COMMERCIAL BANKS – They are financial institutions that carry out commercial services,accept deposits from the public and advance loans.they are formed with the aim of making profit hence are trading businesses like any other.
FUNCTIONS OF COMMERCIAL BANKS
Accepting deposits-they play a vital role in economy by mobilizing domestic savings and enabling efficiency and convenience in transactions by accepting depositsie cash items,warrants,E.F.Ts,night safes etc in three main accounts ie
i. Current accounts.
- Deposits of any amount can be made at any time.
- here the deposits may earn interest and the account holder is expected to pay some fee to the bank for services provided e.g. account maintenance.
- Money deposited in this account is withdrawable on demand by means of cheque.
- Money can be withdrawn from this account at any time during working hours so long as the account has sufficient funds.
- No minimum cash balance is required to be maintained.
- Does not earn interest but instead the bank charges ledger fees for services rendered.
- The banks may allow customers to withdraw more money than they have in their current accounts and this is known as bank overdraft that carries interest at an agreed rate.
ii. Saving accounts
- This are accounts operated by people who have the intentions of saving money(small savers).
- The balance on the account above a certain minimum earns interest.
- Funds are not withdrawn by use of cheques.
- Overdrafts are not usually allowed.
- In most cases one is required to maintain a certain amount in account.
- Withdrawal of money exceeding a certain maximum amount might require a notice to be given by the customer of the intended withdrawal.
- Ordinarily withdrawals can only be made by the account holders themselves.
- Banks don’t use this money as compared with fixed deposit accounts.
iii. Time deposit/Fixed accounts
- Do not allow withdrawal/addition of money into the account before the end of a fixed per-determined period.
- They are appropriate for people who have money that they have no immediate use for
- Earns interest at an agreed rate and the rate of interest depends on the amount deposit as well as the period taken by the deposit.usually higher than savings account .
- There is usually a minimum amount that can be allowed for this type of account
- On expiry of deposit period,the account holder can withdraw all the money together with interest or even renew the contract for another similar different term.
- If the account holder withdraws the money before the expiry date of the agreed deposit period he/she not only loses the accrued interest but might also be charged for breach of contract.
- There are no bank charges to the account holders.
- The money held in fixed deposits can be used as security for getting a loan.
- Lending money/provide loan facilities –this can also be offered even in form of overdraft.others are short term,medium term or long term.
- Safekeeping of valuable items-e.g. title deeds, share certificates, jewellery and wills for safe keeping for their customers and they provide safety vaults and lockers and a nominal fee is charged.
- Provides money transfer facilities-money can be transferred from Nairobi to London via commercial banks.some employees have their salaries transferred to their accounts from employers accounts.this arises mainly through standing orders, credit transfers, telegraphic transfers, cheques, ban k overdrafts, letters of credit,credit cards and travellers cheques.
- Provision of foreign exchange/effect foreign exchange payments-a person with foreign currency can convert it into local currency.
- Provide financial information i.e. giving advice on investment and management of funds –i.e. best shares;saving in a fixed deposit account as well as information on how to engage in foreign trade.
- Provide trusteeship(trustee services)-banks act as managers on behalf of their clients.the bank also act as a trustee on behalf of a client who dies and there is no person to manage his/her business affairs effectively.also takes into account property estate
- Act as guarantors and referees-this usually happens to clients who wish to engage in credit transactions to secure loans from other financial institutions or get goods on credit from new suppliers.
- Act as intermediary between savers and borrowers-a link is created between savers and borrowers of money and through such a link,economic activities are facilitated.
- Discounts bills of exchange-banks discount bills of exchange and accept promissory notes from their trusted clients. discounting a bill means that the bank accepts a bill from its customer and exchanges it for less cash than the amount on the bill because the bill has not yet matured.
- Provides safer means of payment-commercial banks provide safe and reliable means of payment i.e. cheques, bank overdrafts, credit transfers and other means that are used to make payments
- Credit creation-this refers to the process of creating money from the deposits in the customers accounts.
- Helps in financing international trade – i.e offering mediums of exchanges , promissory notes and letters of credit.