NO MARU LLG Introduction For any country’s economy to be sound and progressive, depends largely on how thy monetary and the banking systems are managed by the people and its governing authorities. No matter how hardworking the people of a country are, these two Sectors mys be seen to be working well before the fruits of hard work would be felt and seen. Withoy this, all that would happen is inflation and deflation here and there. This topic therefor, tries to teach how best to manage the banking and the monitory systems for nationg development. Trade By Barter In the olden days there was no money. People specialized in the production of goods ang services that the resources available to them and their abilities can carry. People specialized in the production of coffee, others in bread, others rubber, others yam etc. This is what is known as specialization. Since money did not exist for people to use to buy these goods and services produced by others, they exchanged what they had with what they got from others. This system of exchanging goods for goods is what had become known as the barter system of trade, One interesting thing about the barter trade was that, if one has a yam and needs sugar, one has to look for the one with sugar and at the same time interested in yam. This and many other problems were what were faced by the barter system. Some of the problems are stated and explained below. Problems of the barter system: 1. The problem of double coincidence of wants: -The barter trade system was never smooth one. It was very difficult for one to get what he wanted from Mr. “A” while (Mr. “A”) is also interested in what Mr. "B” has. Under the system, it was very difficult for this double wants to coincide and hence made trade very difficult ant» = o 2 cumbersome. For example, if one has yam and wants fish, one has to go round and Jook for another who has fish and at the same time looking for (interested in) yam, other than that the one with yam must look for one with fish who is interested in yam as well. The problem of divisibility of some goods: - In the era of barter trade, there was a problem of divisibility. Let's imagine a man with one live goat, looking for one tin of rice to cook for his children. How could the goat be divided into pieces for part of it to be exchanged for the tin of rice? Even if it was possible to divide the goat, what portion of it was equivalent to the tin of rice? This was the problem of divisibility in the era of barter trade. The problem of saving/storage: -The problem of storage and savings was very dominant in the regime of barter. Why? Because some goods are very perishable and cannot be stored. Imagine a person who has cartons of tomatoes or dozens of loaves of bread; how can this be stored? Thus no matter how rich one becomes, it was not possible to store some goods. So capital accumulation was highly threatened or even impossible. The problem of lending and borrowing: Lending and borrowing was a real problem during the barter era. This was due to the fact that the value of items borrowed was difficult to quantify in terms of size, weight and quality, since there was no unit of value or measurement. If Bazooka borrowed one hen from a friend, in six months’ time, what kind of hen will he use to replace it? . The problem of bulky and heavy items (portability): - Since wealth could only be put in the form of goods, these goods were very difficult to move about. How can one carry 20 maxi-bags of maize to Accra in exchange of several other goods needed to be bought from Accra? . The problem of unit of exchange: - The barter system was also with how much quantity of rice is to be exchanged with tubers of yam when the two are to be exchanged. The system lacks proper means of measuring each unit of commodity. MONEY Owing to the problems encountered with the barter system, great thinkers of the developed and developing world evolved a system or a commodity called money. It took several forms like cowries, hides, leather, salt, sugar etc. in the early days, Later, all these forms were generally accepted as money. Definition of Money: -It is anything that is generally accepted for payment for goods and services and in the settlement of debts. Simply put, it is any commodity which is generally accepted as a medium of exchange and for settlement of debts. Forms of Money: - Money as introduced to solve the problems posed by barter system, took two forms. These are: (a) Notes and _(b) coins.152 ti i of paper notes. Iti printed and issued (Noes Tse of mane per nei Thi aks)0 ays ey Targe quantities from one place to another. It is @ medium of exchange ang ‘tender. ) pas ‘a legal tender issued by a Central Bank of a country. Contrary , eine they (onins) are shaped pieces of metals, bearing the inscription of issuing authority that gives certification to its value. NB. Other forms of money lke cheques and promissory notes are not legal tender, How Money came to Solve the Problems of Barter ‘As we have seen earlier, the barter system suffered a lot of hurdles and problems. These problems were completely solved or drastically reduced with the introduction of money, Le, tus see how money solved some of the said problems. (1) Generally Acceptable: - Unlike the barter era where goods were not generally accepted by everyone, money today is accepted by anybody in exchange of goods or services. This is also known as medium of exchange. A person with yam who needs rice need not look for a rice seller who also needs yam; but rather, the owner of the yam simply sells the yam and uses the money to buy the rice. By this, t he problem of double-coincidence of want is solved. (2) Problem of Divisiilty is Resolved: ~ Money solves the problem of divisibiity, which was hitherto encountered during the barter era. Money is now divisible into smaller ‘units or denominations. Smaller denominations can be used to buy goods of small units or quantities needed by anyone. G) Money is Potable: -Instead of goods to be carried in their bulky nature from one place to the other, goods are tured into money which is lighter and easy to carry and moved about without difficulty. 1p 4) Money serves as a Store of Value: This means that with the introduction of mone, ‘goods can be sold and the value converted into money. This money can be stored until such a time for it to be used. This has made capital accumulation possible. (5) Money serves as a Standard for Deferred Payment: -This means that with the introduction of money, people can buy goods on credit and pay for them later, Hitherto, if a goat is borrowed, during the time of paying back, there is the problem of the right size, age, colour etc. but with the introduction of money, only the unit price or the standard value is to be paid and that solves the problem, Qualities, features (characteristics) of money For money, to be generally accepted and acclaimed as a legal tender of a country, there are ® few distinguished qualities that it must possess. Among the notable ones are the following: - 1) Portability 2. Durability 3. Divisibility 4. Acceptability 5. Recognizability 6. Homogeneous 7.Relative Scarcity.8. Stabilityualities of mon Every commodity or substance used as money should possess the following qualities Portability: Portability implies that it should il i . be possible to carry money alon, ; , ig ina ae ae oe this means is that one should be able to put money into one’s pocket or a bag ant a le to carry it along to buy anything one needs. Advancement in technology has now made it possible to carry along billions of cedis on a small card for transaction. Hanotene Ape: quality of money is that it should be homogenous. This does not za pas of money used throughout the world should be homogenous. Homogenous onl ly applies to money used in a particular country or a union of countries like the European Union (EU). For example, in Ghana all GH¢5.00 notes should be the same (colour, size, etc.) in all respects. Homogeneity does not imply that a ¢5.00 note should be the same as a US$5.00 note since Ghana and the U.S. are two different countries. Acceptability: What is generally conceived as money in a particular country or area should be acceptable to all the people in that particular country or area as the official medium of exchange. Recognizability: Money should be officially recognized by all the people in a particular country as a medium of exchange. It is for this reason that counterfeit or fake money is rejected by people since it does not constitute an official medium of exchange. Durability: Money was introduced as a medium of exchange.to overcome the perishability originally associated with barter. Durability implies that anything used as money should have a longer life-span. It should be able to withstand wear and tear. Divisibility: This implies that money should be in various denominations such as GP10, GP20, GH¢5.00, ¢GH10.00, GH¢50.00, etc. Consider the inconvenience or the problems that will emerge in transactions if the cedi were to be in only ¢1.000 or ¢2.000 denominations. The various denominations such as ¢10.00 and 20.00 have overcome the problems of determining how much value should be placed on a cup of salt or a goat. Scarcity: One of the qualities of money is that it should be scarce so that it will have value. It is for this reason that great effort in the form of hard work is required to earn money. Stability: For standard of deferred payment to be effective, the value of money must be relatively stable. That is to say its value should not change frequently. This quality of money is also very vital. It is interesting to note that Lipscombe and Pond (1999) have devised 2 phrase or pneumonic known as PHARDDSS to help students remember the characteristics of money.Functions of Mon Money as we know it today has several functions to perform. These functions are stated an explained below. 1. Store of value: Unlike the barter trade era, where it was difficult to save or stor. goods, because they are perishable, money in its form today can be stored ang kept for quite a long time without physical deterioration or wastage. But jy succeed in doing this, it must be stable in value. However this function jg threatened during inflationary periods. This is because the value of money fa, (declines) during inflationary periods. 2. Medium of exchange: This is probably the most basic function of money. Tyi, function of money (medium of exchange) enables us to exchange it (money) fop other goods and services. This is to say, once one has money; it can be excl for any given commodity. This function of money facilitates business ang eliminates the problem of double coincidence of wants under the barter system, 3. A standard for deferred payment: Under the barter regime, so many problems arose if one was to borrow or buy and pay for it later. But today, with the introduction of money, itis possible to buy goods and services and pay for them later. On this note, money makes it possible for business to be conducted on credit basis without problems. 4, Money serves as a unit of account or measure of value: By this function money serves as a common denominator with which values of goods and services are ‘measured. In other words, money is the standard for measuring value. Money actually determines the rate of exchange between and among goods and services, It (money) enables us to measure or estimate or calculate the value of goods and services. It makes it possible to really determine the total value of goods and services. Importance of Mon 1. It enables us to consume varieties of goods and services from within and outside the country. 2. Money gives us capital for investment because we can borrow or save money for investment purposes. 3. Money also makes it possible for the valuation of our assets. 4. Since money enables us to sell our goods and services, the end result is that i gives us employment, Because our services are paid for through money. 5. Money also creates markets for businesses to flourish. What are the Motives for Holding Money? Basically there are three reasons (motives) for holding money. These are Transactionaty ‘motive, Precautionary motive and Speculative motive. —"(a) Transactionary Motive: Day in day out certain percentage amount of money is needed to be held by us to carry out payment for goods and services we patronize. It could be food, clothing and other household items. Businessmen and women also hold a ceftain amount of money to buy raw materials and other expenses. These monies could be kept in the house or in the bank. Monies that are held for these ‘purposes as mentioned above are said to be for transactionary motives. (b) Precautionary Motive: Eventualities like sickness, death or accident do not alert us before they occur. So, monies that are kept so that if the unfortunate happens, we can respond and solve the said problems is said to be Precautionary. Businesses also hold monies in readiness for risk and other unforeseen circumstances. So monies that are kept for such eventualities are to be for precautionary reasons-motives. The amount of money that is held for such purpose depends on the expected risk that lies ahead. (©) Speculative Motive: Sometimes after making provision for precautionary and transactionary motives, some amount is left. One may then decide to use it for interest yielding purposes. Thus by investing it into business. The amount that is committed to this purpose may depend on the prevailing current interest rate. Value of Money: ‘The quantity of goods and services that money can buy is what is said to be its value. So the value of money is related to the price of goods and services. If prices of goods are high, then the value of money is said to have fallen or the value of money is low. On the other hand, if the prices are low, then more goods can be bought; hence the value of money is high or has gone up. If prices keep on changing or fluctuating then the value of money is said to be unstable. What is it? It is a term that is used to describe an economic situation where prices of goods and services continuously and persistently keep increasing. It must be noted that inflation is not just a high price of goods and services, but rather a continuous and sustained rise in the general price levels. This situation is most often prompted by demand outstripping supply of goods and services basically, Types of Iny Inflation as it is, takes so many forms or types. Four main types of inflation exist. These are: 1. Creeping or Mild inflation: This is the type of inflation where increases in prices levels are very low or gradual. Sometimes it is very difficult to detect it. Theii between 1% to u wena ey ee a ng Infinite cet opposite 10 CTP AG the 2 ie highest type of inflation known 80 far. Another name for : ea "tum away or hyper-infation. 10 this type of inflation, ee ie eae more than double in a single day. Inflation can, of goods and ee vzanum. In such situations, people lose Confidence ;, ae ae wr enchange, People will prefer oF resort to barter rather th, money as ree i i i ases are likely to F ein this type of inflation, price increases are likely o susan * et ae said that, inflation has come to stay. 1s pit infaton, ha zs ead to demand fo higher wags and salaries which wi surely push pi res of predation, employers will also push up pices of goods and services, The shove situation will also compel workers to demand increases in salaries and 4 Se tapas In this type of inflation, prices are a bit above creping inflation, But it is not beyond control. So government can use or take measures ig control or suppress it by the use of appropriate government policies such as price controls. The basi cause of this type of inflation is excess demand over supply, 3% per-annum. It is or may be less th, Causes of Inflatios There are two major causes of inflation. These are: (a) Demand pull. (b) Cost push (c)Structural & (d)Mark-up inflation ‘A. Demand Pull Inflation: Causes of demand pull inflation stem from the fact that inflation is set into motion as a result of demand outstripping supply. Some of these causes are identified and explained below. . Inerease in Wages and Salaries: Constant increase in wages and salaries put more money in the pockets of people. This brings about more people demanding more goods and services than before. This situation results in supply not matching demand, hence inflation. 2. Increase in money supply: Sometimes when money supply; especially through the ‘banks goes up in the form of loans and other facilities like overdrafts to individuals and businesses, it increases money in the system. This situation has the tendency to increase the purchasing power of people, When this happens, demand will automatically over-run supply and inflation will set in. 3. Population increase: Increasing growth in population without the corresponding increase in supply will result in excess demand with supply not matching it; hence inflation. }. Rise in government expenditure: When the expenditure of government increases, results in more money in the system. This situation puts demand far above supply and results in inflation. In a related development, deficit financing by the governmest157 Bazooka Series which calls for printing of new notes (cedi cash) also brings about excess liquidity and the resultant effect is inflation, 5, Imported Inflation: If the country from which another country imports her goods is, experiencing inflation, then automatically, the importing country will also experience inflation. 6, Devaluation: It is the reduction in the parity ratio of a country’s currency. This makes it possible for more local currency to be used in the buying of foreign goods thereby ‘making them (foreign goods) very expensive. 5 Cost Push Inflation CAUSES Inflation can also be caused by high cost of goods as well as short fall in production which ‘automatically results in inflation, Some of these are explained below. 1. Lack of credit facilities: When producers have problem getting funds for production, the situation automatically results in inflation because supply will fall short of demand, resulting in inflation. : 2. High cost of inputs: Inputs of production are the factors that are used for production of goods. Some are land, machinery, labour etc. As soon as the prices of these goods are high, it will translate into high cost of production and consequently inflation. 3, High taxes: Taxes in any form imposed by government go a long way to increase the cost of goods. These eventually results into inflation 4. Low productivity: Low productivity resulting fros draught, attack by diseases on crops and natural disasters can cause the failure of most crops especially. When such situations result, the final outcome is demand falling far short of supply and its consequences of setting inflation in motion. 5. Increase in taxes: When both domestic and import taxes go up, businessmen and women also transfer these taxes to consumers. This has the tendency to bring about inflation, 6, Massive exports over imports: This will lead to shortage of goods and services since imports are less than exports. This situation can also lead to inflationary trend. © STRUCTURAL INFLATION Itis caused by governments in the management of the economy. eg printing of more ‘money or excessive expenditure on the military( eg purchase of ammunitions) D) MARK-UP INFLATION In most cases, producers and business-men and women in their desire to make more Profits, increase their goods and services; sometimes even beyond the acceptablelevels. This has the tendency to cause inflation. When inflation comes as a resul; of this, it is termed as mark-up inflation Effects of Inflation: 1. Reedistribution of income: In times of inflation, creditors and those who are on fi jncome lose. This is because the value or their real incomes fall. On the other haeg people like shareholders, debtors and businessmen/ women gain. This is because thes ‘earnings rather increase as result of inflation. . 2. High interest rate: Inflation pushes banks and other money lenders to raise the interest rates. This makes borrowing to be very expensive and eventually results, high cost of production. i 3. Low savings: Inflationary era results in low savings because people are not willing tg save. Why? Because any money saved losses its value with time as a result of inflation. This low savings does not bring about the needed investment. Economic depression and unemployment: Companies and firms that produce goods which are elastic are thrown out of business. This is because any increase in the prices will compel people not to patronize the good any longer. This eventually results in unemployment. . Expansion of businesses: Contrary to point no. 4 above, businesses that produce inelastic goods gain because the increase in the prices of goods does not prevent people from buying the good in question. This results in massive gain and expansion of the market. Increase in government revenue: Since most businesses make gains during inflation; the taxes paid to the government also increase by the same rate. Interestingly, most private businesses do not declare their extra incomes for government to tax them 6. accordingly. 7. High cost of living: Since prices of goods and services sky-rocket during inflation the cost of living becomes very high, resulting in high cost of living. 8. Industrial and political unrest: - Since inflation is marked by high cost of living coupled with low standard of living, most people become dissatisfied with economic trends. This state of affairs could easily result in social and political unrest. Control of Inflation ‘The best way to tackle the problem of inflation is to identify the cause(s) and address the problem from that angle. If it is too much money supply or fall in production, it may be tackled as such. 1. Use of fiscal policies: - This method is aimed at reducing liquidity in the system. It employs the method of reducing government expenditure, raising income tax and embarking on saving campaign. These tools are directly employed by the government. 2. Monetary policies: - This is also a set of tools adopted by the central bank to control inflation. It uses the following tools to achieve its aim. These are: special deposcash ratio, bank rate, and special directives etc. to mop up excess liquidity in the system. The tools mentioned above are well explained under banking just ahead. Control of wages and salaries: - Government should be very prudent in the increment of wages and salaries. This is very vital in the control of inflation because arbitrary increment of wages and salaries has the tendency to set demand pull inflation into motion. The control of wages and salaries therefore will curtail inflation. 4, Increase in production: -It is important to pursue policies that will step-up production to make up for the short fall in the economy. 5. Price controls: - Government can also pass a law to regulate the prices of goods and services. To do this, a maximum price level is set, above which no one is to sell a particular good. This measure will curtail the escalating prices of goods and services. But for this policy tool to succeed, supply must be made to match demand. . Drawing up of budgets surplus: - A budget surplus is a kind of budget drawn by a government where the income is far more than expenditure. By this, more money would be realized but less will be spent. This will go a long way to control inflation. 7, Decrease in imports: - Can also be adopted, especially from countries that are experiencing inflation. 3, DEFLATION This is the direct opposite of inflation. It is an era where prices continue to fall. Or it is a period of falling prices. It is marked by more goods chasing little money; it is a period of demand falling short of supply. It leads to buyers’ market, where the seller is at the mercy of the buyer. Causes of Deflation: A number of factors are responsible for deflation. A few paramount ones are stated below: (1) Massive increases in productivity (2) Low wages and salaries. (3) Decrease in government expenditure. (4) Restrictions on lending activities. (5) Massive savings activities. (6) Increase in tax by the government. (7) Large amount of smuggling of goods in to a ciuntry can also cause deflation. What are the Likely Effects of Deflation? (1) Reduction of profits in business. 2) It slows down business activities, (3) It leads to unemployment. (4) Fixed income earners gain while non-fixed income earners lose. (5) Exports go up while imports decrease. Prices of local goods also become cheaper against the imported ones.BANKING ‘A bank is any financial institution where customers can deposit and withdraw money. It als, provides security for valuables such as wills, omaments, certificates and other documents They can also provide advice on financial matters. Types of Banks Several types of banks exist in Ghana. They are categorized according to the roles they play in the economy. The categories are listed below. Central bank (bank of Ghana) Commercial banks Development banks i. Savings banks . Merchant banks and . Rural banks AYAWNN Details of the various categories are dealt with below: A. Central Bank (e.g. Bank of Ghana) The central bank of Ghana is known as the Bank of Ghana. This is because the central bank of every country is named after that country. So the central bank of Nigeria is referred to as the Bank of Nigeria etc. In every country, the central bank is regarded.as the highest financial body in that country. It is charged with taking care of the financial policies of the country. The Bank of Ghana was given birth to on the 4th of March 1957. What are the Functions of the Central Bank? Below are the main functions performed by the various central banks in every country including the Bank of Ghana 1. Banker to the Government: By serving as a banker to the government, it carries out / the following functions. | (@) Receiving of taxes collected and its subsequent payment into the national accounts. (6) Management of the country’s debt. (©) Lending to the government through the purchase of bonds and bills. \@ Responsible for conducting external business on behalf of the government. 2. Banker to Public Institutions: It is also the duty of the central bank to provide loans and advances to public or state institutions like the Electricity Company of Ghana (ECG) the Volta River Authority (VRA) etc. that may require huge capital outlay for their operations. 3. Banker to Commercial Banks: The central bank provides banking activities to the commercial banks the same way they (commercial banks) serve their customers the commercial banks have cash reserves with the central banks, They thereforewithdraw cash from the central bank as and when needed. It also lends monies to them and effects payment on their behalf. 4, Issuance of Currency: The central bank is the only legally recognized body to print and issue currency notes and coins for circulation, 5. Regulator of Money Supply: The bank controls the other banks as to how much money is to be in the system. By this, the central bank restricts the activities of the ‘commercial banks on whether to increase or decrease the amount of credit given out to customers. 6. Monetary Policy of the Government: The bank also controls the country’s total supply of money through the use of monetary policies such as open market operations, bank rates, cash ratio, special directives and moral suasions. 7. Consultancy Services: - Consultancy services are also provided by the Central Bank to other banks and other non-banking financial institutions in the form of guidelines on the establishment of new banks and other non-banking financial institutions. 8, Lender of Last Resort: - After the government and other banks have gone round and failed to secure loans, the central bank serves as a last resort to fall on. The bank will not refuse to lend to these group of entities if approached. Hence it is referred to as the lender of last resort. Central bank’s tool of monetary policy How does the central bank use its monetary tools to address issues like inflation and deflation in the economy? It does this by employing one or more of the following tools. It is generally referred to as: Tools of Monetary Policy. (1) Open Market Operations (OMO): - This seems to be an effective means of controlling money supply in the system. This tool has to do with the sale and buying of government bonds and other securities in the open market operations (OMO). In order to reduce the supply of money, the central bank sells bonds and other forms of securities to the commercial banks and the public. Since the commercial banks use money to purchase these securities, it has the effect of reducing money in the system. Because, money moves through the customer and through the commercial banks to the central bank, also from the commercial banks and public, thereby making more money available to the government. The effectiveness of this policy tool will however depend on the level of monetization and the existence of money and capital markets. (2) Bank Rate: - This tool uses interest rates to regulate money supply. The bank rate is the minimum rate of interest that the central bank charges on loans and advances granted to commercial banks and discounting of bills of exchange. If the bank rate is high all other rates of interest would be high and vice-versa. In case the central bank ‘wants to reduce money supply in the system, it will increase the bank rate and vice versa if it wants to reduce money supply. The effectiveness of this tool will however depend on the business atmosphere. If business is brisk and attractive, businessmen will still go for the loans no matter how high the interest rate is.‘102 - (@) Cash Ratio: - The cash ratio is the minimum percentage of money commercial banks e ih the central bank. To reduce money supply, the central bank raises the are to keep wi e 3 ri ratio, so that the commercial banks are legally obliged to deposit huge percentage of tir cash with the central bank. This practice will reduce the cash in aeryault of the commercial banks. This will result in the commercial bank’s inabiti, to grant more credit to the public. To increase money supply in the system, the cash ratio is lowered by the central banks, since they have the capacity to bring in more cash from their mother banks outside the country. (4) Special Deposits: ‘These are calls by the central bank to all commercial banks 1p deposit money with it. It is used to contract or curtail credit to the public. If along the line the central bank notices shortage of cash with the commercial banks, it will retum the money to the commercial banks. (5) Special Directives (Selective Credit-control):- These are in the form of instructions given by the central banks to the commercial banks regarding the direction of their Joans, The central bank may direct that so much be given to the agricultural and manufacturing sector while nothing to the commercial sector for example. This policy most often is not complied with. (6) Moral Suasion: - With this tool, the central bank appeals to all commercial banks to exercise prudence in their lending. Even though this is not compulsory, it may attract penalty, if flouted. The Role of Central Banks in the Development of West Africa (Or Ghana) ‘The central bank is very instrumental in the development process through many ways. A few of them are identified and explained below. (1) Direct Investment:-The central bank is in direct investment with other bodies to promote development. For example, the bank of Ghana in conjunction with the World Bank established the Ejura farms. It also tied with the Ministry of Agriculture, A.D.B. and the Akosombo Textile Factories Ltd. All these go a long way to promote employment and also grow the economy. (2) Sectorial Development: - The bank also promotes directly some sectors of the economy. Some of these areas are in the mining, agriculture and industry just to mention a few. (3) Export Promotion: - In 1960, the bank of Ghana established the Ghana Export Company. It is with the aim of promoting Ghana’s non-traditional export commodities. The company is now by the name Export Promotion Council. It is now finding markets for gingers, shear nuts, snails, handicrafts etc. in the markets of UK- and the U.S. (4) Capital Mobilization: - The central bank does everything possible to mobilizing savings especially at the rural level. This is done through the rural banks established at the “village” levels by the Central Banks. Rural banks in Ghana help in the effective mobilization of rural savings with the view to accumulating capital. (5) Provision of Capital for Development: Since there is lack of capital in most West African countries due to low per capital income, the central bank makes fundsavailable through the sale and buying of treasury bills to the private sector. The bank also provides short and long term loans to the government. As a result of the above duties, scarce capital is made available to promote economic growth and development. ks Commercit A commercial bank is any financial institution with the primary aim of making profit for its shareholders. Commercial banks are joint-stock financial institutions that transact business by collecting money or funds and other valuables from the public for safe keeping. These series of services to the public fetch a lot of monies to the respective owners and shareholders. What are the Functions of the Commercial Banks? A. Accepting Deposits from the General Public: Most often than not, commercial banks keep monies belonging to their customers which they need not immediately. The monies kept are put into three main categories — accounts -these are: current Account (demand deposit) Savings Account and Time Deposit Account. ; (a) Current Account: -This type of accounts is mostly operated by businessmen and women. It attracts no interest but rather a fee is charged by the bank for operating this account for the customers. Cheque is used to withdraw money from this type of account. Notice need not be given before monies are withdrawn from this type of account. (b) Savings Account: This type of account is mostly operated by individuals. Monies kept in this type of account attract a small interest. A pass-book is usually given to the operators of this account so he/she can present it to the cashier at the bank anytime he/she wants to deposit or withdraw money. The pass-book contains the statement of account, In theory, a few days’ notice is to be given before withdrawals are made, but in practice it does not happen. (c) Time Deposit Accounts: Monies kept in this type of account earn interest for customers and cannot be withdrawn unless notice is given. It is customers who do not have immediate use of their monies that operate this type of account. The longer the period of time the account is at the bank, the higher the interest and vice-versa. B. Granting of Credits to the Public: Banks grants loans to both customers and non-costumers. These amounts are credited to their account. (@) Granting of Loans: The customer pays interest on the loan or the amount borrowed. The loan is repaid on fixed installment period of time.(b) Overdrafts: Customers especially those with current accounts who eam regular sal are allowed to withdraw more than what they have in their accounts. The amour, which is overdrawn attracts interest. This type of loan is termed overdraft. C OTHERS a) Discounting bills of exchange: A bill of exchange is a notice allowing a creditor toby paid a specific amount of money at a given time. Any creditor, who is to be paig carlier than expected, can be paid by his bankers. But then, he would be paid less thay the amount indicated on the bill of exchange. The difference between what is paid tg the creditor and what is actually on the bill is what the bank makes as profit, b) Aets as Agents for Payment: Commercial banks mostly make payment on behalf of their customers. This is mostly in the form of standing orders or debit transfer. The bank can also receive credit transfers or dividends on behalf of their customers, ©) Keeping Customers Valuables: Commercial banks apart from keeping money belonging to customers also keep their valuables. This may be in the form of life policies, wills, certificates, Jewellery, ormaments etc. All these are done for a fee. d) Acts as Trustees and Advisers: Commercial banks also act as trustees to their customers. This they do by recommending customers to other banks and businesses when the need arises. Besides, they also advise customers on the best steps to take to achieve success in their business transactions. ©) Promoting Foreign Exchange Transactions: Quite apart from their normal banking activities, banks do invest some of their capitals into direct ventures like the production of goods and services. For example, the Ghana Commercial Bank owns some shares in the National Investment Banks as well as other direct productive ventures. The Role of Commercial Banks in the Economic Development of Ghana (West Africa, (1) Direct investment in the various sectors of the economy. (2) Provision of loans to finance economic activities in the economy through customers and other people. : (3) They also mobilize savings from the public in diverse ways. This they do through the opening of branches in many areas of the country. (4) The bank also provides employment to many people by employing them directly and also through the loans provided for them. (5) Provision of loans for economic activities, (6) Carrying out of research for economic growth. (7) Provision of inputs to customers for economic development.Some Problems of Commercial Banks: (1) Lack of capital markets. (2) Lack of qualified staff{personnel). (3) Default in loan payments (by customers). (A) Provision of credits to mostly large scale producers. (5) Concentration in the cities only. CAPITAL & MONEY MARKETS Capital Market A situation where a number of financial institutions come together with the aim of providing medium and long term financial facilities to businesses is termed a capital market. Capital markets specialize in the granting of medium and Jong term loans to businesses, industry, commerce & even government. Money market It is made up of financial institutions that are set up especially for the granting of short and medium term loans to the public. Some financial institutions making up the money market are: Commercial Banks, Insurance Companies, Discount Houses, Savings & Loans Companies Etc. Development Banks A development bank is any financial institution purposely established to provide long-term finance to support a particular sector of the economy. Some typical examples of this type of banks in Ghana include: Agriculture Development Bank, National Investment Bank and Bank for Housing and Construction among others. ‘The Role of Development Banks 1) Direct investment: Development Banks do get involved in the direct production of goods and services in order to speed up the economic development of the nation. An example is where the Agric. Development bank owns 51% share in Béposo Oil Mill. It also has 33% share in Agric-Care Ltd. and also Nasia Rice Company Ltd. 2) Provision of Technical and Managerial Advice: Development banks also provide technical assistance to their prospective and existing investors to enable them deliver quality goods and services. They in addition to this, give managerial advice to ensure higher output. 3) Medium And Long Term Loans: Medium and Long term Loans are provided by the bank to finance the activities of producers. “his activity of the banks helps to minimize problems associated with raising capital.— eens 5 employing a larg ffices ang i ¢ number of people to work at its o making available funds ri the form of loans, the bank is helping to solve th. also ‘unemployment problems in the country. 4 ‘RURAL BANKS rural bank isa privately financed bank situated mainly in the rural areas for the purpose of pilizing funds/ resources in the rural areas to be channeled into productive use. They provide banking services, particularly eredit facilities to small scale producers who are the backbone of the economy. Role/Functions of Rural Banks (a) They mobilize funds from the rural folk through savings they receive in the form of current, savings and deposit accounts. (b) Provision of finance in the form of loans to medium and small scale producers within their catchment area. (©) Discounting bills of exchange. (@ Acceptance of securities for safe keeping. (©) They act as advisers and trustees. (© They get involved in the profitable economic ventures for the development of the localities in which they live. (g) The bank also takes up social responsibilities such as provision of water, roads and electricity ete. for the communities in which they find themselves. Problems of Rural Banks (1) Lack of capital/ small scale operation, 2) Limited customer base. (3) Poor management./inadequate (and unqualified) personnel. (4) Low debt recovery rate. The Major types of Account Operated by the Commercial Banks (A) Saving accounts: This type of account attracts interest to the holder, The account holder after making’ the first deposit is issued with a pass—book. This book contains all the transactions with the bank; that is deposits and withdrawals. Before withdrawals are made, the bank must be notified at | we ; least 3 da . Withdrawals can also be made within 2 weeks interval, ae Features of Saving Account +A pass-book is presented to the - Interest is earned on the account, Holder of the account bemade, (mist BE present atthe bank personally before withdrawals ca account holder for his transactions.To withdraw money, withdrawal form is issued by the bank. Also to deposit money, deposit form is used. . This type of account is for those who can save small amounts of money on regular basis. 7, The saving serves as a security for a bank loan. 4. Procedure for withdrawing money from savings account 2) Withdrawal form is filled by the customer. b) The account number, name and signature as well as the amount are written. c) He then presents the withdrawal form together with the pass-book to the cashier for payment. Benefits of Saving Account a) Savings account serves as collateral for bank loans. b) Credit transfer is enjoyed. c) The safe keeping of money is assured. d) Interest is earned on the money saved. (B)Current/demand deposit account In this type of account, deposits are made with pay-in-slip, while withdrawals are made with a cheque. The holder of this account can deposit money and withdraw money anytime he/she wishes. The bank charges a commission for the services provided. What are the Features of Current Account? a) Pay-ifslips is used for deposits. b) Cheque is used for withdrawing money. ¢) Monies in this account can be withdrawn without notice. @)- Customers are charged commission or bank charges are paid for this type of service provided. ©) The account eas no interest. ) Periodic statement of account is sent to the account holder by the bankers. 2) Overdraft facilities are enjoyed. h) The holder can sign a cheque to withdraw money without he himself going there. What steps are followed in the opening of current account? Introduction a) He collects a form and fills in series of personal information b) Specimen signature card is also signed ©) Passport photograph is submitted (at least two)d) He provides letter of introduction to the bankers as well as names of referees e) He pays some money into the account f) He is issued with a cheque book. 2) He at this stage can deposit money with pay in-ship and withdraw money wit, a cheque. Benefits of Currer a) Safe custo of the money deposited is assured b) He enjoys the flexible cheque system of payment c) Withdrawals can be made anytime without notice d) Loans and overdraft facilities are made available to him by the bank ) Payments can be made through credit transfers and standing orders. (B)Fixed Deposit/Time Deposit Account With this type of account the deposit made by the account holder cannot be withdrawn if the time agreed upon with the bankers is not due. It can be three, six or even twelve months after the date of deposit. The customer earns interest on the amount deposited. The interest earned is higher than that of savings account. If the holder of the account goes in for the money earlier than fixed, he loses all interests due him. Characteristics of Fixed Deposit Account a) Interest is earned on this type of account. b) No bank charges are paid by the account holder. ©) Account holder needs to be present at the bank before withdrawals are made. @) A Customer cannot withdraw money unless a seven day notice is given. ) Withdrawal form is used to withdraw money — debit form. f) To deposit money, credit form is used. g) The particulars of a deposit account are recorded in the deposit account pass book. What are the benefits? a) High rate of interest is earned. b) Savings serves as collateral security for bank loans. c) Safe custody of the amount is assured.