Classwork Series and Exercises {Economics – SS3}: Commercial Banks

SS3 Economics First Term Week2

For previous lesson on commercial banks https://passnownow.com/namaste-lesson/commercial-banks/

Topic – Commercial banks II

Content

1. Types of bank Account
2. Roles of commercial banks in international trade
3. Credit facilities provided by commercial bank
4. Ways by which commercial banks can create money or credit
5. Limitation to credit created by commercial bank
6.   Problems of commercial banks

Types of Bank Account

1. Current Account: This is the type of account operated mostly businessmen and organizations and for a customer who wishes to make payment through the issuing of cheque.In a current account, the customer will be given a cheque book that makes him to withdraw money at any time. Holders of current account are not entitled to interest from the bank; rather they pay commission to the bank. A current account is the account for day to day transactions.

Current bank account is opened by businessmen who have a higher number of regular transactions with the bank. It includes deposits, withdrawals, and contra transactions. It is also known as Demand Deposit Account.

Features of Current Account

• The following points below are the features/ characteristics of current account
• Current account makes your financial management more convenient, it helps to provide easier access to your money or a way to protect your account more efficiently
• Checkbook – In addition to a cash or debit card, most current accounts come with a checkbook. However, account holders must be at least 18 years of age to enjoy this feature. The checkbook allows you even more option for making purchases and paying bills.

With current accounts a person can effectively compete with other financial institutions. These features may include:

• Online or Telephone Banking – Most bank customers today don’t want to have to limit their bank business to standard office hours. Internet banking can be done at a time that is convenient for you, right from the comfort of home. Many companies also offer 24-hour phone service, so you can talk to a live person about your account if you prefer.
• Overdraft Facility – This addition to your current account protects you from accidental overdrafts. When you write a check for more than you have in your account, the overdraft kicks in to cover your debit. You can pay the overdraft back in full or in minimum monthly payments. The specific limit and terms of the overdraft will vary from bank to bank
• Payment of commission is made to the bank in a current account
• Other people can withdraw money from the bank on behalf of another of the customers
• Holders of current account are not entitled to interest
• Money can be withdrawn frequently without any barrier.

2. Savings Account: A savings account is the account that encourages low income earners to form the habit of saving; it is the most common form of bank account. It is operated with the use of passbook. An interest is always paid to the users of a savings account.

Features of Savings account

1. The main objective of saving account is to promote savings.
2. There is no restriction on the number and amount of deposits.
3. Withdrawals are allowed subject to certain restrictions.
4. The money can be withdrawn either by cheque or withdrawal slip of the respective bank
5. The rate of interest payable is very nominal on saving accounts. At present it is between 4% to 6% p.
6. Saving account is of continuing nature. There is no maximum period of holding.
7. A minimum amount has to be kept on saving account to keep it functioning.
8. withdrawals cannot be made by another person on behalf of the customers
9. No loan facility is provided against saving account. Electronic clearing System (ECS) or E-Banking are available to pay electricity bill, telephone bill and other routine household expensive savings accounts
10. Fixed deposit account: Fixed deposit account can also be called a time account deposit, it is usually operated by those who have excess money in their hands and needed to do something with the money.

3. A fixed deposit (FD): It is a financial instrument provided by banks which provides investors with a higher rate of interest than a regular savings account until the given maturity date. Holders of a fixed deposit account are entitled to higher interest rate than a savings account.

Features of a fixed deposit account

• It attracts higher interest rate
• The customer is issued with a deposit account passbook
• Customers can only withdraw subject to seven days of notice
• People save money in a deposit account for a specific purpose and it can be renewed on maturity.

Roles of Commercial Banks in International Trade

• They also help in foreign exchange regulation.
• They also assist to minimize default in the payment of goods through the process of confirming letter of credit.
• Provision of documentary credits; they provide commercial credit facilities to exporters which can help them in the payment of good.
• Commercial banks issue travelers cheque to their customers traveling abroad.
• Commercial banks can act as referees to exporters by providing information to foreign businessmen about their credit worthiness.
• Credit facilities provided by commercial bank
• The commercial banks can help to create credit facilities or act as an agent of lending through the following means

1. Overdraft: This is the privilege given to a customer to withdraw more than what is in his account with the hope of paying later. The excess withdrawn from the account is the overdraft. Only a current account holder is allowed to enjoy this facility and an interest will be paid on the overdraft.
2. Loan: loan is the money lent out to customers at an agreed rate of interest for a specific period of time. For a loan to be granted to a customer, the customer must have a collateral security. The will pay interest on the full amount he has borrowed.

Factors for consideration before granting loan

1. Financial position of customer’s account
2. Credibility of the customer
3. The purpose of the loan
4. Provision of collateral security
5. Period of repayment of loan
6. Total amount applied for as loan
7. Viability of the business

Differences between loan and overdraft

1. To get a loan a separate account called ‘loan account’ must be opened while in overdraft there is no need for a separate account.
2. In getting a loan a collateral security is required while in getting a bank overdraft, there is no reason for collateral security.
3. Loan attracts a lower rate of interest while overdraft attracts a higher rate of interest
4. A loan must be paid back at a fixed time while an overdraft is paid gradually and deducted from the customer’s account.

Problems of Commercial Banks in Nigeria

1. High level of illiteracy
2. Urban concentration
3. Non- repayment of loans
4. Capital shortage
5. Lack of innovative banking practices
6. Corruption.
7. High interest rate
8. Government frequent intervention

Test and exercise

1. Types of bank account are all of these are (a) savings (b) current (c) fixed deposit (d) all of the above.
2. The excess in withdrawing a certain amount of money more than what is in your bank account is (a) overdraft (b) loan (c) interest (d) commission.
3. The account open separately to get a loan from bank is called (a) current account (b) savings account (c) loan account (d) fixed deposit account.
4. One of the major differences between loan and overdraft is (a) loan requires a collateral while overdraft do not (b) overdraft can be given when you operate savings account and vice versa (c) both attracts (d) loan and overdraft are the same.
5. All of these are the problems of commercial banks in Nigeria except  (a) they have too many customers (b) they find it difficult to employ the right personnel (c) non-repayment of loans (d) urban concentration.http://passnownow.com/classwork-support/