ROLE OF BANKS

Banks play very important roles as financial intermediaries in trade and

commerce. They bring the savers and the lenders together, i.e. funds are
transferred from the savers to those who wish to borrow or invest the funds. To
encourage the savers to deposit funds with them, the banks pay them a certain
rate of interest on their deposits. On the other hand, the bank charges those who
wish to make use of these funds at a higher rate of interest. This charge is to
cover the cost of the funds (interest paid to the savers), administrative and
operational expenses and to earn some profits for the shareholders.

MAIN FUNCTIONS OF BANKS

With the expansion of trade and commerce, banks began to play more important
roles to facilitate trade and commerce. Their functions are as follows:
(a) To provide safe keeping for cash deposited in the current, savings and fixed
deposit accounts
(b) To provide a convenient and safe means of making payments through the
current account or by way of bank drafts, bank transfers and bills of exchange
(c) To provide finance by way of loan, overdraft, or discounting bills of exchange
(d) To provide finance in foreign trade by way of documentary credit or
discounting foreign bills of exchange
(e) To give advice on financial investment or on the credit standing of the
customers

SERVICES OF COMMERCIAL BANKS

1. Accepting deposits
2. Providing a convenient means of making payments
3. Lending to customers
4. Other services

Page 1
 Commerce – Students’ Guide
Department of Business and Computing

1. ACCEPTING DEPOSITS
Savings Account
- These are known as time deposits or deposit accounts.
- Seven days notice of withdrawal is required.
- Interest is paid on these accounts.
- There are no bank charges for operating such an account.
- It is suitable for investors with small savings.

Fixed Deposit:
- Large amounts of money can be deposited for a fixed period.
- Higher rates of interest are paid on this account.
- There are no bank charges for this account.
- A certificate of deposit is given to the accountholder.
- Money deposited can be withdrawn only when the specified date
expires.

Current / cheque accounts

- Money can be deposited and withdrawn at any time.
- Overdrafts, standing orders, direct debits and credit transfers are
allowed on these accounts.
- No interest is paid on these accounts.
- There are bank charges for operating such accounts.
- It is suitable for businessmen, who need to deposit and withdraw
money at any time.

DIFFEERENCE BETWEEN SAVING ACCOUNT, FIXED DEPOSIT ACCOUNT

AND CURRENT ACCOUNT
Saving account Fixed deposit account Current account
1. It can be opened with 1. It can only be opened 1. It can only be opened with
a minimum deposit of with a minimum of $500 a certain minimum sum
$1. (or $1000 in some banks). ($500 in some banks).
2. No recommendation 2. No recommendation is 2. Recommendation is
is required to open required to open account. required to open account.
account.
3. Account holder is 3. Account holder is given 3. Account holder is given a
given a passbook for all a fixed deposit certificate cheque book for making

2 Prepared By: Emmanuel George

 Banking

deposits into and which can be presented withdrawals by cheques.

withdrawals from the for payment upon the
account. expiry date.
4. Money can be 4. Amount of deposit 4. Cash and cheques can be
deposited and remains fixed and can only deposited any times and
withdrawn anytime be withdrawn when the withdrawals without notice
although withdrawal at specified period expires can be made by means of
a branch or ATM is unless the depositor is cheques.
limited to a certain willing to forgo the interest.
amount. 5. It earns a higher rate of 5. It does not earn interest
5. It earns lower interest since the bank is (unless the amount
interest than the fixed certain as to the duration deposited is very large) as
deposit account. of the funds at its disposal. the deposit is subject to
It can make use of the withdrawal on demand.
money for investments
and for loans.
6. Account holder need not 6. Account holder has to pay
6. Account holder need pay bank charges for bank charges for operating
not pay bank charges operating the account. the account when the
for operating the deposit falls below a certain
account. minimum amount.
7. It is useful to the 7. It is useful to the
7. It is suitable for the businessman who has businessman who needs a
individual who wishes excess funds which can convenient and safe method
to save small sums of be set aside to earn of facilitating his receipts
money. interest. His deposit and payments. He can make
account enables him to use of the other current
build up sufficient reserves account services like
to finance his business overdraft, standing order,
when the need arises. direct debiting and credit
transfer.

3
Commerce – Students’ Guide
Department of Business and Computing

Paying in slip
It is a form used for paying money into bank account

Bank statement
A regular intervals, or on request, the bank will send to a customer a bank
statement which provides a record of all that has taken place.
Amount which reduce the balance in the account are shown in the payments
column, and the amounts which increase the balance in the accounts are shown
in the receipts column. As each payment or receipt is recorded a new figure is
shown as a new balance figure in a third column.

2. PROVIDING A CONVENIENT MEANS OF MAKING PAYMENTS

The cheque system

A cheque is an order to a bank to pay a stated sum to the bearer of the cheque or
a named person.

Contents of a Cheque:
• Date: The date is written on the top right hand corner of the cheque. A
cheque has to be presented to the bank within six months of the mentioned
date on the cheque. If not the cheque will be a stale cheque and it will be
dishonoured.
• The Drawee: This is the bank on which the cheque is drawn. This is
printed on the cheque and helps when queries arise.
• The Branch Code Number: This appears on the top right hand corner and
at the bottom of the cheque.
• The Payee’s Name: This is written on the top line of the cheque.
• Amount: The amount should be written in words and in figures. The
amounts should be the same. If not the cheque will be dishonoured.
• The Drawer’s Name: This is printed or written at the bottom of the cheque.
• The Drawer’s Signature: The drawer’s signature should appear below the
drawer’s name. If the signature is not the same as the specimen signature
given to the bank, the cheque will be dishonoured.
• The Cheque Number: This appears at the bottom left hand corner of the
cheque.
• The Account Number: The cheque number also appears at the bottom of
the cheque. This helps in the automatic handling of cheques.

4 Prepared By: Emmanuel George

 Banking

Types of Cheque:

Open Cheque
Anyone who finds an open cheque can cash it. So it is not safe to send an open
cheque. This cheque is sent to persons who do not have bank accounts. Money
for this type of cheque can be received over the counter.

Bearer Cheque
This has bearer written on the cheque. This cheque has the same features of an
open cheque.

Crossed Cheque
When two parallel lines are drawn across the face of a cheque, it becomes a
crossed cheque. Such a cheque has to be deposited in the bank account and sent
for clearing. Money is not paid over the counter in the case of a crossed cheque.
There are different types of crossings:
- General Crossing: These cheques can be paid into any bank.
General crossed cheques with “A/c Payee Only” written within the
two parallel lines have to be paid into the account of the payee only.
- Special Crossing: These cheques must be paid into the bank
written between the two parallel lines.
- Not Negotiable Crossing: The payee cannot negotiate such
cheques to another person.

Dishonoured Cheques

A cheque may be dishonoured for the following reasons:

• There may not be sufficient funds in the drawer’s account to make the
payment.
• The cheque may be a stale cheque. That is it is presented to the bank six
months after the mentioned date on the cheque.
• The drawer’s signature may not be the same as the specimen signature.
• The amount written in words and figures may not be the same.
• The cheque is mutilated or defaced.

5
Commerce – Students’ Guide
Department of Business and Computing

Credit transfers
1 A current account holder can instruct his bank to pay directly into the bank
account of the payee. The bank will debit his account and credit the account of the
payee.
2. Credit transfer system can be used to make single or multiple payments. Single
credit transfers are frequently used by debtors to pay bills.
3. This facility is useful to the businessman who has to make a large number of
payments at one time to those with bank accounts. Credit transfers can be used
to pay salaries, rents, hire purchase instalments, etc. In the payment of salaries,
for example, the employer has only to make out one cheque for the total amount
together with a list of the employees' names and account numbers and the
amount of salary to be credited.
4. This method of payment is advantageous because it is:
(a) Convenient - both to payer and payee as the former is spared the trouble of
writing and posting several cheques, and the latter need not go to the bank to
cash the cheque.
(b) Economical - the payer pays the stamp duty for only one cheque and he also
saves on postage.
(c) Safe - there is no risk of cheques getting lost or being dishonoured.

Standing order or banker’s orders:

1 These are orders to a banker to pay regularly a fixed sum of money from one's
current account in order to settle recurring payments like mortgage repayments,
hire purchase transactions, rents, insurance premiums, subscriptions to clubs, etc.

Advantages

1. Regular commitments are met punctually

2. Debtors need not remember due dates for payments.
3. Creditors need not send reminders to debtors to pay up their debts.

Disadvantages

1. The current account holder using the facility is informed of the payment made
by the bank on his behalf only when he receives the monthly bank statement, so it
is possible that he may inadvertently overdraw his account if he has only a small
balance in it.
6 Prepared By: Emmanuel George
 Banking

2. It is restricted to only payments of a specific amount and where payments are

of an irregular sum or have increased in amounts, new instructions have to be
made to the bank. To overcome this problem, direct debiting facilities are provided
to the customer.

Direct debit:
1. The bank may provide direct debiting facilities for payments of varying amounts
at irregular intervals.
(a) Under this arrangement, when the supplier sends an invoice to the buyer a
direct debit form is also sent to the buyer's bank informing the latter to debit the
buyer's bank informing the latter to debit the buyer's account and to transfer the
money to his account. Such payments have to be authorized by the buyer.
(b) This saves the buyer the trouble of remembering due dates of payment and
sending off cheques.
(c) The supplier or creditor gets prompt settlement of debts.
(d) This differs from standing orders in that it is the creditor who gives payment
instructions and not the debtor. The amount and date of payment are not fixed as
in the case of standing orders.

Remittance

1. Remittances are used to send money from one place to another without the
actual physical movement of cash. Examples of bank remittances include
bankers' cheques, bank drafts, mail transfers and telegraphic transfers:
(a) A bankers' cheque or cashier's order is a bank's cheque drawn upon itself. It
can be used for payments of any amount within the same town. It is highly
acceptable since the drawer of the cheque is a bank.
(b) A bank draft is an unconditional order in writing drawn by one bank on another
requesting the drawee bank to pay a third party on demand a specified sum of
money.
(c) A mail transfer is a written instructions given by a remitting bank to its branch
or agent bank to pay a certain sum of money to a third party Such a remittance is
sent by mail. The remitter has to pay the commission and postal charges.
(d) A telegraphic transfer is an instruction that is cabled or telexed to a branch or
agent bank by the remitting bank to pay a certain sum of money to a third party.
The remitter will be charged commission and cable or telex cost.
2. All local remittances are payable in local currency while foreign remittances are
7
Commerce – Students’ Guide
Department of Business and Computing

payable in foreign currencies drawn on an overseas bank. For the latter, the
remitter has to pay the equivalent amount in local currency
3. To the remitter, bank remittances are safe, cheap and convenient to use. To
remitting bank, remittance service provides income from commission, foreign
exchange and the short-term use of interest-free funds.

Documentary credits (letter of credit)

Documentary credit is a letter of undertaking issued by importer’s bank (hereafter
called the issuing bank) to pay an overseas exporter against the exporter’s
shipping documents such as the bill of lading, certificate of insurance, invoice, etc.
which must adhere strictly to the terms and conditions of letter of credit. The
exporter can receive payment for the amount due the instant he deposits the
shipping documents with the agent bank (or advising bank) which is in his country.

Bank draft
 It is a cheque drawn by one bank on another bank, demanding that the
latter pay a specified sum to the payee named on the draft.
 The advantages of using the bank draft to remit money are the same as
those of a cashier's order.
 It can be used to remit money to other towns in the same country or even
abroad.

Debit cards
This is an example of the Electronic Funds Transfer at the Point Of Sale
(EFTPOS). Payments are made electronically from personal accounts to retailers’
accounts. Connect and Switch is examples of debit cards. For this system:

• There should be electronic equipment installed at the retail outlet.

• There should be cards with Personal Identification Numbers issued to
bank’s customers.
• There should be a system for transmitting messages from the retailer’s
terminal to the bank’s terminal.
The customer’s card is inserted in the retailer’s terminal and if there is sufficient
money in the customer’s account, the right amount will be transferred from the
customer’s account to the retailer’s account.

8 Prepared By: Emmanuel George

 Banking

Credit cards:
This enables the customer to obtain instant credit and also cash advances.
The bank charges interest from the day cash is withdrawn or from the day goods
are bought on credit. The advantage to the retailer is the increase in sales. The
best- known credit cards in UK are Barclaycard, Access and Trust card.

The bank gives the credit card to the customers, who can then get credit from
retailers. The retailers prepare three copies of the bill. One is sent to the bank,
one is given to the customer and one is kept by the retailer. The bank pays the
retailer immediately on receiving the copy of the bill. At the end of the month the
bank sends the statement to the customer who has to pay the money within 25
days on receiving the statement. Interest is charged on the amount of goods
purchased.

Electronic Fund Transfers

EFT offers several services that consumers may find practical:

• Automated Teller Machines or 24-hour Tellers are electronic terminals that

let you bank almost any time. To withdraw cash, make deposits, or transfer
funds between accounts, you generally insert an ATM card and enter your
PIN. Some financial institutions and ATM owners charge a fee, particularly
to consumers who don't have accounts with them or on transactions at
remote locations.

• Pay-by-Phone Systems let you call your financial institution with

instructions to pay certain bills or to transfer funds between accounts. You
must have an agreement with the institution to make such transfers.

• Personal Computer Banking lets you handle many banking transactions via
your personal computer. For instance, you may use your computer to view
your account balance, request transfers between accounts, and pay bills
electronically.

9
Commerce – Students’ Guide
Department of Business and Computing

• Point-of-Sale Transfers let you pay for purchases with a debit card, which
also may be your ATM card. The process is similar to using a credit card,
with some important exceptions. While the process is fast and easy, a debit
card purchase transfers money - fairly quickly - from your bank account to
the store's account. So it's important that you have funds in your account to
cover your purchase. This means you need to keep accurate records of the
dates and amounts of your debit card purchases and ATM withdrawals in
addition to any checks you write. Your liability for unauthorized use, and
your rights for error resolution, may differ with a debit card.

3. LENDING TO CUSTOMERS

1. Commercial banks lend money to their customers in the following ways:

(a) By extending a direct loan in which the borrower's bank account is credited
with the amount of the loan and interest is paid on the full loan.
(b) By giving overdraft facilities to their customers who are able to withdraw more
than the amount deposited in their current accounts after making prior
arrangements with the bank. Interest is charged on the amount overdrawn.
(c) By discounting bills for their customers. Bills are documents bearing the
promise of either the government (i.e. Treasury bills) or well-known banking
houses or persons of good credit standing (i.e. bills of exchange) to pay a stated
sum of money at a stipulated date.
2. Banks purchase these bills from their customers at a discount on their face
value. The discount is interest earned by the banks for holding the bills until
maturity. The bank pays the holder of the discounted bill the amount stated less
the interest on the sum for the number of days still to run before the due date.
3. Discounting bills is a kind of credit facility offered by the bank to its customers
because the bank advances payment to a customer who has allowed his debtor a
certain period of credit, and collects the debt from the debtor (i.e. the customer's
debtor) when it falls due.
4. The commercial bank is able to carry out its lending activities for the following
reasons:
(a) It knows from experience that only a small portion of its customers' deposits is
withdrawn as cash at any one time; so it keeps a sufficient amount of cash to
meet such withdrawals.
(b) It can use the rest of the deposits in the bank profitably by either investing or
10 Prepared By: Emmanuel George
 Banking

lending them to customers. In fact, the commercial bank can lend out many times
more than the cash deposited with it through multiple credit creation, subject to
the limits imposed by the Central Bank with regard to the ratio of cash to total
deposits.
(c) It pays interest to its depositors to encourage them to keep their money in the
bank. The interest rate charged on loans and overdrafts will be higher so that the
difference earned is used to pay for operating expenses and any residue becomes
the bank's profits.
5. The differences between overdrafts and loans are summarized in the following
table:

Bank overdraft Bank loan

1. Customer must have current account. He is 1. Borrowers need not have a current. If
allowed to overdraft his account up to a he has a current account, then his
certain amount for an agreed period. The account is credited with the agreed
amount of debit balance outstanding is the amount of the loan for an agreed period
amount of the overdraft taken. of time, while a special loan account is
debited with the same amount.
2. Less formalities are observed as borrower 2. The borrower has to go through the
need not fill in forms whenever he wants formal procedure of applying for loan. If
credit. Being already a customer of the bank, he is not a customer of the bank, he
the borrower need not have reference as to needs references. The bank must be
his financial standing. Security is unnecessary satisfied with the borrower’s financial
if he amount of overdraft required is small. position, security on the loan and the
purpose of the loan.
3. Interest is charged on the actual amount 3. Interest is charged on the whole
and the number of the days the account is amount borrowed for the full period of
overdrawn, e.g. if the account is overdrawn by the loan irrespective of whether the loan
$2,000 for 100 days and the interest rate is is fully used or not. For example, for a
10% per annum then the interest charged loan of $2,000 for a year at 8% per
= 10/100 × $2000 × 100/365 = $54.79 annum, interest charged for the year
Total amount payable at the end of 100 days = 8/100 × $2000
=$2000 + 54.79 = $2054.79 =$160
Total amount payable at the year
=$ 2,000 + $160
=$2,160
4. Any money paid into the customer’s 4. Money paid into the borrower’s
account reduces the overdraft, e.g. a account doesn’t reduce his debts.

11
 Commerce – Students’ Guide
Department of Business and Computing

customer overdraws his account by $2000 on However, when the loan is repaid
1 January and pays into his account $1,000 periodically under standing orders,
on 30 June and another $1000 on 31 interest is payable on the reduced
December. No other withdrawals or payments amounts standing to the debit of the loan
are made into his account during the year. account. For example, a borrower takes
The rate of interest on the overdraft is 11% a bank loan of $2000 on 1 January at an
per annum. interest rate of 10% per annum. The loan
Interest payable is to be repaid in two half-yearly
= Amount standing to his debts × rate of installments.

interest × Period the outstanding amount is Amount payable per period

overdrawn = Installment + interest payable

Interest payable up to 30 June where

=$2000 × 11/100 × ½ (i) Installment = Loan/ No. of

installments
=$110
Interest payable up to 31 December
(ii) Interest payable
= $ 1,000 × 11/100 × ½
= Interest rate per annum × installment
=$ 55
period × Amount outstanding

Total amount of interest payable for the year (Amount outstanding = Loan –

=$110 + $55 = $165. Installment paid to date)

Interest payable for overdraft is $165 while 30 June : 1st installment

the interest payable on the bank loan for the Amount payable

same amount and the same period is $150. = $ 1000 + [10/100 × ½ × $2000]

This is because the rate of interest charged =$1000 + $100

on a bank overdraft is higher than for a bank =$1100
loan. (In practice, interest on overdraft is 31 December : 2nd installment
calculated on a monthly basis, hence Amount payable
increasing the total debit balance by the = $1000 + [ 10/100 × ½ × $1000]
amount of the added interest payable. So in = $1000 + $50
actual fact the customer will have to pay a = $1050
large interest than that calculated above.) Total amount paid by the end of the year
=$ 1100 + $1050
= $2150
( If repayment is not made periodically,
total amount payable at the end of the

12 Prepared By: Emmanuel George

 Banking

year
= $2000 + [10/100 × $2000]
= $2000 + $200
= $2200
The borrower saves $50 ($2200 - $2150)
if he pays by installments.
5. As the banker doesn’t know when and how 5. Since the banker is certain as to the
much of the agreed amount he would be amount of the loan demanded, he
called upon to provide for the customer, he charges a lower rate of interest.
charges a higher rate of interest because of
this element of uncertainty.
6. An overdraft is suitable for the customer 6. This is suitable for the borrower who is
who is unsure to how much, when and for sure that he will require the loan for a
how long he needs credit, e.g. loans for certain time, e.g. loans for personal
business purpose like the purchase of goods purposes like the purchase of household
for sale. equipment and cars, or for business
purpose like the purchase of fixed
assets.

TRENDS IN BANKING

Automated Teller Machine (ATM) service

Banks that have computerized their systems of operation are providing ATM
services to their savings and current account holders. This facility enables the
customer to perform banking transactions anytime in the day at ATMs installed
outside the bank and at key locations. Some of the banking transactions include
withdrawals up to a certain amount each day, transfer of funds between accounts,
deposit of cash or cheques, bank balance enquiry, request for cheque books and
statements of accounts. Some banks in Singapore have even extended the ATM
service to include payments of purchases and bills at participating shops or
organizations where special machines are installed. The ATM cards can be used
at these machines to authorize payment (e.g. NETS service at major shopping
complexes.)

Telebanking
As an extension of ATM services, some banks have introduced telebanking
services to their customers. Customers can pay bills or make loan repayments to

13
Commerce – Students’ Guide
Department of Business and Computing

pre-authorized corporations, check bank balances, order cheque books, request

statements of accounts through the use of their telephones. Telebanking operates
24 hours a day anywhere via the push-button telephone linked with the bank's
computer centre. With the widespread use of such services, together with ATM
and credit card facility, a cashless and chequeless society is emerging.

Internet Banking
Internet banking enables the account holder to instantly search his statements;
sign up to receive free mobile text alerts; pay bills and transfer money between
accounts.

Banking online is the convenient way to:

• Check the account balances and transactions,

• cut down on paperwork by stopping the postal statements,

• pay bills like credit cards and utility bills,

• transfer money between your accounts or into someone else's bank

account,

• Set up, change or cancel standing orders and view or cancel Direct
Debits.

Night Safe facility

A special wallet provided by the bank is inserted in to safe in the outside of the
wall of the bank to which customers are given the key. The following day the
wallet is opened by the customer or bank Clark and customer account is
credited accordingly

14 Prepared By: Emmanuel George