Money and Banking 2

Commercial Banks

These are financial institutions that offer banking services with a profit motive.

Their activities are regulated by the Central bank.

Functions of commercial banks

i. Accepting deposits:

They accept deposit from members of the public
inform of current accounts, savings account and fixed deposit accounts.

Such accounts help individuals to keep money safely.

ii. Provision of safe means of payments:

They provide safe and reliable means of payment such as cheques, bank drafts, credit transfers, electronic funds transfers etc.

iii. Provision of loan facilities:

They provide loans to members in form of short term and long term.

These loans are repayable with interests thus
income to the banks.

iv. Facilitates foreign exchange payments:

They provide foreign exchange that is used in international trade.

They also make payments on behalf of their customers.

v. Provision of safe keeping of valuables:

They provide security for valuables to their customers at a fee

vi. Discounting bills of exchange:

This is process by which a bank accepts
bills of exchange and promissory notes from its customers in exchange of cash less than the face value of the bill or note.

vii. Provision of financial information:

- They advice their clients on financial matters affecting their businesses such as investment option and wise use of loans.

viii. Money transfer:

- They provide varied, safe and reliable means of money transfer. Such means include cheques, standing orders, credit transfers, bank drafts, letters of credit, credit cards, travelers cheques etc.

ix. Act as guarantors and referees:

- They act as guarantors to their customers who want to acquire credit facilities from other financial institutions.

x. Act as intermediaries:

- They act as a link between the savers and
borrowers.

xi. Credit creation:

- This is the process of creating money from the customer deposits through lending.

xii. Provision of trusteeship:

- They can manage a business on behalf of the
client especially if the client does not have managerial skills.

They can also manage the assets of the deceased client if there was no will.

Types of Accounts Offered by Commercial Banks

1. Current account

This is an account where money deposited can be withdrawn on demand by the customer by means of a cheque.

This means that money can be withdrawn at any time during the official working hours so long as the account has sufficient funds.

This account is also referred to as demand deposits.

Features characteristics of current accounts

Deposits of any amount can be made at any time.

Balances in this account do not earn any interest.

The account holder is not required to maintain a minimum cash balance in this account

Withdrawals can be at any time without giving and advance notice as long as the customer has sufficient funds.

Cheque books are issued to the account holder to be used as a means of payment/ cheques are usually used to withdraw money from the account.

Monthly bank statements are issued to the account holder.

Overdraft facilities are offered to the account holders’ i.e the bank can allow customers to withdraw more money than they have in their accounts.

Advantages of current account
• No minimum balance is maintained hence the account holder can access all his/her money.

• Withdrawals can be made at any time.

• Transactions are made easier by use of cheques for example; one does not have to go to the bank in order to make payment.

• Overdraft facilities are available..

• It is possible to deposit any amount at any time during the office hours.

• Use of cheques as means of payment serves as evidence of payments made.

• Payments can be done even if there are insufficient funds in the account using post dated cheques.

• The account holder can withdraw any amount at any time without notice as long as there are sufficient funds in the account.

Disadvantages of current account

• Lengthy procedures of opening the account.

• The account holder does not earn any income since the balances in the current account does not earn interest.

• Initial deposit when opening the account is usually high hence discourages prospective customers.

• Customers are not encouraged to save

since they can access their money at any time.

• Ledger fees are charged on the account making the operations of the account expensive.

2. Savings account (deposit account)

This is an account operated by individuals and firms that have money to save.

Features of Savings account

There is minimum initial deposit that varies from bank to bank.

A minimum balance is maintained at all times.

The withdrawals are up to a certain maximum within a given period.
Withdrawal above this maximum will require notice.

Account holders are issued with a pass book or a debit card (ATM card) for deposits and withdrawals.

Overdraft facilities are not allowed.

Ordinarily, withdrawals across the counter can only be done by the account holder.

The balance on the account above a certain minimum earns some interest.

Advantages of Savings account

• Customers are encouraged to save because of the restricted withdrawals.

• There are relatively low banking charges.

• Initial deposit is usually low as compared to other accounts.

• The balances earn interest to account holder hence an incentive to save.

• ATM facilities have made account operations very convenient to customers.

Disadvantages Savings account

• A minimum balance must be maintained at all times and the customer is denied access to that money.

• For across the counter withdrawals, it is only the account holder who can withdraw cash.

• Withdrawals are restricted and sufficient notice is required before large amounts are withdrawn.

• The account holders do not enjoy services such as cheque books and overdraft facilities like the current account holders.

• Easy access to the money through ATM cards encourages overdrawals.

• Anybody who knows the pin of the card (ATM card) can withdraw money from the account.

Requirements for opening an account

The following are some of the requirements for opening either a current account or a savings account:

i. Photocopies of identification documents such as National Identity Card or Passport.

ii. Passport size photographs (number varies from bank to bank). Some banks are nowadays taking the photographs instead of the customers providing them.

iii. For current account holders, an introductory letter from an existing customer from the prospective customer’s employer.

iv. Filling in the application form provided by the bank.

v. Signing of the specimen signature cards. Usually two.

NB: Once these requirements are fulfilled, the bank allocates the customer an account number, upon payment of an initial deposit.

3. Fixed deposit account

This account is also known as time Deposit account. It is maintained by those who have money not meant for immediate use.

Once money is deposited, there are no withdrawals until the time expires.

Advantages of Fixed deposit account

Interest earned is relatively high as compared to savings account.

There are no bank charges to the account holder.

Money held in fixed deposit account can be used as security to acquirenbank loans.

Restricted withdrawals encourage savings.

The account holder has time to plan for the deposited money.

Disadvantages of Fixed deposit account

Access to money is not allowed until the end of the agreed period.

Interest is forfeited if there is pre-mature withdrawal.

The minimum amount of money for this account is high.

The customer is not allowed to deposit more money in this account.

A notice is required if the customer wants to terminate the contract before expiry date.

The customer is denied the use of the deposited funds before the expiry of the period.

Requirements to Open and Operate a Bank Account

1. Identification documents such as National Identification Card, Passport and Driving License.

2. Reference letter from employer or an existing customer.

3. Filling an application form giving the information about the customer.

4. Submission of a specimen signature to be held by the bank.

5. An initial deposit is paid and the account becomes operational.

Non- Bank Financial Institutions

These are financial institutions that offer finances for development purposes to individuals and organizations.

These institutions address themselves to the needs of specific sectors in the economy.

They offer the finances inform of either short term or long term loans.

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