PRINCIPLES OF BUSINESS

SECTION 7: BUSINESS FINANCE

COMMERCIAL BANKS

These are financial institutions, which are privately owned by shareholders

Functions of Commercial Banks

Acceptance of deposits
Supply finance (loans, investment)
Provide a system of payment for bills
Can act as executor/trustee
Provide safe keeping of documents 9wills, life insurance policies, title deed,
jewellery etc.)
Assist with foreign exchange rate
Provide credit rating to customers
Dispense cash
Buy government securities
Negotiate investments for customers

Services Offered
 Deposits (e.g. savings accounts, fixed deposit, chequing accounts etc.)
 Safety Deposit Boxes
 Mortgages ( long term e.g. houses, commercial buildings, land)
 Other Loans (shorter term e.g. cars, education, furniture, travel etc.)
 Credit Cards
 Retirement Savings Plans (RSP)

CENTRAL BANK
This is an institution controlled by the government and does not compete with commercial
banks.

Function of Central Bank

Issues and regulates bank notes (currency)
Acts as government’s bank (holds all government accounts & issues treasury bills)
Responsible for foreign reserves
 Executes government monetary policy by exercising control of money supply,
borrowing and saving interest rates.
Looks after borrowing from IMF
Supervises commercial banks’ operations
Acts as bankers’ bank (issuing notes and coins, holding banks’ reserves etc.)
Assists with the setting up of financial markets such as the stock exchange

Relationship between Central Bank and Commercial Banks

 Banks are legally required to deposit with the central bank (as a reserve) a
percentage of their total deposits. This is called the legal reserve requirement.
This can be changed by the central bank depending on its objectives. The
higher the amount required, the less money would be available for loans to
the public.
 The Central Bank can also decide the amount of local assets which
commercial banks must hold as part of the total assets which they hold
 There is also a liquidity requirement. This is the ratio of liquid assets to the
total assets held by the bank. Liquid assets are those which can be easily
converted to cash

MONEY MANAGEMENT

Savings
This is money is usually held by a bank or credit union on which interest is earned. The
principal amount remains the same unless some is withdrawn.

Investment
This involves the purchase of shares in an organisation. Dividends are usually paid when
profits are made. The value of the shares can increase or decrease, depending on the
profitability of the company. There the initial amount invested can increase or decrease.
Investments can be made on the stock market, mutual funds or simply putting money into
a new business.

What is money management?

Sound money management is a sensible way of spending and investing money. One’s total
expenditure should not exceed one’s income. Sound money management should follow
these guidelines stated below:
1. Set goals based on what is important to you
 2. Prioritise goals
3. Provide for basic needs first
4. Save for the future(pay sheet deductions, credit union, banks etc)
5. Make wise decisions when buying (i.e. shop around)
6. Get the most out of your purchases (use items properly)
7. Live within your means

A budget can be made an essential part of money management. It is a document showing

all sources of income and the ways in which it will be used for a certain period. A
comparison can then be made between the planned and actual expenditure. If necessary,
adjustments can be made during or after the specified planning period.

Saving should be included in one’s management of money. This can be done through a
number of organisations and informal groups such as
 Banks
 Insurance companies
 Credit unions
 Sou sou, lend- a- hand, meeting turn, box etc.

SOURCES OF FINANCE/CAPITAL
Capital is all the funds raised by individuals or organisations from savings or borrowing. It
may include short-term financing, long-term financing or a combination of both

Money Markets
Money can be borrowed from commercial banks, credit unions, hire purchase
companies etc. These institutions are usually more concerned with short-term lending but
it is not uncommon to lend for longer periods e.g. mortgages.

Capital Markets
These specialise in long-term lending almost entirely to business and industries. They
include insurance companies, pension funds, stock exchange, development banks and
other government agencies

STOCK EXCHANGE

This is the market place where buyers and sellers of securities (all stocks and shares) can
meet to buy and sell. The Stock Exchange is responsible for making arrangements for the
trading of shares. It also sets the rules of operation of the Stock Market and ensures that
members adhere to the rules at all times. In the Caribbean Barbados, Jamaica and Trinidad
have stock markets on which cross border trading is allowed. That is, it is possible to buy
shares from the stock market of another country. Since the shares which are being trading
on the stock exchange were already sold once, the stock exchange is said to be the market
place for second hand trading.

On a stock market there are various risks and benefits. Usually, the higher the risk the
higher the gain. It is often wise to spread investments across high and low risk investments
to minimise losses.

Why is the Stock Exchange Important?

In the Caribbean, many companies (and governments) do not possess the finances to
purchase all they need for continued success. In order to acquire these large sums of
money (capital), businesses go to the public and encourage persons/organisations to
purchase shares. However, most persons will not invest if they did not think that they
could achieve some return on their investment. The money acquired is then invested into
the business but cannot be returned to the individual/organisation. If the investor wishes to
get back the money, the shares can be sold to another investor. These transactions are
facilitated by the stock exchange. Stock exchanges also have international importance
because they provide a market for foreign investment.

Terms of Stock Market

 Bull market- Investors buy or hold on to shares in the anticipation of a rise in price.
As the prices are rising in this market, investors will make a profit by selling at the
higher price.
 Bear Market- In anticipation of a fall in price, investor will sell shares in order to
minimise losses. They may buy back the shares at a relatively low price. In this
market prices tend to be falling.
 Stag market- Investors buy new shares, with the aim of reselling at a profit when
second hand deal starts on the stock exchange.
 REVISION
1. List THREE functions of Commercial Banks.
2. Identify Two services offered by a commercial banks to citizens of a country.
3. Which bank can be called “the bankers’ bank”?
4. Which bank is responsible for the government’s finances?
5. Explain the difference between investment and saving.
6. Explain one reason why commercial banks need the Central Bank.
7. If you want to borrow money list TWO examples of sources from
a) the money market b) the capital market
8. Describe TWO functions of the Stock Market.
9. Name TWO Caribbean countries where stock markets can be found.

REVISION
1. List THREE functions of Commercial Banks.
2. Identify Two services offered by a commercial banks to citizens of a country.
3. Which bank can be called “the bankers’ bank”?
4. Which bank is responsible for the government’s finances?
5. Explain the difference between investment and saving.
6. Explain one reason why commercial banks need the Central Bank.
7. If you want to borrow money list TWO examples of sources from
a) the money market b) the capital market
8. Describe TWO functions of the Stock Market.
9. Name TWO Caribbean countries where stock markets can be found.

REVISION
1. List THREE functions of Commercial Banks.
2. Identify Two services offered by a commercial banks to citizens of a country.
3. Which bank can be called “the bankers’ bank”?
4. Which bank is responsible for the government’s finances?
5. Explain the difference between investment and saving.
6. Explain one reason why commercial banks need the Central Bank.
7. If you want to borrow money list TWO examples of sources from
a) the money market b) the capital market
8. Describe TWO functions of the Stock Market.
9. Name TWO Caribbean countries where stock markets can be found.