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.

1

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

Commercial BanksCommunity

Deposits, Withdrawals, Loans, Bills,

Investment etc

[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

7.2 TYPES OF BANK ACCOUNT

2

[a] The Current Account[b] The Fixed Deposit Account[c] The Saving Account

[a] Current Account or Bank AccountIt 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.

[b] Fixed Deposit Account or Time Deposit AccountIt 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.

3

[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to withdraw his money as the certificate is not transferable.[iv] Advance notice must be given if the money is to be withdrawn before the end of the agreed period.

[c] Savings AccountIt is an account to store money and earn interest and the money can be withdrawn at anytime when needed.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.

4

In which account shall I deposit my money?

ADVANTAGES AND DISADVANTAGES OF CURRENT ACCOUNTAdvantages Disadvantages

1. Payments can be made through the issue of cheque.

2. No need to carry about large sum of money.

3. The bank will settle the debts of current account holder through standing order and credit transfer.

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

1. The account holder does not earn interest.

2. The bank may charge for opening this account.

3. A recommendation is needed for those who wish to open this account.

ADVANTAGES AND DISADVANTAGES OF FIXED DEPOSIT ACCOUNTAdvantages Disadvantages

1. The bank gives high rate of interest.2. The money is kept safe from fire,

robbery, theft, flood, etc.3. No recommendation is required to

open this account.

1. The holder is not advice to withdraw the money before the end of the agreed period, otherwise he will not earn any interest.

2. The account holder must go personally to withdraw his money as the certificate is not transferable.

5

ADVANTAGES AND DISADVANTAGES OF SAVING ACCOUNTAdvantages Disadvantages

1. The bank pays interest on the account.

2. The money can be withdrawn at anytime.

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

1. The rate of interest is low.2. The holder cannot issue cheque to

make payments.3. Overdraft facility is not available to

a saving account holder.

7.3 LENDING MONEY TO CUSTOMERSIf 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.

DIFFERENCES BETWEEN A BANK LOAN AND BANK OVERDRAFT

6

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.

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

Bank Loan Bank Overdraft1. 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 for the length of period it is used.

3. Interest is charged daily on the balance outstanding, i.e. on the actual 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 provided.

4. Borrower must be the holder of a current account.

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:

1. Credit cardsThis 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

7

a. Interest charged on the balances are higher.

b. There is no limit to the amount of credit.

c. He may be tempted to spend more than he can afford.

a. He has to pay commission to the card centre.

b. He gets the payment at a later date.

c. 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 CHEQUESWHAT 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).

8

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

PARTIES TO A CHEQUEa. 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

9

DIBD Bhd [the drawee] Date: 1 st 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/=

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

Pay: _____ Pay: Mr. Muhammad Arif or Bearer__________

Amount __________ Brunei dollars: One Thousand Dollar Only

Amount: 456-788-900

Stamp duty paid

B$ 1000/=

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 dateb. The payee’s namec. The amount of money in words and figuresd. His or her own signature

ADVANTAGES AND DISADVANTAGES OF USING A CHEQUEAdvantages Disadvantages

1. It is safer because there is no need to carry large sum of money.2. It can be easily carried.3. It can be given out for any amount.4. It serves as a receipt.

1. It is not legal tender. Not all businesses accept cheque as a means of payment.2. It can be easily lost.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 CHEQUEThere are two types of cheque:-

An Open Cheque A Crossed Cheque

10

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.

11

DIBD Bhd [the drawee] Date: 1 st 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/=

DIBD Bhd [the drawee] Date: 1 st 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]

REASONS FOR CROSSING CHEQUES1. To make the cheque safer.2. Less chances of the cheque getting loss3. Serve as proof that the payee has receive the money.

DISHONOURED CHEQUESIt 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.

12

REASONS FOR A BANK DISHONOURING A CHEQUE

13