UNIT 15: BANKS

• Banking – helps people to borrow and lend

money to the people and involves financial
activity
• Commercial banks[joint sock, retail or high
street bank]:private sector banks which aim to
make a profit by providing a range of banking
services
 Functions of COMMERCIAL BANKS
• To accept deposits
• To lend
• To enable customers to make payments
• Deposits- current account(demand account)- easy and
immediate access to money but interest is not paid on
money held in this account
• CA- receive and make payments
• Deposit or time account-period of notice has to be
given before money can be withdrawn.
• Interest is paid on money held in this account.
• Customers use DA as a way of saving
• Banks make most of their profit by charging higher interest
from borrowers than that paid on the money held with the
banks
• There are 2 main ways of borrowing from a bank
• Overdraft- customer to spend more than his/her account
upto an agreed limit.
• Interest is charged on the amount borrowed
• Loans- particular purpose for a particular period of time
• Rate of interest is lower than overdraft
• Collateral as a security for loans
• If loan is not repaid- collateral can be sold- recover money
• Accept deposit from those with more money
than they currently want to spend and lend it
to those with an immediate desire to spend
more money than they have at hand
• LENDERS BANKS BORROWERS

• FINANCIAL INTERMEDIARIES
 OTHER FUNCTIONS OF COMMERCIAL
BANKS
• Travellers cheque
• Change foreign currency
• Purchase and sale of shares
• Mortgage loans
• AIMS OF COMMERCIAL BANKS:
• Make profit for its shareholders
• Loans(advances)
• Liquidity-withdraw money from their accounts
• Banks have to keep certain amount- liquid assets- turn
into cash quickly and without incurring loss.
• Long term loans- get interest
 Banking and islam
• Muslim countries- commercial banks are not
allowed to charge interest on bank loans
• Consider interest as SIN(usury)
• Lend to them in return for a share in their profits
• Other banks:
• Investment banks(merchant banks)- act as a
banker to large firm
• Saving banks
 CENTRAL BANKS[world- federal reserve bank of the
USA called Fed, europe-ECB & in UK- bank of england

• Government owned bank which provides banking services

to the gov and commerical banks
• Functions
• Acts as a banker to the gov
• Acts as a lender of last resort
• Manages the national debt
• holds the country’s reserves of foreign currency and gold
• Issues bank notes
• Implements the government’s monetary policy
• Controls the banking system
• Represents the government
 Independence of central banks
• Gov have given the CB the authority to decide
the RATE OF INTEREST
• Use the ROI to achieve an inflation target of
2%
• CB- lower ROI to win public support
• Extensive knowledge of the banking system
and appropriate ROI to set.