O Level Revision : Commerce - Banking

Banking

Importance of banking

Banks facilitate trade and aids to trade by:

• safekeeping cash deposited in the current, savings and fixed deposit accounts;
• causing convenient and safe means of making payments through the current account, bank drafts, bank transfers and bills of exchange;
• financing in the form of loans, overdrafts, or discounted bills of exchange;
• advising on local or foreign financial investments.

Types of banks

1. Central Bank

In Zimbabwe it is also known as the Reserve Bank of Zimbabwe (RBZ). The Central

Bank:

• issues notes and coins
• is the bankers’ bank;  other banks keep reserves at RBZ
• acts as a banker to the government
• controls the country’s stock of money
• acts as the lender of the last resort to banking institutions
• implements the government’s monetary policy
• looks after the stocks of gold and foreign currency

2. Commercial banks

• accept deposits
• allow cash withdrawals
• offer cheque  cards
• allow transfer of money by means of cheques
• provide a convenient means of making payments
• lend money to customers
• provide safe custody for customers’money and other valuables such as insurance policies and wills
• offer financial advice to individuals,  corporate  and government
• operate current accounts for their customers
• Barclays,  CBZ,  Steward  Bank  and  Standard  Chartered  are  examples  of commercial banks in Zimbabwe

Banking accounts

1. Savings account

• Clients save their money and earn an interest.
• A savings account requires a small minimum deposit.
• An account holder is issued with a bank card, an automated teller machine (ATM ) card.
• This account is suitable for individuals who wish to save small sums of money.
• The account holders may pay monthly bank charges for operating the account.

2. Fixed deposit account

• An account holder is issued with a fixed deposit certificate which can be
• presented for payment upon the maturity or expiry date.
• It earns a higher rate of interest.
• The bank can make use of the money for investment and for loans.

3. Current account

• The prospective current account holder completes an application form by giving
• first, middle and last names; address; source of income; and referees.
• If the application is accepted, the bank gives the account holder a cheques book for making withdrawals by cheques.
• The account holder pays bank charges for operating the account.

The cheque system

• A cheque is a written order to pay a bearer a stated amount of money.

Features and parties of a cheque

• Date: the above cheque can be drawn on or after 14 September 1990 and drawee i.e. Royal Bank will refuse to honour the cheque after six months have elapsed from the date of issue.
• Payee: the party being paid by cheque. ACCESS PUBLISHERS is the payee and is to receive the money.
• Drawee: the bank where the current account is held. Royal Bank is the drawee.
• Drawer: the current account holder. Chimuti is the drawer.

Types of cheques

1. a) Open cheque

• Anyone can obtain cash by endorsing the open  cheque on the back.

1. b) Crossed cheque

• Has two diagonal parallel lines across its face.
• Cannot be cashed over a bank counter.
• Must be paid or deposited into a bank account.
• The crossed cheque is traceable to the presenter at any bank.
• Crossing can be general or special.

Clearing of  cheques

• The drawer issues a crossed cheque to payee
• Payee deposits the cheque
• The drawee credits payee and debits the drawer`s account

Advantages of using cheques

• A cheque is convenient - quick to write than counting notes and coins.
• It is light to carry.
• Reduces the risk of loss or theft.
• Cheque transactions are traceable.
• No change may be required.
• Cheque stubs provide a record and proof of payments made.
• A cheque can be scanned into a computer, converted to electronic form and stored.
• Can be written out and sent to payee in advance.
• Cheques can be posted cheaply.

A cheque can be dishonoured if:

• it is post-dated
• it is stale
• it is not signed
• it is not dated
• there are no funds in the drawer’s account
• the drawer stops its payment
• the drawer is insane
• the drawer is bankrupt or insolvent
• alterations are unsigned for

Methods of payment

1. Notes and coins

• Have legal tender.
• Are standard, common and simple methods of payment.

2. Cheques

• Written order to pay bearer a stated amount of money

3. Credit transfer

• Payments are made to a creditor’s bank account at any bank.
• A current account holder instructs the bank to pay directly into the account of a payee.
• Bank debits current account holder’s account and credits payees’ account.
• Suitable for large organisations with large numbers of creditors who have bank accounts.
• Payments are made regularly at one time.
• For salaries, only one cheque is issued.
• List of employees’ names, banks, account numbers and amounts of pay are raised.
• Mode of payment is convenient to payee and payer.
• Reduces paperwork of writing several cheques.
• Creditor draws one cheque and  pays duty on one cheque
• Is safe.
• Is fast in making payments.

4. Standing order

• The  bank  makes  regular  payments  of  regular  or  similar  amounts  for  the customer.
• It saves the cost of posting cheques or cash payments.
• The payee receives prompt payment.
• It reduces paperwork since reminders or requests for payment may not be necessary.
• Standing  orders  or  stop  orders  may  be  used  for  paying  subscriptions  to associations.

5. Direct debit

• The date and amount of the payment vary.
• The creditor or payee initiates the direct debit.
• The payee is assured of payment.
• It reduces bad debts.

6. Bill of exchange

• A bill of exchange is a negotiable instrument drafted by a creditor and accepted by the debtor.
• It is used to secure payment at a future date in export trade.
• The bill may be discounted or used as security for an overdraft or loan.

7. Banker’s draft

• A reliable and safe document drawn by a bank on itself on behalf of a customer who intends to pay a creditor.
• The banker’s draft is drawn because: the debtor is not known to the creditor; the amount involved is large e.g. for purchase of a vehicle, or house; or payment is to be made in foreign currency.

8. Cable transfer

• A form of remittance that requires the use of certified telegrams or cables.
• It is an order to pay in telegraphic form.
• It  is  used  by  banks  in  various  exchange  markets  of  the  world  and  large commercial concerns.
• It is a safe and fast form of remittance.
• It is expensive to use.
• Examples are Moneygram, Mukuru.com and Western Union.

9. Debit cards

• Also known as plastic money.
• Customers swipe the cards at supermarkets, fuel depots, restaurants, hotels, etc.
• The seller of products or service provider is credited instantly; the buyer is debited too.

10. Mobile banking services

• Mobile phone firms namely Econet, Telecel and Netone offer Ecocash, Telecash and One Wallet telebanking services respectively.
• Subscribers transact through registered agents.
• Customer makes transactions any time.
• Obtains account balances.

Advantages

• Simple, convenient, safe and fast.
• Offers 24 hour service, 7 days a week.
• Paperless account maintenance.
• Payment for goods and services.
• No need to carry cash.
• Can be issued with a debit card.
• No need for a bank account.
• Can be linked to one’s bank account.
• Makes electronic bill payment.
• Sends money.
• Receives money.
• Transfers money.
• Subscriber can buy or transfer airtime.

Disadvantages

• Poor network challenges.
• Rural agents may have inadequate funds.
• Punching in a wrong number results in transacting with the wrong person.

Bank overdraft

• Suitable for a borrower who requires finance for short periods only.
• Is charged interest on the amount overdrawn daily and the  interest is variable.
• Makes an informal application for the overdraft.

Bank loan

• Formal borrowing for a specific time frame.
• Bank provides the customer with the total amount of money.
• Interest rate is fixed.
• Interest is charged on the total amount borrowed.
• Loan repayments are over a fixed period.

Details on a bank loan application form:

• amount of loan required
• purpose of the loan
• the profitability of the project
• details of the client’s previous record with the bank
• details of the trading position of the client
• security offered
• client’s integrity
• bank policy on loans
• the period for which the loan may be required

Other types of banks/financial institutions

1. People’s Own Savings Bank (POSB)

• Accepts savings and fixed deposits from the public.
• Invests money in Treasury Bills, Commercial banks and Discount Houses
• Lends money to parastatals.
• Interest on deposits is tax-free.

2. Discount Houses

• Are public joint-stock companies
• Their stock-in-trade is money.
• Borrow money from banks and lend it.
• Provide government with money by buying Treasury Bills.
• Lend money by discounting Bills of Exchange.
• Discount Company of Zimbabwe and Bard are examples of discount houses.

3. Finance Houses

• Obtain funds from the public and commercial banks by offering attractive rates of interest.
• Make profit by lending funds to people wishing to buy durable goods.
• Charge high interest rates on loans.

4. Building Societies

• Central Africa Building Society (CABS) is an example of a building society.
• The public invests in building societies by opening savings and fixed deposits accounts and having paid-up permanent shares.
• Funds deposited in building societies accumulate and are lent to people wishing to purchase or build homes.

5. Merchant banks

• Specialise in large scale banking and financing of international trade.
• Accept Bills of Exchange.
• Control unit trusts.
• Give financial advice to firms on investment management.

a) personal customers; and b)    business customers.