Functions of Commercial Bank

Wednesday, February 20, 2013

Commercial Banks 
Commercial Banks accept deposits of money for safekeeping and provide them with a payment transmission service (cheques), together with saving and loan facilities. 

Functions of Commercial Banks 

1. Accepting Deposits 
Bank deposits are of two types. 

a) Sight deposits/ Demand deposits/ Current Account deposits 
  • It is withdrawable on demand 
  • It is used to finance day-to-day transactions 
  • It can be used to make regular payments 
  • Most banks now pay interest on outstanding current account balance 

b) Time deposits/ Fixed deposits/ Deposit Accounts 
  • It is not withdrawable on demand 
  • It requires notice of withdrawal 
  • It is usually used to finance irregular one-off payments 
  • It gets interest in return 
  • It is deposited for a fixed period of time 
  • It provides the bank with a more stable financial base 

2. Making Payments 
Current Account holders have access to the following payment making services. 
  • Cheque System 
  • Standing Orders: It is an instruction given to the bank to make regular payments of fixed amounts. For example; rent. 
  • Direct Debits: It is an instruction given to the bank to make regular payments but varying amounts. Electricity, Gas, Telephone bills are examples. 
  • Bank Giro Credit: It enables to use only one cheque to pay several bills. 
  • Credit Cards: It helps the cardholders to buy goods and services from those shops who have joined the scheme. 
  • Cash Dispensers / ATM card: It enables the cardholder to get cash from the machine set outside walls of certain banks. It provides customers with 24 hours service in supplying cash. Each customer is given a secret code number and a plastic card which can be used to obtain cash up to an agreed limit. 
  • Traveler’s Cheque and Foreign Currency: Those traveling abroad and households and firms making payments to other countries can use traveler’s cheque. 

3. Advancing Loans 
Lending money is the most profitable activity of commercial banks. Interest charged on money lent is the source of their income. 

a) Bank Loans 
  • Commercial banks provide short-term and long-term loans 
  • It is not necessary to be an accountholder 
  • Borrowers pay interest on the amount borrowed 

b) Bank Overdrafts 
  • It is provided only to current accountholders 
  • The accountholder is entitled to overdraw an agreed amount 
  • Interest is charged only on the amount overdrawn 

4. Other Services 
Commercial Banks also provide the following services; 
  • Advice on investment 
  • Acting as Executors of will 
  • Insurance Service 
  • Unit Trust investment 
  • Share purchase and sales etc
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