BANKING SYSTEM
Bank
• Bank is a main type of financial institution where it
accept deposits and provide financial services to
the customers
• Act as mediator in the financial market
– Mediator between person who demand for money
and person who supply it
–Mediator between the person who want to save
money and the person who want to borrow it
Types of Banks
• Commercial Bank
• Islamic Bank
• Central Bank
• Credit Unions
Commercial Bank
• Common type of bank providing services
to the businesses and consumers through a
wide network of branches
• Assist in promoting trade and industry by
accepting deposits and providing loans
Commercial Bank – Functions
• Three main functions are:
1. Accepting deposits or safe keeping
money
2. Making payments
3. Facilitating business finance
1. Accepting deposits or safe
keeping money
• Banks help their customers to keep their
money safe in a
1. Current account
2. Fixed deposit account
3. Saving account
1. Accepting deposits or safe
keeping money
1. Current account
• Where customers can instantly access the
money
• Also called demand deposit account
• Used mainly to receive payments and make
payments
• No interest earned on the money deposited
1. Accepting deposits or safe
keeping money
2. Fixed deposit account
• Bank allow customers to choose the length
of time for the money to be deposited
• Offer a guaranteed rate of interest for a
specified time period
• Also known as time deposits account
• Offer a high interest rate
• money cannot be withdrawn or transferred
by means of cheque on demand
• A prior notice need to be given to the bank
to withdraw or transfer money
1. Accepting deposits or safe
keeping money
3. Saving account
• deposit account which allows limited
transactions
• Holders are paid reasonable interest rate if the
customer keep money for specified period of
time
• It is between current and fixed deposit account
Commercial Bank – Functions
• Three main functions are:
1. Accepting deposits or safe keeping
money
2. Making payments
3. Facilitating business finance
MAKING
PAYMENTS
FUNCTION OF COMMERCIAL BANKS
LEARNING INTENTIONS
• We are learning about functions of commercial
banks
SUCCESS CRITERIA
• I will be successful if
–I can list the payment methods offered by banks
–List ways that banks facilitate finance
HOW CAN YOU PAY?
You have just
finished your meal
in a restaurant
2. Making Payments
• Commercial bank make payments on behalf of
their customers
• To make payments through bank customers can
use:
1. Cheque
2. Standing orders
3. Direct debit
4. Bank Giro credit system
5. Credit Cards
2. Making Payments
1. Cheque
To transfer money from one account to
another account
Convenient method to pay large amount
(carrying physical cash is difficult and risky)
2. Making Payments
2. Standing orders
Standing orders are instructions given to the
bank to make regular payments of fixed
amounts
Example: rent, insurance etc.
2. Making Payments
3. Direct debit
Instruction given to the bank to pay the bills
that fall due regularly but the amount varies
each month
Example: water, electricity, telephone bills etc.
2. Making Payments
4. Bank Giro credit system
Depositors use only one cheque to pay
several bills
Large companies use this method to pay
salaries
Bills of electricity, water, gas telephone etc
can be attached with the Giro form and pay
the bills using only one cheque
2. Making Payments
5. Credit Cards
Widely used by the depositors
Enables cardholders to purchase goods and
services from different places
Each cardholder is given a limit for spending
Cardholders receive a statement every month
Interest is charged monthly on an
outstanding balance.
FACIL ITAT IN G
BUSINES S FIN A NCE
FUNCTIONS OF COMMERCIAL BANKS
3. Facilitating business finance
• From the money deposited by customers, bank
give loans and charge interest on it.
• Two types of loans are:
1. Bank overdraft:
Customers are allowed to withdraw money in
excess to the money deposited
Interest is charged on outstanding balance
3. Facilitating business finance
2. Bank Loan:
customer borrow a fixed sum of money to be
repaid in monthly instalments.
A fixed rate of interest is charged
To obtain loan, customer would require to
keep a security known as Collateral (Rahunu)
TASK
• Complete the worksheet
Liquidity and Profitability
• Liquidity and profitability- Two main objectives
of commercial banks
• Liquidity: an ability to meet the demand for
cash
• Liquid assets are assets which converts to cash
easily and quickly . Ex: short term loan.
• Liquid assets are less profitable. Ex: interest
charged from short term loan is less than
interest charged on long-term loan.
Liquidity and Profitability
• Therefore, the more liquidity of the bank, the
less its profitability
• To have liquid assets and earn more profit
simultaneously – creates problem
• To solve, bank can try and arrange lending
which makes sufficient liquidity and earn
profit
Process of credit creation
Deposit
Lendin Buys a
g security
Process of credit creation
Deposit Keep reserve of
Lend MVR
MVR MVR 10,000
90,000
(10% CRR)
100,000
Deposit Keep reserve of
Lend MVR
MVR MVR 9,000
81,000
(10% CRR)
90,000
Deposit Keep reserve of
Lend MVR
MVR MVR 8,100
72,900
(10% CRR)
81,000
Process of credit creation
From initial MVR 100,000 cash deposit, the
banking system creates MVR 243,900 of deposits
as each bank lend out their money to their
customers
(MVR 243,900 = MVR 90,000 + MVR 81,000 + MVR 72,900)
Central Bank
• Central bank is at the apex of
the country’s banking system
• It is bankers’ bank
• It regulates and supervise the
banking activities of the
country
• MMA is the central bank in the
Maldives
Functions of central bank
1. Sole note issuing authority
• Currency issuing body
• Currency issued by the central bank is the
legal tender throughout the county
Issuing Banking
Retail Banks Public
department department
• MMA has sole authority to issue notes
Functions of central bank
2. Banker, Agent and Advisor to the government
Banker Agent Advisor
receiving deposits • collect income from • Carry out
taxation monitory policy
making loans and • carries out the
payments • How to use
borrowings of central
collecting cheques government interest rate
providing foreign • make interest • How to manage
reserves payments to those inflation
who hold government
debts
Functions of central bank
3. Bankers’ Bank
• Act as a banker to commercial banks
• Holds cash reserves and deposits of commercial
banks
• Other banks keep accounts in the central bank
• Other banks need to provide information to the
central bank regarding their business and respond
and follow the directions given by the central
bank
Functions of central bank
4. Lender of last resort (option)
• Stands ready at any time to help the banking
system during a shortage of cash
• Lend money to prevent banks from going
bankrupt
Functions of central bank
5. Credit control
• Central bank controls and can change
• interest rate
• Cash reserve requirements
• Open market operations
• Can influence the supply of money in an
economy
Islamic banking
• Islamic bank is a financial institution that
organizes financial resources and invest it
in an islamically acceptable social and
financial objectives
• All the actions should be conducted in
accordance with the principles of Islamic
Shari’a.
Islamic banking
• Four guiding principles are:
1. Prohibition of interest
2. Ethical standards
3. Moral and social values
4. Liability and business risks
In Islamic banking ……
• Both charging and receiving of interest strictly
forbidden
• Give serious attention to the business to be
invested
Investigate the company policy, goods and
services provided and the impact it will have on
society and the environment
In Islamic banking ……
• Provide services to those in need
helping needy people by giving interest free
loans
Helping NGOs to facilitate their activities
• Liability, business risks and profits of any
business are borne by all the parties
concerned
Islamic banking vs Commercial banking
Islamic banking Commercial banking
• Focus on investment • Focus on lending
• Give emphasis on • Give emphasis on
soundness of the ability to repay the
project loan
• Apply moral criteria • Apply on financial
in investment criteria
