Académique Documents
Professionnel Documents
Culture Documents
Lending and borrowing from banks means that they act as financial intermediaries.
They accept deposits from those with more money than they want to spend and lend it to those
with an immediate desire to spend more money than they have at hand.
3. Enabling customers to receive and make payments
Banks act as agents for payments and provide money transmission services. There is now range
of ways in which people can receive money and make payments out of their accounts such as
cheques, standing orders[an instruction to a bank by an account holder to make regular
fixed payments to a particular person or organization.], direct debits, debit/credit cards
and online banking.
4. Other Functions
Provide travellers with cheques
Change foreign currency
Customers can leave important documents such as house deeds and small valuables with their
banks.
Banks can also help with the administration of customers' wills
Provide advice and help with financial matters-Such as completion of tax forms and the
purchase and sale of shares.
Sell insurance
Offer a wide variety of savings accounts with a range of conditions and interest rates.
Offer mortgage loans as well
Aims of commercial banks
Making a profit for their shareholders
The main way it does this is by giving out loans
Liquidity
Banks have to ensure that they can meet their customers' requests to
withdraw money from their accounts.
To do this banks have to keep a certain amount of liquid assets –items
that can be quickly turned into cash without incurring loss.
Banks earn most of their interests by giving out long term loans
However if they lend out all their money in these loans then they will
not be able to pay money to the consumers who are requesting it.
Thus, banks have to balance profitability and liquidity
Having some assets that are earning profit while being illiquid and
having others that are earning low or no interest but being liquid.
Banking and islam
In Muslim countries, commercial banks are not allowed to
charge interest on bank loans. This is because Muslims
regard charging of interest (usury) a sin.
So to tackle this problem- Muslim banks have provided
finance to banks by lending to them in return for a share
of Profits.
Islamic sharia scholars are employed to issue religious
edicts that approve financial products including loans.
Other Types of banks
There are two other types of banks- investment banks and savings banks
Investment banks or merchant banks-
• These are banks that tend only to large firms. They accept deposits from
• them and lend money to them as well.
• They manage the issue of new shares and buy and sell shares and other
• financial securities on behalf of their own customers.
• They also give advice on, and help with mergers and takeovers.
Savings banks
• They try to encourage people with relatively low incomes to save,
• They make it easy to withdraw cash with few penalties
• A large proportion of the money lent by these banks goes to the govt.
Central Banks
Central Banks are government-owned banks
which provide banking services to the
government and commercial banks.
For example: Federal Reserve Bank Of the USA,
European Central Bank and Bank Of England.
Functions of a Central Bank
1. Acts as a banker to the government
o Tax revenue is paid into the government's account at the
central bank
o Payments by the government are made out of the
government's account at the central bank.
2.Operates as a banker to the commercial banks
Central bank keeps part of the cash balances of all commercial
banks as deposit with a view to meeting liabilities of these
banks in times of crises. These cash balances are kept by the
commercial banks in 2 ways: a] part of the cash balances with
themselves b] another part with the central bank as deposit
o Holding accounts at the central banks allows the commercial banks to
withdraw money to settle the debts between each other and draw out
the cash if their own customers are taking out more money than
usual.
3. Acts as a lender of last resort
If a commercial bank fails to get financial accommodation
from anywhere , it approaches the central bank as a last
resort
o It will lend money to those banks that are temporarily out of cash.
4. Manages the national debt
o National debt is the total amount of money that the government owes.
o Over time government debt tends to build up.
o The central bank carries out borrowing on the government's behalf
It does this by issuing government securities such as issuing government bonds, paying
interest on these and repaying them when they fall due