Business Finance Flashcards
what are the functions of the commercial banks
- Accepting deposits: holding currency from customers and providing safety for such funds.
- To provide loans: can come in the form of an overdraft; when a Current A/C holder is given permission to overdraw in excess of what is on the account or a regular loan for which one must apply for.
- To provide safety deposit boxes: used to keep valuables.
- Night safe facilities: a facility which allows one to make deposits after closing hours.
- Make payments on behalf of its customers via:
* -Standing orders: an order to the bank to pay a fixed amount on a particular date every month.
* Cheques
* Credit cards
* Executors: bank may act as executors when it administers the will of a deceased person.
Types of Accounts
a. Fixed Deposit: an account that allows one to keep money for a fixed period of time at a fixed interest charge.
b. Savings Account: usually for regular savers. Customers can withdraw at any time but the bank reserves the right to be given notice of a withdrawal.
c. Current Account: gives one the right to withdraw by using cheques. Also called a Checking Account.
Advantages of using cheques
- Safety
- Convenience
- Can be stopped
- Can act as a receipt
Disadvantages of using cheques
- Payee may not receive payment when the cheque is brought to the banks (bounce)
- May not be accepted by payee
- Cheque may be stolen, lost or forged.
Reasons for dishonoured cheques
i. Insufficient funds in the drawer’s account
ii. Improper signature
iii. Words and figure differ
iv. Stale cheque i.e. period of time for presentation of cheque has expired.
v. Post-dated cheque i.e. a cheque which must be used for payment at a future date.
vi. Cheque shows signs of being tampered with.
vii. Drawer stops the cheque.
Requirements of the bank for regular loans
- Purpose for the loan
- Ability to re-pay
- Collateral
Services offered by Commercial Banks
- 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 travelers 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.
what is a central bank
A Central Bank is a government institution which seeks to implement government monetary policies who seeks to control the supply of money in the economy.
Features or Functions of the Central Bank
- The sole note-issuing authority
- Acts as a banker to the government by: Keeping government funds
Lends money to the government
Services the national debt
Advises the government - It is the banker’s bank i.e.
* It keeps cash balances and cash reserves of the Commercial banks
* Commercial banks borrow from the Central Bank
* Act as the clearing house for the Commercial banks i.e. it clears cheques for the Commercial banks. - The lender of last resort
- Acts in a supervisory capacity to the Commercial banks; to safeguard the interest of the depositors and ensure that they conduct business using “sound” banking principles (make spot checks, on site inspection and analyse returns of the books).
- Administer foreign exchange control and operate open-market operations on behalf of the government.
Tools used by the Central Bank to ensure that the supply of money is controlled
- Adjusting the liquidity ratio:
the commercial banks must obey the dictates of the Central Bank as to the minimum liquidity ratio that they must maintain.
* Liquidity ratio: the amount of cash to deposit that the Commercial banks must keep as cash. - Special deposit: the Central Bank has the power to demand that the Commercial banks deposit a certain percentage of their total deposit with it. This reduces the bank’s liquidity.
- Central bank directive:
- The minimum lending rate:
- Open-market operations:
Monetary policies geared towards achieving:
a. Full employment
b. Keep down inflation
c. To encourage economic growth
d. To improve the B.O.P( balance of international payments)
Contractionary monetary policy: a policy implemented to reduce the amount of money in circulation within the economy.
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.
- Monetary policies( reflationary/ deflationary)
Savings and Investments
Savings is defined as money set aside or not spent from ones personal income while investment is defined as methods of increasing wealth.
what is a budget
- A budget outlines how much of an individual’s income is to be spent on his various expenses.
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.
Short & Long Term Financing
Short-term capital may be accessed through the money market which Borrowers are required to repay within a short-term time period e.g. 1 to 5 years while Long –term capital may be accessed through building societies, the stock exchange, unit trust companies and development banks which Borrowers are given a much longer repayment periods e.g. up to 20 years.
