Chapter 24
The Role and Function of Financial Institutions
A commercial bank is a financial institution
that grants loans, accepts deposits, and offers
basic financial products such as savings
accounts and certificates of deposit to
individuals and businesses. It makes money
primarily by providing different types of loans
to customers and charging interest
Commercial banks play an important role in the
smooth running of the economy
Deposit account: a bank account used to store + Registered Mail: Suitable for sending and
money on which interest is paid
Overdraft: a borrowing arrangement where a
current account holder is allowed to spend more + Post Boxes: Upon request and payment, post
money than there is in the account, up to an
agreed limit
Post office: most countries in the world have
post office, the services they offer in each
country may be different
Financial role: post offices have a financial role + Courier or Parcel Service: For sending /
in most countries, their financial services are
especially valued in rural communities.
Payments: a post office can be used to make
payments. A number of payment options may be Banking is extremely important to trade
available
Savings account: a bank account into which
account holders pay a regular amount each
month to build up savings. The account pays
interest, likely to get interest on their deposits + Helps to lend money to business when needed
and usually have access to their money on
demand
Current accounts: a cheque account used to
handle payments and receipts for account
holders, there operate like the current
accounts of banks
Loans and mortgages: possible to borrow
money from a post office
Foreign currency: foreign currency can be
purchased from a post office, can be ordered
over the counter of might be delivered to
individuals or businesses
Credit card: issued by the post office, allow
user to buy goods and pay for them later
Types of Banks
(1) Central Bank -There is only one Central
Bank in a country.
(2) Commercial Banks- There are many
commercial banks in a country.
Function of a central bank
+ issue money (notes and coins)
+ ensure stability of banking system
+ lender of last resort to commercial banks
+ lender of last resort to government
+ monetary policy (set interest rates)
Commerce
Main Functions or Services provided by the
Commercial Banks
1. Accepting Deposits
2. Lending Money
3. Means of Payment
4. Other services
Communication role
Mail Services offered by the Post Office
+ Ordinary Mail: To send and receive letter.
receiving sensitive information.
+ Express Mail: Used to send documents in
urgency.
boxes are provided for people who don’t have a
permanent address.
+ Franked/Prepaid mail: on request and
payment franking machine that prints stamps are
issued.
+ Air Mail
receiving cargo of small size and weight- can be
tracked.
Importance of banking
+ It helps buyers and sellers to make payment
and collect money from each other quickly,
efficiently and safely
+ It provides a safe place for traders to keep
their money
so that trade can \ continue smoothly
Types of bank accounts: saving account, fixed
deposit account, current account
The saving account
- Allows the depositor to safe - keep the money
in the bank.
- The money in a savings account earns a small
interest.
- A passport is given to the person who opens
the savings account. Money is deposited or
withdrawn.
Advantages: money is kept from theft, fire,
robbery and floods, money deposited earns
interest, allowed to withdraw the money
whenever he requires it
Disadvantages: bank pays a lower rate of
interest on a savings account as compared to a
deposit account, depositor can not issue
cheques, overdraft facilities is not available to
a savings account holder
The Fixed Deposit Account
- Money deposited in this account cannot be withdrawn
for a certain period of time
- The depositor is entitled to earn interest according to
how long money is kept in the account
- The depositor is given a certificate of acknowledgement
by the bank which states the amount, rate of interest and
period of deposit agreed upon
- The depositor MUST withdraw money on expiry of period.
- Certificate is not transferable to other parties
- Advance notice must be given to the bank if money is
being withdrawn before the agreed period. If not,
depositor may lose all interest collected
Current accounts: are usually for businessmen and
daily transactions don't serve a purpose of saving
your investments. The transactions facility to this
account is so flexible that you can make innumerable
transactions in a day. Hence, the banks don't pay any
interest on your invested amount but it changes
certain service changes on such accounts
The drawer of a cheque, that is, the person who
issues the cheque, pays a stamp duty of ten cents
per used, as revenue for the government.A current
account holder can deposit any cheque from his
customers or debtors into his account for collection
by the bank on his behalf.
Leading of money to business
a bank lends money to businesses in the form of:
Bank overdraft
A bank overdraft is a way of lending money to the
customer by allowing him to draw a cheque up to an
agreed limit over and above the balances in his
current account. It is granted for a fixed period of
time
Bank loan
A bank loan is a fixed sum of money which is lent to
the customer on condition that the loan is repaid
with a fixed amount of money. The customer also has
to pay interest on the loan
Credit card
A credit card allows holders of the card to make
purchases on credit. The user will usually be billed at the
end of every month. Interest will be charged on the bill if
the user does not pay up within the payment time frame.
Advantage of credit card
- pay on credit card that is, no need to pay with your
own money immediately
- convenient, especially for travelers, as there is no need Benefits or advantages of debit card
to carry large amounts of cash to make payment
- some types of credit card are widely accepted
internationally
- it is a secure form of payment to the retailer as it
reduces the amount of cash it the amount of cash in the
retail shop and discourages theft
Disadvantages of credit cards to the retailer
- The retailer has to pay commission for every transaction - gifts on redeeming accumulated points
- The retailer will only get paid when the transaction is
authorized
- The retailer has to check and verify the authenticity of - coverage
the card
Disadvantages of credit card to the card holder
- The card holder might over spend
-There is credit limit on the card
-High interest will be charged on the outstanding balance - Night Safe Facilities
if the card holder does not pay the issuer (bank) on time
Automated teller machine
- The automated teller machine (ATM) is a machine that
allows a person financial transactions any time, without
the need of a bank teller
- The transaction that can be performed using the
machine include withdrawals, transfer of funds, request
for statement of account
Advantages: depositor with a fixed deposit
account can earn higher interest when
compared to the depositor with the savings
account, longer the agreed deposit period,
higher the interest earned, no recommendation
is required to open this account
Disadvantages: the depositor is not allowed to
withdraw money before the end of the agree
period, no interest will be paid, the person must
go personally to withdraw his money upon expiry
as the certificate is not transferable
Advantages and disadvantages
Advantages: money deposited in current accounts is
safe, payments can be made thought cheques, no
need to keep or carry about large sums of cash to
make payments
Disadvantages: money kept in the current account
does not earn any interest, bank changes changes a
fee for opening this account, recommendation is
needed for those who wish to open an account
Differences between a bank overdraft and bank loan
Bank overdraft:
- It is normally taken for a short period
- Rate of interests is higher because amount used is for a
short period
- Interests is charged daily on outstanding balance, that
is, on the actual amount overdrawn for the length of time
it is used
- Borrower must be holder of a current account
- Security has to be provided for large amounts of
overdraft
Bank loan:
- It normally taken for a long period
- Rate of interest is fairly low as the amount used is to be
paid over a long period of time
- Interest per annum is charges on the entire amount of
loan granted and for the length of period it is used
- Borrower need not to be a customer as long as security
provided
- Security in varies form may be have to be provided
A debit card (also known as a bank card, plastic card or
check card) is a plastic payment card that can be used
instead of cash when making purchases. It is similar to a
credit card, but unlike a credit card, the money is
immediately transferred directly from the cardholder's
bank account when performing any transaction.
- a prepaid card
- nominal annual fee is charged
- alternative mode for cash transactions
- immediate transfer of funds
- instant cash withdrawal from an ATM
- easy to carry, handle and manage
- earns bonus points for executing transaction
- cash bank offer
- free insurance
Other bank services
- Telebanking
- Bank Giro System (Credit transferred system)
- Safe Deposit Boxes
- Automatic Teller Machines (ATM)
- E-banking
Commerce
 Night Safe Facilities
Night Safe banking allows you to deposit with
the Bank 24/7 at most locations where this
facility is available.
- Save time
- It provides a fast, convenient and efficient
way for you to lodge deposits containing cash,
cheques and merchant envelopes using a Night
Safe wallet or Business Express Deposit
envelope without the need to be served by a
Customer Service Representative.
- Greater security
- Night Safes offer greater security and peace
of mind as you do not have to keep cash on your
business premises overnight.
- How does Night Safe banking work?
- Prepare your deposit in a Night Safe wallet or
a Business Express Deposit envelope
- Unlock the Night Safe and open drawer fully
- Place the wallet or envelope into the back of
the drawer
- Close the Night Safe drawer
- Reopen the Night Safe drawer to ensure the
wallet has dropped down into the body of the
safe
- Close and lock the Night Safe drawer.
- Night Safe locations
- Find a branch with night safe services by using
Advanced Search in our Locate Us tool.
Foreign Currency Exchange
Banks deal with foreign currencies. The
exchange rate is set by the bank:
- As the requirement of customers, banks
exchange foreign currencies with local
currencies, which is essential to settle down the
dues in international trade.
- Useful for customers who wish to travel
overseas for pleasure or for business
- Very useful for tourists
MOBILE BANKING
Mobile banking (also known as M-Banking, SMS
Banking) is a term used for performing balance
checks, account transactions, payments, credit
applications and other banking transactions
through a mobile device such as a mobile phone or
personal digital assistant (PDA)
Current mobile banking applications:
- SMS banking
- WAP Banking
- STK (Sim Toolkit) Banking
Banking Anytime, Anywhere
Digital banking enables you to produce basic
banking transactions like money transfer and bill
payments in just a few clicks. Some banks even
have their own mobile apps that let clients open
new accounts and deposit money online.
Internet banking
- Introduction
- Internet banking refers to the banking services
provided by the banks over the internet
- E-Banking includes;
- Paying of bills
- Fund Transfer
- Viewing Account Statement. etc…
Benefits for banks
- Larger customer coverage reducing the costs of
operations
- Promoting their services and products
internationally
- Increasing the customer satisfaction and
providing a personalized relationship with
customers
Benefit for customers
- Convenience 24 hours a day, seven days a week
- Cost reducing transfer fees
- Speed faster circulation of assets
- Competitiveness - fostering competition in
financial market
- Communicate easily
- Abolishing the uses of paper
- Offering one - stop - shop solutions
Disadvantages of internet banking
- Transaction problems
- High cost of technology
- Banking relationship
- Technical breakdown
- Security concern, like “hackers” accessing your
bank account
- Must have basic computer skills and internet
knowledge
Cashless society
Pros:
1. Reduces risk of violent crime
2. Reduces tax evasion
3. Harder for criminals who rely on cash
payments
4. Quicker transactions and shorter queues
5. Better hygiene
6. Reduces worthless square change
7. Can imposes cost on banks and firms
Cons
1. Many adults lack access to bank accounts
and credit cards
2. Privacy issues. Government gain more
control over citizens
3. Cash helps households manage finances
4. Freedom to choose would be take away
5. Cash has intrinsic and emotional value e-
cash doesn't

Benefit of online banking

- There are obvious benefits of online banking: the
generation next will certainly laugh when we tell them
people used to actually go to a bank to pay bills.
- Online banking is an easy, reliable and convenient way to
fulfill our banking needs. This robust banking facility
connects us with our bank at our convenience, we don’t
have to plan our day according to bank hours, no more
waiting in the queue and even you can check your balance
whenever you want.
- Technology has enabled numerous advantages and
overcome the traditional banking, offering the best of Commerce
banking experience on your fingertips