety and financial
soundness of insured institutions (Policyholders)

Financial Services Commission (FSC)

 The mandate of the Financial Services Commission (FSC) is to supervise and regulate the
securities, insurance and private pensions industries.
 In doing so the FSC oversees the registration, solvency and conduct of firms and
individuals doing business in the securities and insurance (Life and General) industries.
 The FSC oversees these entities by administering a number of statutes and accompanying
regulations.
 The FSC also handles customer complaints and provides the public with important
financial information

Supervisor of Insurance

To protect the interest of the public, whether as a consumer or third party. This is done through
the monitoring of insurance entities and pension administrators to ensure financial stability and
use of fair business practices while carrying out their business operations.

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Administration of the Insurance Act and Regulations

 Licensing of Insurance Companies and Insurance Intermediaries

 Ensure the payment of appropriate annual fees
 Monitor statutory departments and statutory funds
 Review annual financial statements submitted by insurers and intermediaries
 Ensure overall compliance by all licensed insurance entities with requirements of the
Insurance Act and Regulations

Role of regulatory bodies

To monitor, control and guide various industry sectors in order to protect consumers.

Functions of regulatory bodies:

To enforce regulations and licenses of various financial activities, including depository, lending,
collection and money transmission activities.

Functions of the Central Bank

 The Central Bank has the sole authority to issue notes and coins.

 The Central Bank is a banker to the government as it keeps the government accounts.

 It manages the national debt.

 It is a banker to all banks as commercial banks must keep an account with the central bank.

 A lender of last resort-The commercial banks and all other financial institutions can count on
the central bank for financial assistance.

 It is a financial agent for government. The government uses the Central Bank to carry out its
economic policies. These policies are known as monetary policies.

Relationship between the Central Bank and Commercial Banks

The Central Bank is the head of the financial system. All financial institutions including
commercial banks are regulated and monitored by the Central Bank.

All commercial banks must keep an account with the Central Bank. These balances are used for
cheque clearing purposes between banks. Payments for cheques between banks are set off at
the Central Bank’s clearing house. The Central Bank can also demand commercial banks to

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deposit a certain percentage of their total deposits with the central bank in order to control the
money supply. (Setting the cash reserve ratio)

The Central Bank is a lender of last resort and will aid commercial banks when needed. The
Central Bank dictates the interest rate that commercial banks can offer by setting the bank rate.
This is the interest rate set by the Central Bank and the rate at which commercial banks and the
Central Bank do business, e.g. loans offered by the Central Bank to commercial bank.

Direct controls and requests are also issued. These might include the reduction of loans to
particular industries. This could be the form of verbalised encouragement (moral suasion) or
measures such as increased interest rates on certain loans.

Central Bank may demand special deposits from the commercial banks, which are for fixed
time periods. Although these earn interest it means that there is less money for commercial banks
to lend out.

Strategies to Manage Personal Income

Subsequent to the deduction of taxes and other statutory payments the income earner must
manage his money to maximize its use. He must exercise and develop habits of careful spending
and saving techniques. A good money manager will budget.

1. A budget outlines how much of an individual’s income is to be spent on his various

expenses; it disciples an individual to live within the constraints of his personal income.
The process of preparing a budget involves the record keeping of past expenditures, and
making decision based on these about future expenditures. Priorities must be set to meet
basic needs and a systematic plan for savings to achieve future goals.

2. Financial advising provides financial advice or guidance to customers for compensation.

Financial advisors, or advisers, can provide many different services, such as investment
management, income tax preparation and estate planning.

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Sources of Short & Long Term Financing

Short-term capital may be accessed through the money market. Institutions in the money market
include commercial banks, merchant banks, credit unions and discount houses. Borrowers are
required to repay within a short-term e.g. 1 to 5 years.

Sources of Short term financing include:

 Personal sources eg. personal savings, credit cards and redundancy payments
 Trade credits and Promissory Notes
 Unsecured loans (no collateral required) and overdrafts
 Secured loans
 Loans from family
 Loans from government agencies such as NEDCO
 Advances from customers
 Crowd funding eg Kickstarter, Patreon

Long –term capital may be accessed through building societies, the stock exchange, unit trust
companies and development banks. Borrowers are given a much longer repayment periods e.g.
up to 20 years.

Sources of Long term financing include:

 Shares
 Secured loans
 Debentures
 Loans from government agencies
 Mortgages

3. Savings and Investments

Savings is defined as money set aside or not spent from ones personal income. Money saved is
most effective in an interest bearing facility such as a commercial bank to keep up with inflation
which reduces the value of money over time. Other forms of savings include, the credit union,
insurance and partner (meeting turn, sou sou, box hand).

Investment is defined as methods of increasing wealth. It differs from savings as it involves

risks. Earning from capital invested is usually much higher than interest earned on savings.

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Forms of investments include: unit trust companies, mutual funds, the stock exchange and
starting a business.

Types of bookkeeping systems

1. Single Entry - is a method of bookkeeping relying on a one sided accounting entry to
maintain financial information. Used for simplicity. Commented [A1]:
2. Double Entry - means that every business transaction will involve two accounts (or Commented [A2R1]:
more). Both a Debit and Credit entries will be used.

Financial Statements and their purpose

Income statement or Profit and Loss Statement

Allows owners, shareholders and partners and investors to identify whether or not the business is
profitable. Investors would only invest in a profitable business while owners must justify the
continuation of the business.

Balance Sheet or Statement of financial position

The Balance Sheet illustrates the businesses net worth through its assets and liabilities. If the Net
Assets are significant then there is little chance that the business will fail. Investors and owners
use this statement to assess the performance of a business.

Cash Flow Statement

This statement gives information on the liquidity of the business or its ability to possess and
retain liquid cash for the operation of a business. Liquid assets such as cash are important as
goods and services have to be acquired in order for a business to be successful. If a business cash
outflows are greater than its inflows then this indicates low level of performance for the business.