Business Finance

Financial institutions

A financial institution is an establishment that conducts financial transactions

such as investments, loans and deposits
The financial sector is made up of agencies such as:
1. Central bank,
2. Commercial banks,
3. Non bank financial institutions
• Credit unions
Financial Institutions cont..
• Insurance companies-pool risk by collecting premiums from a
large group of people who want to protect themselves and/or their loved ones
against a particular loss, such as a fire, car accident, illness, lawsuit, disability or
death.
• Building societies e.g. Victoria Mutual (offer mortgages and
demand-deposit accounts)
4. Micro-lending agencies (lend small loans to individuals who have little to no
collaterals) e.g Access and World Net
5. Government agencies responsible for the oversight of specific functions
for the government e.g. MOF which has responsible for overseeing and regulating the
collection and allocation of public revenue and create a society that promotes a better
standard of living for all citizens by effectively managing the economy and promote
economic growth.
Functions offered by Financial
Institutions
1. Loan and Credit facility
A facility is an agreement between a corporation and a public or private lender that allows
the business to borrow a particular amount of money for different purposes for a short
period of time. The loan is for a set amount and does not require collateral. The borrower
makes monthly or quarterly payments, with interest, until the debt is paid in full. A facility
is especially important for companies that want to avoid things such as laying off workers,
slowing growth, or closing down during seasonal sales cycles when revenue is low. . Types
of facilities include overdraft services, deferred payment plans, lines of credit, revolving
credit, term loans, and letters of credit. Facility is essentially another name for a loan taken
out by a company.
Functions offered by financial
institutions ….
(2) Savings and deposits;
A savings account is an interest-bearing deposit account held at a bank or other financial
institution that provides a modest interest rate. The financial institutions may limit the
number of withdrawals you can make from your savings account each month
 Bank deposits consist of money placed into banking institutions for safekeeping. These
deposits are made to deposit accounts such as savings accounts, checking accounts and
money market accounts. The account holder has the right to withdraw deposited funds, as
set forth in the terms and conditions governing the account agreement.
Functions offered by financial
institutions ….
3) Making payments;
Financial institutions will make payment on behalf of the client. This may be
done through:
 -Standing order - where the banks takes the amount required from the clients
account and make the required payment.
 -Mobile Wallet- this is essentially an app running on a mobile phone or tablet
use to manage mobile commercial activities such as supposing payment cards
(credit and debit) when making purchases
 - Credit card, debit card, Electronic Fund transfer,
Functions offered by financial
institutions ….
(4) Investment:
Investment involves putting money into some form of assets with the aim of making a
financial gain that is different and larger than interest. Investment involves committing
money into monetary assets such as stocks and shares.
 Stock is a general term that describes the ownership of certificates in any company
 Shares refers to ownership of certificates of a particular company
 Bonds are a debt security that has a similarity to IOU. Borrowers such as large
companies and government issues bonds to raise money from investors willing to
lend for a set period of time. The longer the time the greater the returns. The rate
of interest paid on bonds is significantly higher than on other interest-bearing
investments.
 Investment trust are companies that takes the money of those who invest in their
companies and reinvest in other companies.
Services offered by financial institutions

(a) night safe deposits; This facilitates late bankers

hence ensuring extended business hours (for maximum
/optimal profits)
(b) online banking; gives you the ability to manage
money online with your mobile device or computer.
There’s no need to visit a bank branch, and you can do
what you need to do when it’s most convenient for
you. They can be easier to use, they’re free or
inexpensive, and they’re better for tracking spending
Services offered by financial institutions

(c) advisory services; give advice to

businessmen/firms about (viable) investments and
sound financial management.
(d) credit and debit cards; Debit cards allow bank
customers to spend money by drawing on funds that
they have deposited at the bank. Credit cards allow
consumers to borrow money from the card issuer up
to a certain limit in order to purchase items or
withdraw cash
Services offered by financial institutions

(e)trustee work; More generally, 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. In both cases,
the trustee has a fiduciary responsibility to act on
behalf of the beneficiary or client, rather than in
his/her own interests.
Services offered by financial institutions

(f) deposit boxes; Safe deposit boxes are generally located in

banks, post offices or other institutions. Safe deposit boxes
are used to store valuable possessions, such as gemstones,
precious metals, currency, marketable securities, luxury
goods, important documents (e.g. wills, property deeds, or
birth certificates), or computer data, that need protection
from theft, fire, flood, tampering, or other perils. An
individual can purchase insurance for the safe deposit box in
order to cover e.g. theft, fire, flooding or terrorist attacks.
Services offered by financial institutions

(g) ATM/ABM services; An automated teller machine (ATM) is an

electronic telecommunications device that enables customers of
financial institutions to perform financial transactions, such as cash
withdrawals, deposits, transfer funds, or obtaining account information,
at any time and without the need for direct interaction with bank staff.
ATMs are known by a variety of names, including automatic teller
machine in the United States, (ATM, American, British, Australian,
Malaysian, South African, Singaporean, Indian, Maldivian, Hiberno,
Philippines and Sri Lankan English), often redundantly ATM machine,
automated banking machine (ABM, Canadian English. Although ABM is
used in Canada, ATM is still very commonly used in Canada and much
Canadian organization used ATM over ABM
Services offered by financial institutions

(h) e-trade – E-trade is an online, relatively reliable stock

brokerage firm which offers investors the ability to buy and sell
securities such as stock, mutual funds, bonds and do online
trading research without any interaction with a broker.
(i) settlement services; financial settlement means to offset an
outstanding future obligation with a financial or cash transfer

Settlement is the actual exchange of money, or some other value, for the securities
Services offered by financial institutions

(j) remittance services. A remittance is a transfer

of money by a foreign worker to an individual in
their home country. Money sent home by migrants
competes with international aid as one of the
largest financial inflows to developing countries
Role and function of financial regulatory
bodies
Financial Regulatory Bodies are government
organizations such as:
i) Central Bank.
(ii) Jamaica Deposit Insurance Company (JDIC).
(iii) Financial Services Commission (FSC)
Role and Function of the Central Bank

The Central Bank, the Bank of Jamaica (BOJ) was established by the
Bank of Jamaica Law, 1960. Consistent with many other countries, the
BOJ falls within the portfolio of the Minister of Finance and is the
monetary authority in Jamaica.
The Bank of Jamaica Act states the objectives as follows:
1. Issuance and Redemption of notes and coins
The Bank of Jamaica issues and redeems bank notes and coins, in order
to meet the public's demand for cash. The BOJ is the sole issuer of the
country's legal tender - the Jamaica dollar.
Role and Function of the Central Bank …

2. The BOJ as banker to the Government.

As banker to the Government, the Bank: administers some of
the Government's main deposit accounts; services the
Government's external public debts; and. acts as agent for
the Government. This involves the maintenance of accounts
of the Central Government and the subsidiary accounts of
some public sector agencies. As an agent of the Government,
the Bank conducts the settlement of GOJ securities and also
operates an auction for certain GOJ securities
Role and Function of the Central Bank …

3. Banker to Commercial Banks

As banker to commercial banks the BOJ exercises oversight
responsibilities for a clearing system, which provides for the
clearance and settlement of transactions between banks.
The Bank also influences the level of liquidity in the financial
system by varying the percentage of prescribed liabilities
that commercial banks must maintain at the Bank as a
minimum cash reserve. The Bank also supplies liquidity to
the system in the event of a general shortage of funds.
Role and Function of the Central Bank

4. Reserve Management
The Bank is responsible for the management of the
country's foreign exchange reserve. These reserves
are held for the purpose of cushioning the effects of
adverse demand or supply shocks. The reserves are
held primarily in United States (US) dollars, as it is
the currency to which the Jamaica dollar is aligned.
Role and Function of the Central Bank

5. Formulation of exchange rate policy

Jamaica's exchange rate policy is aimed at ensuring relative
stability in the external value of the local currency. In
pursuit of this objective, the Bank adopts a three-fold
approach to the management of the foreign exchange
market. It: monitors and undertakes market surveillance;
collects data and disseminates information on market
activities; and acts as participant in the market as a means
of creating orderly conditions
Role and Function of the Central Bank

6. Implementation of Monetary Policy

Monetary policy refers to the actions taken by a Central Bank
to affect financial conditions in the economy, in pursuit of
the broader objectives of low-price inflation, sustainable
growth in real output and high employment
Role and Function of the Central Bank

7. Lender of last resort

There are times when commercial banks experience
financial difficulties and cannot obtain credit from
other financial institutions. The Central bank may
step in as a lender of last resort to assist
commercial banks and prevent them from collapsing
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
The Corporation’s primary objective is to establish and
manage a Deposit Insurance Scheme to protect depositors
from loss, up to a specified limit. Its main goal is to provide
insurance against loss of depositors’ funds through the
management of the Deposit insurance Fund
Financial Services Commission (FSC)

This is a regulatory body charged with supervising and

regulating a country’s financial system to ensure the safety,
stability and integrity of the system. It is done through close
supervision and regulation of 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 also handles customer complaints and provides the
public with important financial information
Role and function of regulatory bodies

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.
Commercial Bank

Commercial banks accept deposits and provide security and

convenience to their customers. Part of the original purpose
of banks was to offer customers safe keeping for their
money. By keeping physical cash at home or in a wallet,
there are risks of loss due to theft and accidents, not to
mention the loss of possible income from interest. With
banks, consumers no longer need to keep large amounts of
currency on hand; transactions can be handled with checks,
debit cards or credit cards, instead
Commercial bank …

Commercial banks also make loans that individuals and

businesses use to buy goods or expand business operations,
which in turn lead to more deposited funds that make their
way to banks. If banks can lend money at a higher interest
rate than they have to pay for funds and operating costs,
they make money.
Relationship between central bank and
commercial banks
1. Variations in the liquid assets ratio; (A liquid asset is
something you own that can quickly and simply be converted into cash while
retaining its market value)

The central bank stipulates how much deposits and other

specified liabilities commercial banks and other financial
institutions are required to hold in cash. This serves to
restrict the commercial banks against unsound credit
policies. The central bank may increase or decrease the
liquid asset requirements influencing the amount of money
in circulation and the availability of funds to be lent out.
Relationship between central bank and
commercial banks
(2) Vary or adjust the bank rate
Bank rate or discount rate is the rate of interest which the central bank
charges for loans or advances made to commercial banks and other
financial institutions. This rate is important because all other rates of
interest charged by financial institutions in the country are based on it.
The bank can make changes in the bank rate in order to affect the
economy. If people are spending too much, leading to an inflationary
situation, the government through the central bank can increase the
bank rate. The commercial banks will in turn increase their rates of
interest making borrowing more expensive; thus, resulting in less money
being borrowed from banks.
(3) Changing the minimum reserve requirements.
A legal requirement that a certain percent of the
deposit of the commercial bank must be held as
interest free deposit at the central bank. This
action by the central bank can severely affect the
lending ability of commercial banks. With the
commercial banks reduce ability to lend there will
certainly be reduced public demand for loans.
(4) Moral Suasion
By regularly meeting with financial
institutions and giving them clear directions
and guidelines, the central bank can
persuade them to follow these guidelines
rather than face measures defined by statue
Evaluation 1

 In recent times, the Caribbean island of Woodwater has been having problems with
its financial institutions. Many customers have lost faith in the banking system and
are withdrawing their money and purchasing shares on the stock market and real
estate. The government, through the Central Bank, has stepped in to prevent a
collapse of the commercial banking sector
 Distinguish between commercial banks and the central Bank (4 marks)
 Outline FOUR types of services provided by commercial banks (4 marks)
 Explain ONE way in which customers may benefit from EACH of the services outlined
in (B) above (4 marks)
 Outline TWO differences between purchasing shares on the stock market and saving
in a commercial bank (4 marks)
 Discuss TWO ways in which the Central Bank can intervene in the banking sector to
prevent a collapse (4 marks)
Evaluation 1

 Purr Chase would like to buy goods on credit from Sales Plus Limited, a popular
hardware store in her community. Nevados National Bank (NNB), the local bank, has a
variety of credit plans available to assist persons like Purr Chase to make purchases
 Describe THREE types of credit methods that Nevados National Bank (NNB) can provide
to enable Purr Chase to buy goods from Sales Plus Ltd. (6 marks)
 State THREE conditions the Purr Chase must satisfy in order to obtain a loan from NNB
(3 marks)
 Outline THREE methods of payment that Purr Chase could use to repay her loan at NNB
(3 marks)
 Explain TWO ways by which the Central Bank could reduce the capacity of NNB to
make loans to its customers (4 marks)
 Identify ONE institution that could provide Purr Chase with credit facilities similar to
those provided by commercial banks (1 mark)