BANKING AND FINANCE COMPLETE NOTES

Def.: is the process of whereby one deposits and withdraws money from a banking institute
on demand
This a process whereby the financial institutes safe keep money and valuable items for clients
and provide them on demand
Personal finance
✓ This section deals with the monetary decisions of individuals and families. Individuals
and families earn, save and invest their income, they manage their money more
effectively and make better monetary decisions.
Sources of personal income
✓ Income is the total sum of money earned by an individual in a given period of time.
Personal income covers all forms of money received from all possible sources. An
individual ideally has a wide variety of sources of income, all of which are stable and
reliable. The major sources of persona] income include:
➢ From work - This income is in the form of payment to an individual of a wage
or salary in return for work done.
➢ Business ventures - Individuals can earn profits from operating their own
business activities.
➢ Social aid or social welfare programmes _ these are payments given to certain
groups of individuals from government. They include pensions, scholarships
and unemployment benefits.
➢ Dividends - Dividends are payments received from investments in shares of
companies. Dividends are a share of the profits of the business.
➢ Rental income - This is income that comes from owning and letting out
property and land.
✓ Saving income
✓ It is important to set aside some of your income for future use. The money set aside is
called savings, savings is money not immediately spent. Saving patterns also changes
at various stages of a person's life.
Reasons for saving income
✓ Retirement - When you retire, you no longer receive a regular income from
employment. Saving assures you of financial security when you leave employment.
✓ To finance a major purchase - People save when they are planning a major purchase.
People save money for the down payment or for the outright purchase of a major
asset, such as a vehicle, house or furniture.
✓ To meet unexpected demands for cash – The uncertainties of life also make it
Important for you to save part of your income. Saving helps you to build a reserve
that you can use in an emergency. E.g. sickness and death
✓ Other reasons why people save income include to finance a vacation, education or to
gain financial freedom.
How do people save income?
✓ The most common instruments are available through financial institutions. They
include saving accounts, fixed deposit accounts and certificates of deposit.
Savings accounts
✓ A savings account can be opened at any bank.
✓ Can keep money in the account for future needs.
✓ It is a low risk method of saving that earns a low interest rate.
✓ This method of saving allows you to easily access your funds via automated teller
machines (ATMs).
Fixed deposit accounts
✓ Fixed deposit accounts are useful for saving over a longer term.
✓ These accounts do not give access to your funds on demand until the end of the
investment period.
✓ The account is ideal if you do not need immediate access to your money.
✓ The account pays a higher interest on your savings, which is tax free with some
banks.
Certificate of deposit (CDs)
✓ A certificate of deposit is also known as term deposit accounts where you commit to
leave your money in the account for a set period.
✓ The terms vary from 30-day term deposits to 180-day deposits.
✓ The longer the term, the higher the earnings received.
✓ Account holder receives a fixed rate of interest.
Personal investments
✓ An investment is anything that is purchased that is expected to generate more income
or profits.
✓ Investing is like getting your money to work for you. This saving involves investing
your money with the intention of growing it
Why invest?
✓ Increasing your personal income, which gives one personal financial freedom.
✓ Financial security through a steady flow of income from your investments.
✓ The increased income enables you to purchase the goods and services that you desire.
Methods of personal investments
✓ These are the categories of investments:
➢ ownership investments
➢ Lending investments
➢ Cash equivalents
➢ Mutual funds.
Ownership investments
✓ Types of ownership investments are:
✓ Shares or stocks - These are certificates that you buy to get part ownership, or a
share, of a business. You get a return on investment made by the business, known as
dividends or can also benefit if the prices of the shares increase (capital gains), this is
a risky investment but it has the potential for high returns.
✓ Your own business - You can put money and time into starting and running you Own
business venture.
✓ Real estate - This involves using your money to buy buildings, land and any form of
property. You get returns on your investment by letting them out or repairing and
selling them.
✓ Precious commodities - You can buy precious metals, such as gold, or paintings and
other collectables and resell them at a profit.
Lending investments
✓ Lending investment instruments include savings accounts and certificates of deposit.
✓ Bonds involve lending money to a company or government for a given period of time.
The bond holder receives a fixed rate of interest for the period.
✓ At the end of the period the bond holder is paid back the amount lent.
✓ This is a safe method of investment but the returns are low.
Cash equivalents
✓ Cash equivalent forms of investment are easy to turn back into money.
✓ They are less risky and more flexible than other investment options.
✓ They are found on the money market and include term deposits and ordinary savings
accounts.
Mutual funds
✓ Also known as unit trusts, are where a number of investors pool their money together
and engage a professional fund manager to manage their money.
✓ The money is used to buy stocks and bonds.
✓ The main source of earnings is the growth of value of the underlying shares held,
interest earned and dividends gained.
✓ There are many types of mutual funds
➢ Income fund,
➢ General equity funds
➢ Specialist equity funds.
Money
✓ Money is defined as any generally acceptable means of payment. It is anything that is
accepted, within an economy, in exchange for goods and services.
The origins of money
✓ It was these problems that led to the developments of money. The problems included:
✓ Transport
✓ Valuation of commodities
✓ Indivisibility of commodities
✓ Double coincidence of wants
✓ Storage
Characteristics of money
✓ Features or characteristics of money must be:
✓ Durable - It must not wear out or tear easily. It must last for a long time in
circulation.
✓ Portable - It must have a convenient size and weight so that it can be carried around
easily.
✓ Dividable - It must be capable of being divided into smaller denominations to enable
small transactions and change.
✓ Scarce - It must be limited in supply. It must not be readily available so that it
maintains its value.
✓ Uniform - Notes and coins of the same value must be the same in terms of colour,
size and quality.
✓ Stable in value - It must maintain a stable value over time. It must not fluctuate
wildly in terms of value.
✓ Acceptable - Everyone within an economy must be prepared to accept it in settlement
of a debt.
✓ Recognisable or identifiable - There must be no doubt that it is money when it is
presented for payment.
Functions of money
✓ Money is used as a:
✓ Medium of exchange
✓ Measure of value
✓ Store of wealth
✓ Unit of account
✓ Standard for future payment.
Medium of exchange
✓ Money simplifies trade. People exchange goods and services for money, which they,
in turn, use to purchase their own needs and wants. Money has removed the need for
the double coincidence of wants.
Measure of value
✓ Money acts as a common denominator for expressing and comparing values of
different commodities. It enables goods and services to be valued and priced. The
value of goods and services can be expressed in monetary terms.
Store of value or wealth
✓ Money provides a convenient way of storing or keeping wealth. It is no longer
necessary, as it used to be, to keep your wealth in the form of commodities or
livestock, which can deteriorate or die.
Unit of account
✓ Money makes the preparation of books of accounts easier. All business transactions
can be recorded in terms of money.
Standard for future payment/deferred payment.
✓ Money allows people to take goods and pay for them later. This means that money
makes it easier for credit transactions to take place.
Legal tender
✓ Legal tender is any form of payment that must, by law, be accepted when settling a
debt. The term usually refers to government issued notes and coins. It does not
include cards and cheques.
Inflation
✓ Inflation is defined as a continuous and sustained increase in the price levels. It
represents a fall in the value of money, which means that money buys fewer goods
and services. Inflation can be referred to as creeping, galloping or runaway depending
on the rate at which money is losing its value.
➢ Creeping inflation is a slow increase in prices,
➢ Galloping inflation is a [aster increase in prices
➢ Runaway inflation is where prices are increasing all the time.
Types of inflation
✓ Demand-pull inflation
✓ Cost-push inflation.
✓ Imported inflation
Demand-pull inflation
✓ Occurs when the demand for goods and services increases at a faster rate than supply.
It means that there is too much money in the economy chasing fewer goods and
services. The high demand pulls prices up to try to restrict the demand for the limited
goods and services.
Cost-push inflation
✓ Cost-push inflation results from a rise in the prices of factors of production. As prices
of inputs increase, they push costs of production upwards. The burden of cost increase
is passed on to consumers in the form of high prices as business organisations try to
maintain profitability. Increases in the price of fuel, power and labour all lead to cost push
inflation.
Imported inflation
✓ This mainly affects organisations that import raw materials from other countries, an
increase in customs duty or raw material prices is directly proportional to the prices of
the products charged to consumers. E.g. G-tel, Mazda, Foton
What causes inflation?
✓ Inflation is caused by an increase in:
➢ Money supply
➢ Wages
➢ Prices of imported raw materials.
Increase in money supply
✓ An increase in the supply of money, if not matched by an increase in the availability
of goods and services, will result in demand exceeding supply. This in turn results in
higher prices, and the higher prices stimulate inflation.
Increase in wages
✓ A rise in the wage levels results in an increase in the costs of production. This, in turn,
forces producer" to increase their prices to maintain their profit.
Prices of imported raw materials
✓ This Occurs in countries that rely heavily on imported raw materials. An increase in
the prices of imports increases the cost of raw materials, which pushes up the costs of
production. This will cause prices in the economy to rise.
Effects of inflation
✓ High rates of inflation result in hardships, especially for the poor and fixed income
earners.
✓ Generally, higher rates of inflation result in:
➢ Decrease in the total output of goods and Services
➢ Shortages of goods and services
➢ Long queues for goods and services
➢ Creation of a black market for goods and services
➢ a drop in the general standard of living
➢ High rates of unemployment as businesses reduce their size or close their
operations
➢ Lower levels of savings as people have less spare money to save
➢ More strikes as employees demand higher wages
➢ A fall in the value of the local currency.
✓ Budgeting
✓ Def.: is a way of looking at how much money you make and how much you spend
over a given period.
✓ Def.: It is a detailed summary of the likely income (money coming in) and
expenditure (money being spent) for a given period of time. It can be prepared for a
weekly, a monthly or a yearly basis.
Importance of budgeting
✓ It is a guideline for spending and saving, hence gives discipline on individual
spending.
✓ One avoids overspending and buying on impulse, and you have more control over
your finances.
Budgets helps to:
✓ Work out the movement of your money so that you can identify wasteful expenditure
✓ Adapt to financial changes
✓ Prepare money for expected and unexpected expenditure
✓ Determine in advance whether you will have enough money to meet needs and wants
✓ Pay your bills on time
✓ Get out of debt or stay out of debt
✓ Plan your savings
✓ Achieve your financial goals by keeping you focused on your money goal.
Creating a budget
✓ Follow these steps to create a budget:
✓ 1. Write a list of your financial goals and arrange them in order of importance. The
goals should be realistic, for example build or buy a house, buy a car, payoff a loan.
✓ 2. Determine your sources of income. List the sources of income and the amount that
comes in from each source.
✓ 3. Determine your expenses. List everything you spend your money on. You can use
old financial documents such as receipts and statements to help you make this list.
✓ 4. Compare your income and your expenditure. Add up all your income and your
expenses and subtract the expenses from the income to get the net income.
✓
Borrowing
✓ It is the act of taking and using an item that belongs to someone else for a given
period of time with the intention of giving it back. Borrowing occurs regularly in our
daily lives.
Reasons for borrowing
Individuals usually borrow to:
✓ Start a business - They obtain loans to purchase stock, pay bills and buy or rent
premises so they can operate a business. The idea is to use the profits to pay back the
loan.
✓ Buy assets - These items are large and expensive and take a long time to save for,
such as a car or a house. You borrow in order to spread payment over a long period of
time.
✓ Meet emergencies - Certain events may occur unexpectedly that may require
spending large sums of money, for example, medical bills. Individuals may borrow to
cover such unexpected expenses.
✓ Fund special events - People may borrow to fund a wedding, a holiday or fund their
children's or their own education.
Borrowing options
The main methods of borrowing include:
✓ Credit cards
✓ Overdrafts
✓ Personal loans
✓ Mortgages
✓ Hire purchase
✓ Credit sales
✓ Leasing.
✓ The right borrowing option will depend on why you are borrowing, the amount you
want to borrow and the period you want to borrow for.
Taxation
✓ A tax is a payment made to government by individuals or businesses on their income,
purchases or business profits. It is a statutory obligation, which means that tax is
compulsory.
✓ The Jaw expects all those who qualify to pay taxes and evading paying taxes leads to
a punishable offence by the law.
✓ Taxes have the effect of reducing your disposable income and affects consumer
spending. Hence taxes are an important part of managing your personal finances.
✓ Taxes lake a variety of forms, and can be classified into:
✓ 1. Direct taxes –
➢ Direct taxes are taxes collected by government from the taxpayer, which
means that the taxes are paid directly to the government.
➢ Direct taxes include taxes on income, profits and wealth. Examples include
income tax, corporate tax and capital gains tax.
✓ 2. Indirect taxes –
➢ Indirect taxes are paid indirectly to the government by the tax payer. These
taxes are collected on behalf of the government by a trader, who forwards
them to government.
➢ They include taxes levied on the manufacture or sale of goods and services.
Examples include value added tax (VAT) and sales tax. Indirect taxes have the
effect of increasing the prices of goods and services.
Why pay taxes?
✓ To fund government activities - The taxes levied by government help created a source
of revenue for the government, which enables it to pay its workers and to provide
essential goods and services, such as health, education, public libraries, security and
defence.
✓ To redistribute wealth - The government uses taxes to redistribute wealth from the
rich to the poor. Personal taxes are usually charged based on the level of your income.
Governments make the rich pay higher taxes and use the revenue to fund programmes
to assist the poor.
✓ To discourage the consumption of harmful goods and lessen their costs to society –
The government uses taxes to decrease the adverse effects of some goods considered
dangerous to society such as tobacco and alcohol. The taxes also Increase the prices
of these goods, thus discouraging their excessive consumption.
Sources of financial advice
✓ Financial advice may be obtained from:
✓ The media, such as business publications and newspapers
✓ Financial institutions, such as banks, insurance companies and building societies
✓ Family, friends and relatives.
Consequences of poor financial management
✓ Overspending
✓ loss of assets through repossession the inability to pay off debts
✓ blacklisted, which means you will not be able to get credit from financial institutions
✓ bankruptcy
✓ costly legal action by creditors
✓ Depression.
Banking systems
✓ A bank is an institution that takes custody of a client's money and pays it out when the
customer wants it.
✓ Banks are important in an economy because they facilitate payments, finance traders
and customers, and keep money safe.
✓ A country's banking system is made up of different financial institutions. These
financial institutions are classified into:
✓ Central Bank
✓ Commercial banks
✓ Building societies
✓ Savings banks
✓ Merchant banks
✓ Finance houses
✓ Discount houses.
NB// The Central Bank is the core of the financial system as it monitors, regulates and
supervises other financial institutions.

Commercial banks
Commercial banks are companies that provide various banking facilities to the general public
and organisations. Commercial banks in Zimbabwe include:
✓ Banc ABC
✓ Barclays Bank
✓ Commercial Bank of Zimbabwe
✓ Standard Chartered Bank
Role of commercial banks
✓ Commercial banks offer different types of services that facilitate trade. They:
Sending and receiving payments
✓ Commercial banks provide the means by which traders and consumers can send or
receive payments. The main methods of sending and receiving payments include:
➢ Standing order or stop order
➢ Direct debit
➢ Credit transfer
➢ Real-time gross settlement.
Stop order/ Standing order
✓ The stop order, or standing order, is a method of payment that is used to pay a fixed
sum of money at regular intervals.
✓ This is used to pay fixed amount each month at a fixed date each month.
✓ One completes a stop order authorisation instructing the bank to make the payments.
✓ This method of payment is appropriate when paying:
➢ Mortgage instalments or loan repayments
➢ Subscriptions to clubs and societies
➢ Premiums to insurance companies.
Advantages:
✓ The debtor does not need to remember the payment.
✓ It saves the costs of writing and posting Cheques.
✓ The creditor gets paid promptly.
✓ It reduces the risks of bad debts.
Direct debit
✓ It is used for making payments of varying amounts at irregular intervals.
✓ It is used to pay varying amounts and dates of payment each month.
✓ This method is ideal for paying electrical bills, telephone bills and water bills.
✓ Account holder authorises the bank to pay the bill when it is presented by the creditor.
✓ Thus, the creditor initiates the payments and this method, both the creditor and the
debtor must have bank accounts.
Advantages
✓ Reduces the risk of bad debts
✓ Saves on paperwork, as there is no need to send reminders
✓ Assures the creditor of payment
✓ Eliminates the costs of chasing debts
Credit transfer
✓ A credit transfer is a method of payment used to pay many creditors at the same time
using one cheque.
✓ The bank client completes a multiple transfer from giving details of the creditors to
be paid. It gives the:
➢ Names of the creditors
➢ banks and bank branches of the creditors
➢ Account numbers
➢ Amount to be paid to each creditor.
✓ The client then writes one cheque to cover the total amount to be paid.
✓ The bank debits client's account and transfers the amount to creditors account
✓ The creditor must have a bank account.
✓ If no bank account you can pay cash when you present the transfer form.
✓ The system is ideal for paying salaries to workers and dividends to shareholders.
✓ The method saves the time and costs of writing and posting many cheques.
Real-time gross settlement (RTGS)
✓ It is a method of payment that involves the electronic transfer of money between
banks. The transfers are done:
➢ in real time, which means there is no waiting period for the payment and the
accounts are settled as soon as the order is processed
➢ On a gross basis, which means that payments are done independently one by
one and they are processed separately and not combined with other
transactions.
✓ The RTGS is controlled by the Reserve Bank of Zimbabwe.
Accepting deposits
✓ Commercial banks accept money from organisations and the general public for
safekeeping.
✓ They operate different types of bank accounts where individuals and organisations
can keep their money safe.
✓ The main types of accounts are:
➢ Current accounts
➢ Savings or deposit accounts.
Current accounts
A current account has the following features:
✓ It is provided by commercial banks only.
✓ The account holder is given a cheque book so that payments can be made using
cheques.
✓ The account has no minimum balance.
✓ The account holders can overdraw their account if authorised by the bank (at a fee).
✓ It is ideal for keeping small sums of money for short periods as balances earn low
rates of interest.
✓ The account holder receives monthly statements from the bank summarizing all
transactions.
✓ Withdrawals from the account can be done at any time, even without notifying the
bank.
✓ Account holders have access to facilities such as stop orders, direct debits and credit
transfer facilities.
✓ Banks charge a ledger fee for maintaining the account and a service fee [or carrying
out transactions.
Savings account
✓ A savings account has the following features:
✓ The account can be opened with any banking institution.
✓ Savings accounts arc aimed at those who wish to save over long periods of time.
✓ The account earns interest,
✓ The account requires a minimum balance and cannot be overdrawn.
✓ The account holder uses a passbook and deposit and withdrawal slips to carry out
transactions.
✓ All payments from the account are made on a cash basis.
✓ Holders have no access to stop orders, direct debit and credit transfer facilities.
✓ There are no ledger fees but the account holder has to pay service charges for
transactions carried out.
✓ Notice of withdrawal is needed.
✓ Account holders do not receive monthly statements. Statements are only issued on
request.
The cheque system.
✓ The cheque system is a function that distinguishes commercial banks from other
financial
What is a cheque?
✓ A cheque is a document used to withdraw money from a current account. A cheque is
an instruction to a bank to pay the stated sum of money to the named individual.
✓ Whenever a cheque is used, three parties are involved:
➢ The drawer - the account holder, the person giving the instruction
➢ The drawee - the bank where the account is held
➢ The payee - the named individual, the person to be paid.
✓ A cheque shows the following details:
➢ Drawers name
➢ Drawee’s name
➢ Payee’s name
➢ Branch code
➢ Date
➢ Amount in word and in figures
➢ Account number
➢ Cheque number
➢ Drawer's Signature.
➢ Bearer cheque - A bearer cheque is payable to the named person or anyone
who presents the cheque at the drawee bank. A bearer cheque states 'Pay:
named person's name or bearer'. A bearer is not safe and is rarely used.
‘Together we are stronger’ 0777329822/ 0717140557
➢ Order cheque - An order Cheque states 'Pay: named person's name or order'. It
is payable only to the named person or any other person authorised by the
payee. It is safer than a bearer cheque.
Types of cheques
✓ Cheques can be open or crossed.
Open cheques
✓ An open cheque is a cheque that can be cashed over the counter at the drawee bank. It
has no parallel lines drawn across its face.
✓ It is used when the payee has no bank account. 'l he cheque is not safe as it can be
cashed by anyone.
Crossed cheques
✓ A crossed cheque has two parallel lines drawn across its face.
✓ The lines cancel out the instruction to pay on demand, therefore it cannot be cashed
over the counter.
✓ The cheque must be deposited into a bank account. The crossed cheque can only be
used when the payee has a bank account. It is a safe method as it can be traced if it
lost.
✓ Cheque crossings can be:
➢ General crossings
➢ Special crossings.
A general crossing:
✓ Has two parallel lines but does not have the name of the bank or branch written
between the crossings
✓ Can be deposited into an account at any branch or bank of the named payee.
A special crossing:
✓ Has two parallel lines across its face
✓ Has the name of the bank or branch written between the lines
✓ Must be deposited into the named bank and branch.
Dishonored cheques
✓ A dishonored cheque is one that is presented to the bank by the payee but the bank
refuses to make payment against it.
✓ Usually the cheque has 'Refer to drawer' stamped or written on it.
✓ It is commonly referred to as a bounced cheque.
✓ There are a number of reasons why a bank may refuse to honor a cheque:
➢ There are insufficient funds in the account to cover the cheque.
➢ The cheque is stale (the cheque was created too long ago).
➢ Any alterations on the cheque are not signed.
➢ The cheque is post-dated (it is dated for the future).
➢ There are details missing from the cheque for example, there is no date.
➢ The amount in words differs from the amount in figures.
➢ The cheque is torn, dirty or mutilated.
➢ The drawer's signature differs from the specimen Signature at the bank.
➢ The drawer has been declared bankrupt or insolvent.
➢ The bank has been informed of the death or insanity of the drawer.
➢ The account has been closed.
➢ The drawer has made a stop payment order
Bank draft
✓ A bank draft is a cheque drawn by a bank on itself in favour of a customer.
✓ It is the bank's own cheque and is commonly known as a counter cheque.
✓ It is a secure method of payment as it cannot be dishonoured.
✓ Payment is guaranteed.
✓ It is often used when:
➢ large sums of money are involved
➢ The debtor is not known to the creditor.
Bank-certified cheque
✓ A bank-certified cheque is drawn by an account holder and signed on its face by the
bank manager to guarantee payment. It is a customer cheque.
✓ The bank then sets aside the money to cover the cheque. This cheque cannot be drawn
in foreign currency.
✓ Cheque card
✓ A cheque card is a card issued to current account holders to be used together with a
cheque.
✓ It guarantees payment by cheque up to an agreed limit.
✓ The holder fills in the details of the card on the back of the cheque and signs it when
making purchases.
✓ It can also be used to make cash withdrawals or access services at an automated teller
machine (ATM).
✓ Verification is done by entering a personal identity number (PIN) and a Signature
authorisation.
Advantages of making payments by cheque
✓ • Payments can be made at any time. You do not need to go to the bank to obtain the
cash first.
✓ Cheques can be drawn for any amount and the amount is exact. They eliminate the
need for change.
✓ They save time because notes and coins do not need to be counted.
✓ A cheque is a safe method of payment, especially when it is crossed.
✓ Crossed cheques can be posted by ordinary mail.
✓ Cheques are portable.
✓ Cheques can be post-dated, which means that the cheque can only be cashed when the
account holder knows there will be money in the account.
✓ Returned cheques act as receipts for payment.
✓ Cheque stubs provide a record of payment.
✓ The account holder receives monthly statements from the bank.
✓ A cheque is transferrable.
Cheque clearance
✓ Clearing a cheque involves the transfer of funds from the drawer's account to the
payee's account.
✓ The process of transferring the funds varies depending on whether the drawer and
payee use the same bank, same branch or different banks.
✓ Drawer and payee use the same bank
✓ If the drawer and the payee use the same bank and
✓ the same branch, the payee deposits the cheque into his or her own account. The bank
then debits the drawer's account and credits the payee's account.
✓ If the drawer and payee use the same bank but different branches, the payee deposits
the cheque into his or her own account at his or her own branch and his or her account
is credited.
✓ The Cheque is then sent to the bank head office where it is sorted according to branch
of origin.
✓ It is then sent to the drawer's branch, which debits the drawer's account.
Drawer and payee use different banks
✓ If the drawer and the payee use different banks, the drawer deposits the cheque into
his or her own bank and branch account and the account is credited.
✓ The Cheque is then sent to the payee's bank head office where the cheques are sorted
according to banks of origin.
✓ The head office sends the cheques to the Reserve Bank clearing house, where
representatives of different banks meet and physically exchange the cheques. The
debts between the banks are settled.
✓ The cheque is then sent to the drawer's bank head office. The cheques are sorted
according to branch of origin.
✓ The cheque is sent to the drawer's branch where the drawer's account is debited.
Automated teller machines
✓ An automated teller machine (ATM) is a self-operating machine that provides
banking services to customers.
✓ The ATM is connected to the bank's computer system.
✓ The account holder is provided with an ATM card and PIN, which they use to access
the service. The ATM allows account holders to:
➢ make a balance inquiry
➢ request a cheque book
➢ request a bank statement
➢ obtain a mini-statement
➢ transfer funds within the same bank
➢ pay bills
➢ purchase airtime
➢ Make cash and cheque deposits.
Advantages of ATMs
✓ They provide a 24-hour service.
✓ They reduce paperwork as there is no need to complete deposit or withdrawal slips.
✓ They save on labour.
✓ They save on space.
✓ Using Zim-Switch, you can use other banks' ATMs.
✓ They dispense cash quickly.
✓ You have to use a PIN for security.
Bank advances
✓ Commercial banks allow clients to borrow money which are known as advances e.g.
loans and overdrafts
Bank loan
✓ A bank loan is a formal way of borrowing a large sum of money, which can be paid
back over a long period of time.
✓ A loan can be given to anyone as long as they have proof of collateral security.
✓ Loans are mainly used to finance capital expenditure, such as buying machinery.
✓ A loan account is opened when a loan has been granted.
✓ Interest on the loan is fixed and is charged on the whole time the loan is approved.
✓ The rate of interest is low. The loan is repaid over a fixed period of time through fixed
monthly instalments.
Bank overdraft
✓ An overdraft is an informal way of borrowing small amounts over short periods of
time.
✓ This method of finance is available to current account holders only.
✓ It can only be obtained from a commercial bank.
✓ It is mostly used to finance working capital requirements or revenue expenditure such
as buying stock.
✓ A bank overdraft allows the current account holder to write a Cheque for an amount
that is more than what he or she has in the account, up to an agreed limit.
✓ Interest on the overdraft varies and is charged daily on the amount overdrawn.
✓ The rate of interest is usually high.
✓ The repayment period and amount varies.
✓ An overdraft does not require collateral security.
Bank cards
✓ Bank cards are all types of bank plastic cards that are issued by banks to their clients
used in place of cash to purchase goods and services.
✓ They are often referred to as plastic money.
✓ They are not legal tender but represent money in your account.
✓ They include:
➢ credit cards
➢ debit cards
➢ ATM or cash cards.
✓ Debit cards
✓ A debit card is a card issued to an account holder to provide electronic access to his or
her account.
✓ A debit card has the following features:
➢ It allows the holder to buy goods and services at point-of-sale terminals.
➢ Payment is immediately transferred from the holder's account to the trader's
account.
➢ It can only be used if you have money in the account.
➢ It enables the account holder to withdraw cash from an ATM or through cash
back when purchasing goods.
➢ The cardholder uses a PIN to authorise the transaction.
➢ There is a bank charge for each transaction.
➢ It can only be used within a country.
Cash-card or ATM card
✓ A cash card is provided to an account holder and is used to withdraw money from a
current account through an ATM.
✓ The cardholder is given a PIN for security.
✓ The card also enables the account holder to:
➢ make a balance inquiry
➢ make a deposit
➢ transfer funds
➢ pay bills
➢ purchase goods and services at point-of-sale terminals
➢ Withdraw cash along with purchases.
Credit cards
✓ A credit card allows the account holder to purchase goods and services by presenting
the card as payment.
✓ It is issued to authorised customers for use at merchants who display signs accepting
the cards.
✓ A credit card enables the account holder:
➢ A revolving-credit facility up to a given limit, the card holder can use the card
to pay for something even if there is no money in the account
➢ Pay back the loan for purchases in full each month or by instalments
➢ Get a monthly statement showing the transactions for the month
➢ To withdraw money from an ATM
➢ To use the card both locally and internationally.
Business finance
✓ Business organisations obtain their finance from different Sources.
✓ The two main sources of finance for small businesses are:
➢ The owner's personal savings
➢ Borrowing from friends and relatives.
✓ These sources can only raise small amounts of capital.
Sources of finance
✓ As the business grows, they require more finance or capital to sustain their operations.
✓ There are two sources of such capital:
➢ Internal sources
➢ External sources
Internal sources
✓ This is finance that is raised from within the business. It includes:
➢ Retained profits
✓ These are profits made by the business, but not distributed to shareholders.
✓ It is also known as ploughed-back profits and is a cheap source of finance, which is
available only to existing businesses.
➢ Sale of assets,
✓ which means the business may sell assets that it no longer needs to raise capital
➢ Rights issue
✓ This involves selling shares to existing shareholders.
External sources
✓ External finance is raised from Sources outside the business.
✓ These Sources include:
➢ Bank overdraft
➢ Trade credit
➢ Leasing
➢ Debt factoring
➢ Hire purchase
➢ Bank loan
➢ Debentures
➢ Shares
▪ Ordinary shares
▪ Preference shares.
Bank overdraft
✓ This is where the business is allowed to withdraw more money than is actually in the
account.
✓ The overdraft is provided by commercial banks.
✓ It is a short-term method of borrowing, which is flexible and Informal.
✓ However, it is expensive to use and can raise limited amounts of capital.
✓ A ban overdraft has a short period of repayment
✓ Interest for bank overdrafts is usually high
Trade credit
✓ Trade credit is when a trader allows another trader to collect goods and to pay for
them later.
✓ It allows the borrower to sell the goods to raise funds to pay-off the debt. It is a cheap
method of raising capital.
✓ The disadvantage is that it does not provide cash for other uses.
✓ It keeps the trader in a debt cycle
✓ Good become expensive to buy on credit
Leasing
✓ Leasing involves renting machinery and equipment to use for a period of time.
✓ The fixed assets remain the property of the lessor - the owner of the assets.
✓ The business will have an option to buy the assets at the end of the lease period.
✓ It can also be defined as hiring with no option to buy the asset
Factoring
✓ This is when the business sells its debts to a factoring company, usually a finance
house that takes over the debts.
✓ The business obtains immediate cash, less the factoring charges.
✓ This is an option that is used by business when they are desperately in need of cash,
some might be having cash flow problems.
Hire purchase
✓ This source is used for the purchase of equipment, machinery, furniture and other
assets.
✓ The business pays a deposit and the balance is spread over a long period of time.
✓ It is a way of buying an asset using instalments.
✓ This is hiring with an option to buy the asset
✓ The benefits of the method are that the assets may pay for themselves, and the business
does not need to raise large sums in order to buy assets.
✓ The problem is that the business does not obtain cash.
Bank loan
✓ This is a long-term method of borrowing money, where the business obtains a lump
sum from the bank.
✓ Loans are provided by all banks arid have a fixed period of repayment.
✓ This is a cheaper way to borrow money than to take an overdraft. However, the loan is
secured against company assets.
Debentures
✓ This is where the business borrows from members of the public. The loans may be
secured or naked - not secured - on the business' assets.
✓ The business pays a fixed rate of interest to the lender and repays the amount
borrowed at the end of the debenture period.
✓ The business has an option to convert the Joan into equity.
✓ The disadvantage of the method is that interest has to be paid whether the business
makes a profit or not.
Shares
✓ This is capital provided by owners of the business.
✓ Those who buy shares become par-owners of the business or shareholders.
✓ This source is a share from profits every rear.
✓ Private limited companies issue out shares privately while public limited companies
advertise the issue of shares.
✓ The business only pays dividends if it makes profits.
✓ The shares can be ordinary shares or preference shares.
Ordinary shares
✓ Holders of ordinary shares receive a dividend that fluctuates depending on the profit
that the business has made.
✓ The holders of these shares have voting rights in annual general meetings
✓ It is quite a risky investment as the holders are paid last when the company liquidates.
✓ Ordinary shares cannot be redeemed
Preference shares
✓ Holders of preference shares receive a fixed dividend irrespective of the levels of
profit.
✓ It is a safe form of investment; they are paid first before ordinary shareholders
✓ Preference shareholders do not have voting rights at the company's annual general
meetings.
✓ Preference shares can be redeemed
✓ Preference shares can be:
➢ Cumulative - where dividends that are missed are carried forward to the next
financial year
➢ Non-Cumulative - where dividends that are missed are not carried forward to
the next financial year
➢ Redeemable - which means that these shares can be bought back by the
company at a future date
➢ Participating - which means the holders receive a further share of the profits
if profit is above a given level.
Long-term capital
✓ Long-term capital is used by a business to finance
✓ Long-term capital expenditure, such as buying machinery or premises.
✓ This form of capital must be paid back in a period of 12 months or more.
✓ Long-term capital is obtained on the capital markets, such as the Stock Exchange,
insurance companies and pension funds. E.g. Shares and debentures.
Short-term capital
✓ Short-term capital is needed by a business to finance short-term requirements.
✓ The capital must be paid back within 12 months.
✓ Short-term capital is provided on the money market [provided by banks].
✓ Short-term capital includes bank overdrafts, trade credit and leasing.
Other financial institutions
✓ The financial system of a country is made up of a number of different types of
financial institutions.
✓ Apart from the commercial banks, the financial system consists of:
➢ Building societies,
➢ discount houses,
➢ finance houses,
➢ merchant banks,
➢ People's Own Savings Bank (POSB)
✓ Development institutions, such as:
➢ Small Enterprise Development Corporation (SEDCO).
✓ The main features of these financial institutions and services offered are:
Merchant banks
✓ Merchant banks are often referred to as wholesale banks as they mainly deal with
other banks and companies.
✓ They do not have a wide branch network and are mostly found in major cities.
✓ Merchant banks can also be called accepting houses because they accept and discount
bills of exchange.
✓ Merchant banks offer the following services.
➢ They arrange for shares to be issued.
➢ They assist limited companies to raise long- term capital by arranging for
shares to be issued.
➢ They sell shares to the public on behalf of companies.
➢ They provide financial advice. They act as financial advisors to companies.
➢ They can advise firms on investments and arrange mergers and acquisitions.
➢ They act as underwriters, which means they undertake to buy all the unsold
shares after a share issue.
➢ They accept deposits. Like other banks, merchant banks accept deposits from
both individuals and companies for safekeeping.
➢ They operate saving accounts and other types of accounts.
➢ Merchant banks lend money. They offer loans to both government and private
individuals or companies.
➢ They finance exporters and importers by arranging letters of credit.
➢ They accept and discount bills of exchange.
➢ They guarantee the payment of bills of exchange.
➢ They source and keep foreign currency, which they lend on short term to
importers.
➢ They pay interest on customer's deposits.
➢ They provide automated teller machines.
➢ They operate e-banking, telebanking and mobile banking facilities.
Finance houses
✓ Finance houses are important in the buying and selling of goods.
✓ Their main business is to finance the purchase of goods, by individuals or companies,
on hire purchase.
✓ These are the services offered by finance houses.
➢ Finance houses accept deposits. They accept money from companies and the
public for safekeeping.
➢ They operate several types of accounts.
➢ They finance hire purchase transactions, which enables individuals and
organisations to purchase consumer durables, such as television sets and
furniture on credit.
➢ They borrow money from commercial banks.
➢ They lend money to discount houses.
➢ They accept and discount bills.
➢ They offer leasing services.
➢ Leasing is the renting or hiring of an asset for a period of time.
➢ They give financial advice and information.
➢ They offer debt factoring services.
➢ They buy or take over the debts of a business.
➢ They also give loans or advances to customers.
➢ They provide e-banking, telebanking and mobile banking services.
➢ They operate automated teller machines.
Discount houses
✓ Discount houses are financial institutions that specialise in buying, selling and
discounting treasury bills and bills of exchange.
✓ Discount houses render the following services to the public.
➢ They accept deposits [or safekeeping.
➢ They lend money to commercial banks, finance houses, government and
private companies.
➢ They invest in securities, such as treasury bills and government bonds.
➢ They discount bills of exchange and treasury bills.
➢ They store cash reserve assets for banks, which they pay back when required.
➢ They provide financial advice and information.
➢ They raise money for the government.
➢ They operate several types of accounts, such as savings accounts and term
deposit accounts.
Building societies
✓ Building societies are institutions whose main service is to provide long-term loans
for buying or constructing houses and this is exactly how they got their name -
building societies.
✓ Services rendered by building societies
➢ They accepting deposits from individuals and organisations for safekeeping.
➢ They operate savings accounts where they keep money safe.
➢ They provide stop orders or standing order facilities.
➢ They issue cheques on request.
➢ They provide automated teller machines and point-of-sale (POS) terminals
➢ They issue bank cards.
➢ They provide money transfer facilities, such as the Real Time Gross Transfer
System (RTGS).
➢ They pay interest on deposits.
➢ They provide financial advice and information.
➢ They provide mortgage finance; these are long-term loans of up to 25 years for
building, constructing or buying houses.
➢ They run subscription shares and paid-up permanent shares (PUPS), which
pay tax- free interest to customers.
➢ They also give loans against the PUPS.
People’s Own Savings Bank
✓ The People's Own Savings Bank (POSB) was established by government to mobilise
savings by providing accessible banking facilities through the post office branch
network (ZIMPOST).
✓ The People's Own Savings Bank provides these services:
➢ It offers savings accounts and tax-free fixed deposits accounts where money
earns higher interest than in other banks.
➢ It can receive and make payments on behalf of its customers. E.g. some
employees receive their salaries through the POSB.
➢ It also provides stop-order facilities.
➢ The bank issues cheques on request.
➢ It lends money to government, parastatals and individuals.
➢ It provides ATMs and POS terminals.
➢ It allows the use of cards.
➢ It invests in treasury bills.
➢ It provides money orders and postal orders.
➢ It operates e-banking and mobile banking facilities.
Small Enterprise Development Corporation
✓ The Small Enterprise Development Corporation (SEDCO) is a government-owned
institution established in 1983.
✓ It promotes small to medium enterprises.
✓ It provides financial support and training to small and medium businesses.
✓ Services rendered by the Small Enterprise Development Corporation
➢ It provides business leans to SMEs.
➢ It trains SMEs in business management.
➢ It provides infrastructure and cheap premises, such as factory shells and
vendor marks.
➢ It encourages and assists in the formation of co-operatives and SMEs.
The Reserve Bank of Zimbabwe
✓ Like any other country has a central in Zimbabwe it is called the Reserve Bank of
Zimbabwe
✓ The functions of the reserve bank of Zimbabwe
➢ It is the banker to the government.
➢ It performs different banking services to government departments, such as
handling their accounts and giving short-term advances to the government.
➢ It is the banker's bank.
➢ The RBZ accepts deposits from banking institutions.
➢ It issues notes and coins.
➢ It is the only issuer of notes and coins in line with the cash demands and also
to replace worn-out notes and coins.
➢ It formulates and implements monetary policies.
➢ It controls the money supply and determines the interest rates and exchange
rates use to manage inflation.
➢ It is the custodian of gold and foreign currency reserves.
➢ It keeps the country's gold and foreign currency reserves.
➢ It is the lender of last resort.
➢ Lends money to other banks that may be facing a shortage of cash,
➢ It regulates and supervises the banking system.
➢ It issues new banking licenses, oversees the operations of other banks and
withdraws licenses from those not operating according to laid-down
procedures.
➢ The RBZ advises government on financial matters and economic issues.
➢ It acts as a clearing house for inter-bank cheques.
➢ It manages the national debt.
Business calculations
✓ The business calculations required by various stakeholders will be found within the
set of annual financial statements that are produced for each financial year that the
business operates
✓ Business calculations are important for these reasons:
✓ They assist in gauging the performance of a business.
✓ They measure the growth of a business through use of profitability ratios, such as:
➢ Return on capital employed (ROCE),
➢ the profit margin
➢ mark-up,
✓ Liquidity ratios, such as:
➢ Current ratio,
➢ Acid test ratio
➢ Stock turnover ratios.
✓ Terms used in business calculations are:
➢ working capital
➢ Gross profit
➢ Net profit
➢ Turnover
➢ Cost of goods sold/ cost of sales
➢ Rate of stock-turnover.
Working capital
✓ Working capital refers to the amount of capital used for the day-to-day running of a
business, that is, the circulating capital of a business
✓ Businesses need to manage their working capital in order to operate successfully and
avoid being caught up in a debt cycle
✓ Ways of managing working capital are:
➢ Buying goods on credit
➢ Selling goods using cash
➢ Reducing the debtors’ collection period
➢ Increasing the creditors payment period
➢ Efficient stock management [keep minimum stocks]
➢ Leasing idle assets
➢ Selling inefficient assets
✓ Current assets minus current liabilities.
Gross profit
✓ Gross profit refers to net sales (turnover) minus the cost of goods sold during a given
trading period, usually a year
✓ The profit on trading (without anything being deducted from it)
✓ The profit a company makes after deducting the costs associated with making and
selling its products.
Net profit
✓ Net profit refers to gross profit minus expenses incurred by the business in a given
trading period, usually a year
✓ What is left of the revenue a business generates after it pays all its expenses directly
related to the generation of its revenue.
Turnover
✓ Turnover refers to net sales of a business, sales minus sales returns (returns inwards)
✓ The net value of goods sold during the year.
✓ Cost of (sales) goods sold
✓ This is the cost price of goods that have been sold.
Rate of turnover (or stock-turn)
✓ The rate of turnover is important because it measures how quickly goods and services
are sold.
✓ The rate of turnover (or stock-turn) refers to:
➢ The number of times in a given period that stock has or goods have been
bought and sold
➢ The number of times a company orders and sells its goods in a trading period
➢ A measure of how quickly goods are sold and replaced (or bought) in a given
period of time, usually a year.
✓ Using the balances above, you can calculate:
➢ working capital,
➢ gross profit,
➢ net profit, turnover
➢ Rate of turnover (stock-turn).
Working capital
✓ Working capital = current assets – current liabilities, t is calculated as follows:
Current assets $
Closing stock (inventory) 600
Debtors (trade receivables) 1 00
Cash at bank 60
Cash in hand 20
780
Less: Current liabilities
Creditors (trade payables) 320
Working capital 460
✓ To calculate turnover, gross profit and net profit, compile a Trading and profit and
loss account
Rate of turnover (stock-turn).
✓ It is calculated as follows:
➢ Rate of stock turnover: cost of goods sold
Average stock /inventory
✓ Average inventory is calculated as follows:
➢ Average inventory: Average stock /inventory
Margin
✓ The profit margin is the gross profit expressed as a fraction or percentage of the
selling price (or sales or turnover).
✓ It assesses the ability of a company to tum revenue into profits, and is a way of
measuring a company's performance.
✓ It is calculated using this formula:
Mark-up
✓ The mark-up is the gross profit expressed as a fraction or percentage of the cost price
(or cost of goods sold).
✓ It is calculated using the following formula:
➢ Gross profit mark-up: Gross profit * 100
Cost of goods sold
➢ Gross profit mark-up: 1 000 * 100
2 550
39.2%
Relationship between Margin and Mark-up
The Zimbabwe Stock Exchange
✓ The stock exchange is a market where second-hand securities are bought and sold. It
is an organised and regulated market where one can buy and sell shares, bonds and
other securities.
Importance of the Stock Exchange
✓ The stock exchange acts as a barometer for the well-being of an economy.
✓ It encourages people to invest by providing a ready market for buying and selling
shares. E.g. its investors can easily convert their shares into cash.
✓ It provides potential investors with names of reputable companies to invest in.
✓ It facilitates the raising of finance for government and private companies through
selling stocks and bonds.
✓ It prepares reports of companies on the stock exchange and provides information to
investors.
✓ It helps channel the savings of investors into productive activities.
✓ It educates members of the public through its outreach programmes.
✓ It establishes the prices of shares, and quotes and publishes the prices of second-hand
securities.
✓ The stock exchange safeguards investors in the following ways:
➢ It has a code of conduct for dealers.
➢ It compensates investors who may be defrauded by dealers.
➢ It controls and regulates the admission of members, listing and delisting
companies.
➢ It assesses and examines the performance of listed companies to ensure they
maintain standards.
➢ It delists companies that fail to maintain the minimum standards
Stockbrokers
✓ Stockbrokers are agents or middlemen who link members of the public and the sellers
of securities.
✓ Stockbrokers perform the following functions:
✓ They act as intermediaries between investors and jobbers.
✓ They buy and sell securities on behalf of clients.
✓ They manage and look after clients' investments.
✓ They provide advice and information on investments.
✓ They obtain past prices for clients.
✓ They arrange payment for shares traded.
✓ They draft contract notes.
✓ They arrange for the transfer of share certificates.
✓ A broker deals with the jobber on behalf of clients
✓ They deal in all types of securities. In return for their services, brokers earn a
commission, known as brokerage, based on the value of the securities traded.
Stockjobbers
✓ Stockjobbers are merchants or wholesale traders who buy and sell securities on their
own behalf.
✓ Jobbers do not deal with the public directly. They only deal with brokers. They are
independent dealers who buy and sell shares on their own behalf and in this way earn
a profit.
✓ Stockjobbers function as follows:
➢ They specialise in buying and selling a particular class or type of securities.
➢ They work on the stock exchange floor.
➢ They deal directly with stockbrokers and not with members of the public.
➢ They earn a profit known as a jobber's tum.
➢ Speculation is the practice of buying or selling securities on the market in
anticipation of making a profit in the future, due to a rise or fall in the prices of
the securities
Bulls
✓ A bull on the stock market is an investor who expects prices of securities to rise in the
future.
✓ Bulls buy securities with the hope of selling them at a future date at a higher price.
They profit from a future increase in the prices of securities.
Bears
✓ A bear on the stock exchange expects a future fall in the prices of securities.
✓ Bears sell securities they have with the hope of buying them in future when prices
fall.
✓ They profit from a future fall in the prices of securities.
Stags
✓ A stag specialises in new share issues.
✓ Stags purchase shares of newly floated companies hoping to sell them above the par
value.
✓ A stag anticipates a future increase in the prices of newly issued shares.
Trends in banking
✓ Introduction of information technology in the banking sector has seen banks
developing products and services that suit a more technologically oriented customer
base.
✓ These transformations include:
➢ telephonic banking
➢ mobile banking
➢ Internet banking facilities.
➢ Tele-banking enables the account holder to access banking services over the
telephone without visiting a banking hall or bank ATM.
➢ The account holder must first register with the bank to use the service. A
password is set up for security.
➢ The service may be automated, when it uses an automated speech recognition
device, or it may be live, when there are customer service representatives that
attend to clients' calls.
✓ The facility enables bank customers to:
➢ make balance inquiries
➢ pay bills
➢ transfer money from one account to another with the same bank
➢ request bank statements.
Mobile banking
✓ Mobile banking is a facility that enables bank clients to carry out banking transactions
using their tablets or mobile devices, such as cell phones, tablet devices.
✓ This is how mobile banking works:
✓ • The account holder must register with the bank and set up a password or personal
identity number (PIN) for security.
✓ The facility links your cell number to your bank account.
✓ SMS alerts are relayed to the account holder as soon as a transaction has been effected
on the account.
✓ Services are accessed through pre-set message prompts.
✓ The mobile banking facilities do not require internet connectivity, but use the network
of the mobile telephone operator.
✓ The mobile banking facility enables customers to:
➢ make balance inquiries
➢ transfer money within the same bank
➢ pay bills
➢ buy airtime for him- or herself or for another person
➢ request bank statements
➢ View mini-statements.
➢ It requires internet connectivity and is also known as online banking or ebanking.
✓ You must first register with the bank to use the service and must set up a password to
prevent unauthorised access to the account.
✓ The facility links the account holder's device to the bank's computers through the
internet.
✓ Internet banking offers many transactions and inquiries online without having to visit
the branch.
✓ The services provided include:
➢ balance inquiries
➢ transferring money between accounts with the same bank and to other banks
➢ paying bills
➢ viewing images of cheques, deposit slips and statements
➢ Downloading bank statements.
Impact of banking developments
✓ Recent banking developments have brought benefits and challenges to both the
consumers and the bank.
✓ To the consumers include the following:
➢ It is very easy to access accounts – consumers can access their accounts at any
time and from anywhere.
➢ Visits to the bank and time spent in a banking hall are reduced.
➢ Access to information about products and services provided by banks is
increased.
➢ The costs of doing business are reduced.
➢ The safety and speed of processing transactions are increased.
➢ Paperwork is reduced.
➢ Queuing is eliminated.
✓ Telebanking, mobile and internet banking have the following disadvantages:
➢ A limited range of services is provided to the consumer compared to banking
in person.
➢ There is no personal interaction between the bank and its customers.
➢ There may be interruption of the services due to internet and network
connectivity problems.
➢ There is a risk of technical breakdown in machinery.
➢ Access to information technology tools, such as computers and smart phones,
is limited.
➢ There may be threats of cyber fraud, such as accounts being hacked.
International financial institutions
✓ International financial institutions are financial organisations that are formed by more
than one country to provide financial support to member countries in areas of
development.
✓ They are owned by member countries and are subject to international laws.
✓ Membership is drawn from developed countries, known as donor countries, who
provide the finance, and developing countries that borrow from the institutions.
✓ Their main objectives are poverty reduction and economic development through the
provision of loans, grants and technical support.
✓ International financial institutions may be classified into:
➢ multilateral development banks
➢ regional development banks
➢ Bilateral development banks.
✓ Multilateral Development Banks are created by a group of countries, both developing
and developed, irrespective of the geographical location. They include:
➢ International Monetary Fund (IMF)
➢ African Development Bank (AFDB)
➢ International Finance Corporation (IFC)
➢ International Banks for Reconstruction and Development (IBRD)
➢ International Development Association (IDA).
✓ Regional Development Banks consist of countries from a specific geographical
region.
✓ They have a regional bias in their activities. Examples include:
➢ African development Bank (AFDB)
➢ Asian Development Bank (ADB)
➢ European Investment Bank (EIB)
➢ East African Development Bank (EADB)
➢ Islamic Development Bank (IDB).
✓ These are established by a single country, usually a developed country, to support
developmental activities in developing countries. Examples include:
➢ French Development Agency
➢ German Investment Corporation
➢ Netherlands Development Finance Company.
✓ The majority of countries borrow funds from other countries or from international
funding agencies or organisations.
✓ The international funding agencies or organisations that will be discussed
✓ here are:
➢ International Monetary Fund (IMF)
➢ World Bank (WB)
➢ African Development Bank (AFDB)
➢ International Finance Corporation (IFC).
The International Monetary Fund (IMF)
✓ It is an international financial institution established to create and maintain a sound
global monetary system.
✓ It comprises 188 member countries.
✓ Membership is open and voluntary. It is part of the United Nations system.
✓ The IMF performs these functions:
➢ It provides financial assistance and advice to member countries.
➢ It monitors the financial and economic policies of member states.
➢ It lends money to members with short-term balance-of-payments problems.
➢ It promotes international trade by making international payments easy.
➢ It promotes the use of free market systems by member countries.
➢ It provides technical assistance and economic training.
➢ It helps stabilise exchange rates.
➢ It carries out economic surveillance.
Criticism levelled against the IMF is as follows:
✓ The funds programmes are inappropriate for developing countries. For example, the
Economic and Structural Adjustment Programme (ESAP) was meant to help with
unemployment and poverty, but failed to do so.
✓ There are too many conditions that members have to meet before obtaining assistance
and it can be inflexible in its negotiations.
✓ It pays little attention to developing countries' views.
World Bank
✓ The World Bank is a financial institution established in 1944 after World War Two
with the mandate to assist in the rebuilding and reconstruction of European countries
devastated by war. However, it has since expanded its operations and membership to
non-European countries.
✓ The World Bank is made up of the:
➢ International Bank for Reconstruction and Development (IBRD)
➢ International Development Association (ICD).
✓ The bank assists developing countries through:
➢ Providing long-term loans to governments of member states for capital
projects aimed at developing infrastructure at concessionary rates offering
advice and training the promotion of foreign investments.
The African Development Bank (AFDB)
✓ It is a regional development institution established in 1964 to spearhead economic and
social development in African member countries.
✓ Its function is to:
➢ reduce poverty and improve living standards
➢ promote investment in public and private capital projects
➢ finance African governments and private companies investing in member
countries
➢ provide technical assistance for development projects
➢ promote regional integration
➢ Mobilise financial resources.
The International Finance Corporation
✓ Ii is a member of the World Bank Group and was established in 1956. It focuses
mainly on the private sector of the member countries' economies.
✓ The institution provides:
➢ investment services
➢ advisory services
➢ Asset management services.
✓ The purpose of the IFC is to:
➢ encourage private sector development in developing countries
➢ Reduce poverty by investing in private sector projects that promote
development
➢ Source financial resources for private enterprises
➢ Promote accessible and competitive markets
➢ Provide loans and trade finance to business and private projects.