CHAPTER 7: BANKING AND FINANCE



CHAPTER 7: BANKING AND FINANCE | |

7.1 WHAT IS A BANK?

It is a place which helps people deal with their money. It offers customers with wide range of banking and financial services.

Type of bank

THE MAIN SERVICES OR WORKS OF A COMMERCIAL BANK

[a] Accepting deposits from customers.

[b] Lending money to customers through bank loan and bank overdraft.

[c] Issuing bank drafts or traveller’s cheques.

[d] Providing a convenience means of making payment through cheque or credit card.

[e] Providing safe custody for valuables and documents.

[f] Providing cash for customers when required.

[g] Making regular payments for customers.

[h] Providing automatic teller machines (ATM) and night safes for the convenience of customers.

[i] Providing internet banking services for customers.

THE MAIN SERVICES PROVIDED BY A COMMERCIAL BANK

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7.2 TYPES OF BANK ACCOUNT

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[a] Current Account or Bank Account

It is an account to store money, which are going to be needed constantly for making payments. Examples paying wages, water bills, insurance, mobile phone bills etc.

i. Most businessmen open current account so that they can keep their money safely and pay their debts with cheques.

ii. The current account holder is given a cheque book (to make payments to someone). A cheque can be deposited in this account.

iii. At the beginning of every month, the bank sends a bank statement, which shows all deposits, withdrawals and balance in the bank .

iv. The depositor of the current account does not earn any interest.

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[b] Fixed Deposit Account or Time Deposit Account

It is an account in which money is deposited in the bank and must left untouched for a certain period of at least three months.

[i] The holder is given a certificate of acknowledgment, which states the amount, the rate of interest and the period agreed upon.

[ii] The depositor is entitled to earn an interest which is higher than that of the savings account.

[iii] The depositor must go to the bank personally to withdraw his money as the certificate is not transferable.

[iv] Advance notice must be given if the money is to be withdrawn before the end of the agreed period.

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[c] Savings Account

It is an account to store money and earn interest and the money can be withdrawn at anytime when needed.

i. The holder is given a passbook, which must he bring to the bank whenever he makes a deposit or a withdrawal.

ii. Deposit means putting money into the bank.

iii. Withdrawal means taking out money from the bank.

iv. To deposit money the account holder must fill up a deposit slip/form.

v. To withdraw money the account holder must fill up a withdrawal slip/form.

vi. The depositor of the saving account holder is entitled to earn an interest.

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ADVANTAGES AND DISADVANTAGES OF CURRENT ACCOUNT

|Advantages |Disadvantages |

|Payments can be made through the issue of cheque. |The account holder does not earn interest. |

|No need to carry about large sum of money. |The bank may charge for opening this account. |

|The bank will settle the debts of current account holder through standing |A recommendation is needed for those who wish to open this account. |

|order and credit transfer. | |

|The money is kept safe from fire, robbery, theft, flood, etc. | |

ADVANTAGES AND DISADVANTAGES OF FIXED DEPOSIT ACCOUNT

|Advantages |Disadvantages |

|The bank gives high rate of interest. |The holder is not advice to withdraw the money before the end of the agreed |

|The money is kept safe from fire, robbery, theft, flood, etc. |period, otherwise he will not earn any interest. |

|No recommendation is required to open this account. |The account holder must go personally to withdraw his money as the |

| |certificate is not transferable. |

ADVANTAGES AND DISADVANTAGES OF SAVING ACCOUNT

|Advantages |Disadvantages |

|The bank pays interest on the account. |The rate of interest is low. |

|The money can be withdrawn at anytime. |The holder cannot issue cheque to make payments. |

|The money is kept safe from fire, robbery, theft, flood, etc. |Overdraft facility is not available to a saving account holder. |

7.3 LENDING MONEY TO CUSTOMERS

If a trader needs money urgently to expand the business, buy new machinery or buy a large amount of stock and has not enough money, he can go to the bank to lend some money in two ways.

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DIFFERENCES BETWEEN A BANK LOAN AND BANK OVERDRAFT

|Bank Loan |Bank Overdraft |

|1. It is normally taken for a long period. |1. It is normally taken for a short period. |

|2. Rate of interest is fairly high as the amount used is for long period. |2. Rate of interest is high as the amount used is for short period. |

|3. Interest per annum is charged on the whole amount of the loan granted and|3. Interest is charged daily on the balance outstanding, i.e. on the actual |

|for the length of period it is used. |amount overdrawn for the length of time it is used. |

|4. Borrower need not be a customer of the bank as long as security is |4. Borrower must be the holder of a current account. |

|provided. | |

|5. Security in one form or another may be provided. |5. Security has to be provided for large sums of money only. |

7.4 OTHER SERVICES OF COMMERCIAL BANKS

There are some other ways that banks can help customers. They are:

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1. Credit cards

This is cards issued by banks to enable holders to make credit purchases at establishments which accept these cards.

Advantages of credit cards:

a. Safe and convenient especially to travelers.

b. The advantage of instant credit.

c. The retailers benefits as his sales increase.

|Disadvantages of credit cards to the card holder |Disadvantages of credit cards to the retailers |

|Interest charged on the balances are higher. |He has to pay commission to the card centre. |

|There is no limit to the amount of credit. |He gets the payment at a later date. |

|He may be tempted to spend more than he can afford. |He has extra work in checking the authenticity of the card. |

2. Automated Teller Machine Service (ATM)

a. Banks provide ATM services to their

savings and current account holders.

It is placed outside the bank and provides

24 hours banking services.

b. The ATM service enables the customers

to perform banking transactions, such as

withdrawals, transfer of funds, deposits, balance inquiry,

request statement of account.

3. On-line Banking

7.5 CHEQUES

WHAT IS A CHEQUE?

It is a method where a customer can authorizes his bank to pay cash or transfer money from his current account to that of the payee’s account (who received the money from the cheque).

PARTIES TO A CHEQUE

a. Drawer – the person who issues or signs the cheque.

b. Drawee – the bank upon which the cheque is drawn.

c. Payee – the receiver of the money on the cheque.

ESSENTIAL INFORMATION OF A CHEQUE

5. Date

1. Payee

2. Cheque No. 3. Drawee 4. Payment of stamp duty

9. Counterfoil

6. Account No. 7. Amount in words Amount in figures 8. Drawer’s signature

HOW TO WRITE A CHEQUE?

The drawer will normally write four things on the cheque:-

a. The date

b. The payee’s name

c. The amount of money in words and figures

d. His or her own signature

ADVANTAGES AND DISADVANTAGES OF USING A CHEQUE

|Advantages |Disadvantages |

|1. It is safer because there is no need to carry large sum of money. |1. It is not legal tender. Not all businesses accept cheque as a means of |

|2. It can be easily carried. |payment. |

|3. It can be given out for any amount. |2. It can be easily lost. |

|4. It serves as a receipt. |3. The drawer’s signature can be forged. |

| |4. It may cause inconvenience to those who do not have a banking account. |

| |5. It may be altered by a dishonest person, if it is not drawn carefully. |

TYPES OF CHEQUE

There are two types of cheque:-

An Open Cheque A Crossed Cheque

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1. OPEN CHEQUE

[a] It is a cheque which is cashable at the bank counter.

[b] It is perfectly plain without any parallel lines drawn across its face.

[c] It is unsafe as cash can be paid out to the wrong person.

2. CROSSED CHEQUE

[a] It is a cheque which can only be paid into a bank account.

[b] It consists of two parallel lines drawn across its face.

[c] It cannot be cashed over the counter of the bank but must be paid into the payee’s bank account for collection.

REASONS FOR CROSSING CHEQUES

1. To make the cheque safer.

2. Less chances of the cheque getting loss

3. Serve as proof that the payee has receive the money.

DISHONOURED CHEQUES

It is a cheque which, when presented to the bank for payment refused by the bank.

Reasons for dishonoured cheques:

[a] The drawer has insufficient amount of money in his bank.

[b] The drawer has asked the bank to stop the payment.

[c] The drawer is dead, bankrupt or insane.

[d] The drawer has closed his account.

[e] The cheque is torn.

[f] The cheque is postdated.

[g] The cheque is stale.

[h] The cheque is not in order, for example, no signature, payee’s name is wrong spelt, amount in words is different from the figure, the date on the cheque is incorrect.

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REASONS FOR A BANK DISHONOURING A CHEQUE

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Commercial Bank.

The bank is owned by individuals or private people. It is set up to serve business.

[a] The Current Account

[b] The Fixed Deposit Account

[c] The Saving Account

Community

Deposits, Withdrawals, Loans, Bills, Investment etc

Commercial Banks

DIBD Bhd [the drawee] Date: 1st January 2008

Payee: Mr. Muhammad Arif or Bearer [the payee]

Amount: Four Hundred Dollars

Only

Cheque No: 123 45 56

A/c No: 28102004 Lidiyana [the drawer]

$400/=

a. It provides the customers to use a bank’s secure website to view balances and statements, perform transactions and payments, and various other facilities.

b. It is very useful, especially for banking outside bank hours and banking anywhere where internet access is available.

2. Bank Overdraft.

It is the sum of money that a bank lends to its current account holder by allowing him to withdraw up to a certain agreed amount above his balance. It is short-term borrowing, for e.g. for 1 month, 2 months or 3 months.

1. Bank Loan.

It is a fixed amount lent out to the customers at a certain rate of interest per annum. It is normally repayable over a long period, i.e. long-term borrowing, e.g. a year, 4 years, 5 years or even 10 years.

B$ 1000/=

710711 71071 Bank Islam Brunei Darussalam Date: 1st January 2008

Date: ______ BIBD Bhd

Pay: _____ Pay: Mr. Muhammad Arif or Bearer

__________

Amount

__________ Brunei dollars: One Thousand Dollar Only

Amount: 456-788-900

Lidiyana

Stamp duty paid

$400/=

DIBD Bhd [the drawee] Date: 1st January 2008

Payee: Mr. Muhammad Arif or Bearer [the payee]

Amount: Four Hundred Dollars

Only

Cheque No: 123 45 56

A/c No: 28102004 Lidiyana [the drawer]

DIBD Bhd [the drawee] Date: 1st January 2008

Payee: Mr. Muhammad Arif or Bearer [the payee]

Amount: Four Hundred Dollars

Only

Cheque No: 123 45 56

A/c No: 28102004 Lidiyana [the drawer]

In which account shall I deposit my money?

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