FINANCE AND BANKING

A bank can be defined as an institution that provides a convenient and safe means of making payments, provides
finance, provides a safe place for keeping money and gives advice on financial investments.

METHODS OF PAYMENT IN BOTSWANA

There are different means of payment in use: cash, cheques, postal orders, and money orders.

1. Money:
Money is anything which is accepted as a method of exchange and means of settling debts and obligations. Money
refers to bank notes and coins. Money should be acceptable, durable, portable, divisible, scarce and uniform.
Functions of money

 Money is a medium of exchange

 Money a measure of value
 Money is a store of value
 Money is a means of future payment
 Money is used as a unit of account
 Money is also used as a way of punishment
Advantages of money as a means of payment

 It is universally acceptable
 It simplifies transactions
 It encourages people to give discounts
 It is suitable for small payments .e.g. buying a single sweet
Disadvantages of money as a means of payment

 It attracts the attention of thieves

 In times of inflation people lose interest in it.
 Money is not suitable to be sent or posted to the payee
 Fake bank notes can easily be used by dishonesty people to pay your company
2. Postal orders
A postal order is a means of sending small amounts of money through the post office.
 The sender is issued with a blank postal order form.
 The sender fills in the payee’s name and office of payment and post it to the payee
 The payee receives postal order, takes it to the named post office and receives cash on signing the order
If the postal orders may be made out without naming the post office, in this case it should be crossed so that the
payee pay or deposit into his or her account.

3. Money order
Money order is a payment order for a pre-specified amount of money. It is payment through the post office
 The sender fills in money order form stating the amount he wishes to send, the name of the payee and
post office of payment
 A receipt given to the sender
 The payee receives slip notifying him the amount to be paid

1
  Payee must produce a proof of identity which could be an identity card, passport, driver’s license and
residence permit.

4. Cheques
A cheque is a bill of exchange or an order drawn on a bank instructing it to pay other person’s a certain sum of
money on demand. A cheque is an order in writing made upon a bank by a current account holder asking the bank
to pay a specified amount to a person named on the cheque or his order or the bearer.

A CHEQUE BOOK: This is a booklet containing a number of cheque leaves bound together for the convenience of
the users. It is used to withdraw money from a current account and it serves as a receipt to the account holder.

FEATURES OF A CHEQUE

1. THE DATE: all cheques must have a space for the date on which they are drawn. It must be dated to show the
day it should be drawn or when it was issued.

2. PAYEE’S NAME: The name of the person to whom the cheque must be paid is stated immediately after the word
“PAY”. A customer can withdraw cash from his account by writing “CASH” or “SELF” after the word “PAY” on the
cheque.

3. THE AMOUNT: The amount to be paid by the bank must be clearly written both in words and in figures. The two
must always agree or be equal. It is important to write the amount to be paid in such a way that it cannot be
altered by some dishonored person.

4. THE SIGNATURE: The drawer is bound to sign his name at the right-hand corner of the cheque. The signature
must correspond with the specimen signature which the bank was given on the day the account was first opened.

5. COUNTER FOIL: A counterfoil is attached to each cheque by means of a perforated edge which is kept by the
drawer as a record of payments and to crosscheck these on his bank statement when it is given to him by the bank.

6. Alterations to a cheque must be accompanied by the initials of the drawer.

7. ACCOUNT NUMBER OF THE DRAWER: The account number of the drawer must be written on the cheque if it is
not printed on it.

8. SERIAL NUMBER OF CHEQUE NUMBER: The serial number or the cheque number must be on the cheque.

9. BRANCH NUMBER: where the branches of the bank are codified, this must be on the cheque.

2
A SPECIMEN CHEQUE

Bank name
Branch name date of payment magnetic ink
Payee’s name

GHETTO BANK 00-7-3733

Nswazi Branch date: 05/11/2011

Pay Mr. Theo Kenosi or order

The Sum of five hundred pula only

________________________________________________
P500.00
J. Rocket, P O Box 5 Tonota

A/C 003718920 _____________ __________________

382920 1-92207 003718920

(Drawer) account
Holder’s name amount in figures
Account number

Branch number account holder’s signature

Amount in words

Cheque number

There are three parties to a cheque:

1. DRAWER: A person who has a current account with the bank. And draws (writes) and signs a cheque.
2. DRAWEE: The bank upon which the cheque is drawn. And who pays on behalf of the drawer.
3. PAYEE: The person named on the cheque to whom it is made payable. The drawer becomes the payee
when he draws a cheque for himself.
TYPES OF CHEQUES

A BEARER CHEQUE: It is a cheque payable to anyone who presents it at the counter. It needs no endorsement and
the bank pays cash to anyone who presents it for payment.
The order reads: “Pay………….or Bearer. It is not a safe means of payments since anyone who presents it to bank
would be paid.

3
GHETTO BANK 00-7-3733
Nswazi Branch date: 05/11/2011

Pay Mr. Theo Kenosi or bearer

The Sum of five hundred pula only

________________________________________________
P500.00
J. Rocket, P O Box 5 Tonota

A/C 003718920 _____________ __________________

382920 1-92207 003718920

AN ORDER CHEQUE: It is a cheque payable to a named person. It requires endorsement other than the original
payee. The order or instruction reads “Pay…or Order. It is safer than a bearer cheque and banks usually check the
identity of the payees before paying the money against order cheques. The named person or organisation can
transfer such a cheque to someone else by endorsing it i.e. signing it at the back. (If the cheque is crossed,
however, it would not be transferable).
GHETTO BANK 00-7-3733
Nswazi Branch date: 05/11/2011

Pay Mr. Theo Kenosi or order

The Sum of five hundred pula only

________________________________________________
P500.00
J. Rocket, P O Box 5 Tonota

A/C 003718920 _____________ __________________

382920 1-92207 003718920

CHEQUE CROSSINGS

OPEN CHEQUE: An open cheque is uncrossed cheque and can be cashed over the counter.

CROSSED CHEQUE: Crossing a cheque refers to drawing two parallel lines down the face of the cheque. A crossed
cheque cannot be cashed over the counter; it can be paid only into a bank account of the payee. To enable cash to
be paid over the counter where the two parallel lines are drawn already, the drawer opens the cheque by writing
“PAY CASH “within the parallel lines and adding his signature.

4
MEANING OF SOME PHRASES USED IN CONNECTION WITH THE CROSSING OF CHEQUE:

ACCOUNT PAYEE ONLY: This shows that the amount state don the cheque is credited only to the account of the payee. It makes it impossible
for the cheque to be paid into any other account other than the payee.

NOT NEGOTIABLE: It means that a person who, taking the cheque cannot obtain to himself nor give to anyone else a better title to the cheque
than was possessed by the person from whom he took it. A cheque crossed “not negotiable” losses its natural quality of negotiability, and if it is
lost or stolen, no person, other than the true owner can acquire a good title to it.

UNDER TWENTY THOUSAND PULA: This phrase limits the amount to be paid by the bank. It is to prevent possible fraud by adding any other
figure to the amount on the cheque. For instance the cheque crossed with the phrase “under P20, 000”. Under General Crossing on Page could
reduce the chance of any payee altering it to P220, 000 by adding 2 before P 20,000. In other words it means that the amount to be credited or
withdrawn by the payee falls within the stated amount and not more than the stated figure.

COMMISSION TO DRAWER’S ACCOUNT : A cheque drawn up by a drawer which is payable in another bank or other than his own bankers and
marked with the words “ Commission to Drawer’s Account” means that the commission payable in clearing the cheque must be debited to the
drawer’s account.

ENDORSING A CHEQUE: To endorse a cheque is to write the payee’s name at the bank of the cheque as a form of identification. It helps the
bankers to know what to do with the cheque lead if payment is to be made to another person other than the payee.
REASONS WHY BANKERS ASK FOR ENDORSEMENT
Bankers may ask for endorsement for the following reasons:
 When the payee cashes the cheque (unless it is made to self instead of paying it into his account
 If the payee passes the cheque to another person.
 Where the cheque includes a form of receipt whereby the signing of the receipt amounts to the endorsement.
 When the instrument of payment is other than cheque eg. Promissory note, draft and bill of exchange.

The two main types of crossing are General crossing and Special Crossing

GENERAL CROSSING: It is when two parallel lines are drawn across the face of the cheque without any special direction to the drawee or
collecting bank (i.e. no bank’s name written across the face).

EXAMPLES OF GENERAL CROSSING ARE:

(a) (b)

(c) (d)

5
The general crossing shown in cheque (A) and cheque (b) indicates that the money can be paid in to any account
while those with general crossings like in cheque (c) must be paid only into the account of the payee. It is an
extremely safe type of cheque as it is not transferable.

All cheques are negotiable instruments, i.e. documents representing title to money in which the ownership passes
in full to a transferee (receiver of cheque) who takes it in good faith. This is so even if the transferor has stolen the
cheque. But the cheque crossing which is presented with the words ‘Not Negotiable’ in between the parallel lines
is an exception to this.

The general crossing with the words ‘Not Negotiable’ like in cheque (d) gives the rightful owner of the Cheque
protection, as the cheque still remains his legal property even though it may be stolen. It does not restrict its
transferability, but anyone accepting such a cheque is forewarned that he must return it to the rightful owner,
should it be found that the cheque has been stolen.

SPECIAL CROSSING: It is made by writing the name of a particular bank across the face of the cheque with or
without the lines. The cheque can only be dealt with at the named bank.

GHETTO BANK 00-7-3733

Nswazi Branch date: 05/11/2011

Pay Mr. Theo Kenosi or order

The Sum of ____________________________________________________

________________________________________________

J. Rocket, P O Box 5 Tonota

A/C 003718920 _____________ __________________

382920 1-92207 003718920

6
GHETTO BANK 00-7-3733
Nswazi Branch date: 05/11/2011

Pay ______________________________________________or order

The Sum of __________________________________________________

________________________________________________

J. Rocket, P O Box 5 Tonota

A/C 003718920 _____________ __________________

382920 1-92207 003718920

EFFECTS OF CROSSING A CHEQUE

The effects of crossing a cheque are:
i. It is less attractive but it is safe.
ii. It enables easy tracing of the person to whom the cheque is finally paid.
iii. It can be paid to a subsequent holder (payee) only after endorsement.
iv. It can be cashed over the counter only when the drawer cancels the crossing by writing “PAY CASH
“and signing.
v. It can be paid through the medium of a credit entry i.e. by crediting the account of the payee.

CERTIFIED CHEQUE: This is a personal cheque drawn by a customer to which an authorize official (e.g. Accountant
or Manager) of the Bank appends his signature to indicate that the customer has sufficient money in his account to
cover the amount stated. This is used in making payments in cases where the receiver wants a
guarantee/assurance that the cheque will not bounce/be dishonoured.

POST-DATED CHEQUE: A cheque is said to be post-dated when it bears a date ahead of the current date. A post-
dated cheque cannot be cashed until the due date. It would dishonour if presented before the due date.

STALE CHEQUE: It is a cheque which the payee has delayed for more than six months beginning from the date of
issue.
ANTE-DATED CHEQUE : This is a cheque the bears a date earlier than that on it which is actually drawn but the date
should not be six months earlier, otherwise it becomes a stale cheque.

DISHONOURED CHEQUE: A cheque is ‘dishonoured when the banker on whom it is drawn refuses to make
payment for some reasons. Such a cheque is marked R/D meaning “Refer to Drawer” or I/F meaning Insufficient
Funds or No Funds (N/F).

REASONS FOR WHICH A CHEQUE MAY BE DISHONOURED OR BOUNCED OR RETURNED

1. When the amount written in words differs from the amount written in figures

7
 2. If the drawer has insufficient funds in his accounts
3. If there is a mistake or omission on the cheque either the cheque is not dated or the drawer’s signature is
not written
4. When the drawer’s signature does not correspond with the one on the signature slip with his bankers.
5. When the drawer has stopped the cheque for one reason or the other.
6. If the cheque had stayed for more than six months since it was drawn (stale cheque)
7. If the cheque is post-dated and it is presented before the due date
8. On receipt of court order or government order stopping withdrawal of money from the account of the
drawer
9. When the bank is informed of the death insanity of the drawer
10. When the drawer has closed the account.
ADVANTAGES OF A CHEQUE

1. It is a convenient method of payment as no notice of withdrawal is required.

2. A cheque can be made out for any sum and it eliminates the needs for counting or carrying bank notes.
3. It is a safe method of payment and convenient than having to carry large sums of money (cash).
4. A cheque can safely be sent by ordinary post when crossed whereas cash need a registered envelops.
5. It serves as a record of receipts and payments since each cheque has a counterfoil in which particulars are
recorded.
6. Payment can be stopped by the drawer if necessary.
7. It is a relatively cheap means of making payment as the cost of each cheque is nominal in most countries.
8. The bank keeps a record of cheque payments which is sent regularly to the customer in the form of a bank
statement of accounts.

SAFEGUARDS WHICH COULD BE TAKEN TO PREVENT FRAUDULENT USE OF A CHEQUE

1. The date on which the cheque is drawn must be correctly stated.
2. Sate the name of the payee clearly and correctly.
3. Cross out open spaces on the lines.
4. The amount must be clearly written in words and figures in the space provided.
5. The cheque must be signed in the drawer’s usual signature and must agree with the one with the bank.

THE CLEARING SYSTEM OF A CHEQUE

The clearing house is an institution through which banks settle their inter-bank indebtedness. The operation of
banker’s clearing house system involves a daily meeting of all the different banks in a town for the purpose of
settling their indebtedness.

Banks clear cheque through the following methods:

1. BRANCH OR LOCAL CLEARING:

This is where the drawer and the payee operate the current accounts with the same branch of the bank. Cheques
received which are drawn on the same branch of the bank are cleared very easily. The bank debits the drawer’s
account and credits the payee’s account i.e. the branch simply transfers the amount from the drawer’s account to
the payee’s account. The cheque does not need to go to the clearing house.

2. INTERNAL OR HEAD OFFICE CLEARING:

8
It occurs when the payee and the drawer have bank accounts with the same bank but different branches. Cheques
received which are drawn on different branches of the same bank are forwarded to the Head office of the Bank in
that locality. The payee’s bank will credit his account and send details of the cheque to the Head Office. The Head
Office will then send the cheque to the drawer’s branch where his (the drawer) account will be debited. It is not
sent to a clearing house because no other bank is involved.

3. TOWN CLEARING (INTER- BANK):

This occurs when two or more (different) banks are involved but all of them are in one town or city. The cheques
still pass through the clearing house, but are specially cleared on the same day rather than taking days.

4. GENERAL OR NATIONAL CLEARING:

It occurs when two or more banks are involved and they are not in one town. Clearing a cheque becomes more
complicated if the drawer and the payee use different banks. The payee’s bank will credit his account and send the
cheque to its head office. The head office of the payee’s bank will send the details of all the cheques together,
drawn on each other to the bankers. At the clearing house, representatives of different banks meet to exchange
cheques drawn on each other and who make arrangements for totals owed by one bank to another to be paid. The
clearing house will send details of the cheque to the Head office of the drawer’s bank and this Head office will send
the cheque to the drawer’s bank (branch) where his account will be debited. The Central clearing House which is
operated by the country’s Central Bank. Every bank operating in a country has an account with the Clearing House
for the purpose.

PROCEDURE FOR CLEARING CHEQUE

Step 1: A customer pays by cheque and a cheque is deposited at the bank.

Step 2: The cheque will be sent to the bank’s headquarters.

Step 3: The cheque will be sorted and sent to a clearing house.

Step 4: The cheques will be exchanged between banks at the clearing house.

Step 5: The cheques will be returned to its headquarters

Step 6: The cheque is sent back to its branch and debited from customer’s account.

TYPES OF BANKS

CENTRAL BANK
This is the main and most important bank in a country. The Bank of Botswana is the Central Bank of Botswana. The
central Bank controls the operation of the whole banking system in the country and carries out its monetary policy.
It is owned and managed by the Government. The Central Bank issues, controls and regulates the supply of money
in the country. It acts as banker and financial adviser to the government. The Central Bank also banks for the
Commercial Banks. The Government has an account at the Bank of Botswana in the same way as individuals have
current accounts at commercial banks.

FUNCTIONS OF A CENTRAL BANK

9
1. ISSUING BANK NOTES & COINS: The Bank of Botswana is the only bank which is allowed to issue the country’s
currency i.e. Bank notes and coins. Other currencies issued by any other body are not a legal tender it becomes
counterfeit i.e. illegal money.

2. KEEPING GOVERNMENT’S ACCOUNT: The bank of Botswana acting as a government banker transacts all
banking business on behalf of the government. It has an account for the Government where all government
revenue is paid into, then monitors the government budgets. Government monetary policies are implemented by
the Bank of Botswana.

3. IT ACTS AS A BANKER’S BANK: The Bank of Botswana keeps account for the commercial banks in the same
manner as the commercial bank’s keeps accounts for their customers. Through the Bank of Botswana Inter-Bank
indebtedness through the clearing system can be settled.

4. LENDER OF THE LAST RESORT: As the lender of the last resort, all commercial banks, merchant Bank and other
financial institutions turn to the Central Bank as their last hope for money during difficult moments of funds
shortage. In effect, all banks in Botswana are customers to the Bank of Botswana and can benefit from the banks
assistance in time of difficulty.

5. MANAGEMENT OF THE COUNTRY’S FOREIGN EXCHANGE RESERVES:

Foreign exchange management is concerned with the process by which the bank of Botswana seeks to preserve
the stability of the national currency in relation to other currencies and also maintain an appreciable foreign
exchange reserves. The foreign currencies that are reserved can be made available for buying goods and services
from other countries and some invested then interest earned on them.

6. ADVISOR TO THE GOVERNMENT

The bank of Botswana advises the government on monetary policy matters such as inflation, taxation and
exchange rates.

7. BANKER’S CLEARING HOUSE

The central bank has a department responsible for helping in the clearing of the cheques which move between the
various commercial banks.

8. SUPERVISION OF THE BANKING SYSTEM

The central bank supervises the commercial banks and other deposit taking institutions to make sure banking
system in Botswana is strong and customers’ money is safe. To get a bank licence from bank of Botswana, for
example, strict guidelines have to be met.

9. SERVICING THE NATIONAL DEBT

The central bank just like any other individuals, also borrows money. The government can borrow from other
countries or from international financial institutions such as the World Bank, International Monetary Fund, African
Development Bank or even from the public i.e. local people. It is the central bank that manages such loan
accounts.
OMMERCIAL BANKS

10
These banks offer a wide range of banking services and are of particular importance to businessmen. They are
privately-owned and profit seeking finance institutions. They are the basic units of banking systems. They are
sometimes called Joint Stock Banks e.g. Barclays Bank, Standard Chartered Bank etc.

FUNCTIONS OF COMMERCIAL BANKS

Commercial Banks provide the following services to their customers

1. Acceptance of deposits.
2. Providing a convenient means of making payment
3. Lending to customers
4. Providing other services

ACCEPTANCE OF DEPOSITS
Customers put their money into a bank for the purpose of keeping it safe. The commercial banks offer these types
of accounts: -

a) CURRENT ACCOUNT
This is an account from which money can be withdrawn for payments by means of cheques. A bank does not allow
interest on current account, but instead may make a charge for its services, depending on the amount of work
involved. There is a minimum initial deposit required but no minimum balance to be maintained. A holder or
customer of such an account can make deposits and withdrawals at anytime. Services available to a current
account holder include overdraft, standing order, direct debiting, and credit transfer services.

ADVANTAGES

 Cheques can be used for payments.

 Money can be withdrawn on demand.
 Overdrafts are possible
 The bank sends regular statements to account showing the balance in accounts.
 Payments can be made on standing orders and direct debits.
 The customer can arrange for his employer to pay his wages directly into his current account by means
credit transfer.
 The holder enjoys safe keeping of his money.

DISADVANTAGES

1. No interest is earned on this account, although some commercial banks now allow interest on current
account with high minimum balances.
2. There may be bank charges to be paid on this account.
PROCEDURE FOR WITHDRAWING MONEY FROM CURRENT ACCOUNT
A customer who wishes to withdraw money with a cheque does the following:

i) He fills in a cheque lead with the date and amount.

ii) He writes his account number if it is not on the cheque.
iii) He signs the cheque with his regular signature.
iv) He states cash or the name of the payee.

11
 v) He presents the cheque to the paying cashier for payment.

FIXED DEPOSIT ACCOUNT

This is an account into which money is paid with the intention of leaving it in the bank for a specified period of
time to earn interest. Withdrawal of money is subject to 7 days notice. Cheques and standing order may not be
drawn on deposit account.
ADVANTAGES

 There are no bank charges.

 Higher interest is earned
 The holder enjoys safe keeping of his money
 The savings serve as collateral for bank loans.

DISADVANTAGES

 Cheques cannot be used for payment.

 Standing order, direct debit or other money transfer services cannot be used.
 Overdrafts are not possible
 Seven days notice of withdrawal is required.

SAVINGS ACCOUNT
This is used by customers who want somewhere to save small sums of money on regular basis. Withdrawal can be
done or demand but not subject to bank charges a bank passbook is issued or given to a customer in which
deposits and withdrawals are recorded. Small interest is earned on the balance. This account is intended for the
low income earner

ADVANTAGES

 Small interest is earned.

 There are no bank charges.
 Money can be deposited at anytime
 The holder enjoys safe keeping of his money
 He enjoys credit transfer facility
 The savings serve as collateral for bank loans.

DISADVANTAGES

 No cheque book is provided

 No overdraft is allowed.
 Withdrawals at a branch may be allowed only once a week.

PROCEDURE FOR WITHDRAWING MONEY A SAVINGS ACCOUNT

 The customer fills in withdrawal form with amount and date.

 The customer writes out his account number.

12
  The account holder signs the withdrawal for with the authorized signature
 He presents the withdrawal form together with his savings deposit passbook and identity for payment.

OTHER SERVIES OF COMMERCIAL BANKS

The commercial banks perform numerous services to their customers.
The following services are rendered by the commercial banks:

 They provide the means of payment or transfer of money in the form of cheques, bank draft, telegraphic
transfer, standing order, travelers’ cheques etc
 Ensure a continual supply of cash to the community. The control of this is by the Central Bank of
Botswana, but the commercial banks act as the vehicles for executing the policy of the central bank.
 Operate the cheque system in transferring drawings on current accounts.
 Provide night-safe facilities for money deposited outside the normal business hours.
 Provide a means of saving by deposit accounts.
 Provide a service for the safe deposit of jewellery and important documents.
 Pay bills fixed amounts on behalf of their customers.
 Operate credit transfers as alternative methods of payment to the cheque system.
 Sell bankers drafts as safe and easily acceptable means of payment.
 Make available loans and overdrafts by using money deposited with them by customers.
 Buy and sell stocks and shares through their brokers on behalf of their customers.
 Receive dividends on a means of savings by deposit accounts.
 Act as referees for customers.
 Act as executors and trustees.
 Transact foreign exchange business.
 They offer advice on tax matters.

STANDING ORDER
This is an instruction from a customer to his banker, asking the bank to make periodical payments of fixed amount
from his current account on his behalf. It is used in settling regular bill. E.g. rents, insurance premiums, hire
purchase transactions, subscriptions etc. The bank will automatically do this by debiting his account and sending a
credit to the bank and branch of the beneficiary.

ADVANTAGES

 Regular commitments are met punctually.

 The account holder or customer can conveniently forget about his regular due dates for payments.
 Creditors need not send reminders to debtors to pay their debts.

DISADVANTAGES

 The bank will not inform the customer when they are going to make the payment. So if the customer
keeps insufficient balance in his account the bank may refuse to make payments as instructed and this
can cause a lot of embarrassment to the customer.
 It is restricted to only payments of a specified amount and where payments are of irregular sum; this
method can not be used.

13
  Where payments have to increase a new authority will need to be signed by the customer and this take
sometime.

DIRECT DEBITS
This is used when payments are either irregular and of varying amounts or both. Examples: subscriptions to clubs
which is increased every year, electricity. Unlike standing order, it is the creditor or the payee who informs the
payer’s bank to transfer the payments to his account with an authorization from the debtor or the payer.

ADVANTAGES

 This save the buyer the trouble of remembering due dates of payment.
 The supplier or creditor gets prompt settlement of debts.
 The current account holder does not have to sign cheques all the time.
 The payer can safeguard himself by instructing his bank not to accept a direct debit above a stipulated
level without specific authority from himself.

CREDIT TRANSFER
This system enables people with or without bank account to make payments to large number of creditors (people
owed) by filling in a credit transfer form provided at the bank counter. The debtor prepares a list containing names
of creditors and the amount to be paid is sent to the bank with cash or cheque. The facility is very useful to the
businessman who has to make large number of payments at one time to those with bank accounts. This system
can be used to pay salaries, rent, hire purchase installments etc, only one cheque is prepared to cover all the
creditors.
ADVANTAGES

 It is convenient for both the payer and the payee as the payer does not have to take the trouble of writing
and posting several cheques and the payee need not go to the bank to cash the cheque.
 The payer pays the stamp duty for only one cheque and saves one postage costs.
 There is no risk of cheques getting lost or being dishonoured.

BANK DRAFT: A bank draft is a cheque drawn by a bank on its branch. It guarantees payment as the person
obtaining it pays cash to the issuing bank so that there is no risk of it being dishonoured.

MAIL TRANSFER: It is an order sent by a bank to a branch or correspondent to pay money in foreign country. The
customer pays cash to his banker and requests the transfer to be sent by ordinary mail. It is not negotiable or even
transferable and so involves no risk of loss.

TELEGRAPHIC MAIL TRANSFER

This is an order to pay sent by telex or cable to a named exporter. The importer’s bank informs the correspondent
bank to pay the exporter the equivalent foreign exchange. Payments could be made within a few hours of dispatch
from issuing centre. It is more expensive form of remittances than mail transfer due to the speed with which the
transfer is made.

CREDIT CARDS

14
Credit cards are issued to by banks to enable the holders to buy goods and services on credit up to an agreed
maximum at the firms/ companies e.g. Shops, hotels, and petrol stations which accept that particular credit card.
Examples are Barclay cards, Visa, Access, American Express etc.

ADVANTAGES

 A credit card is safer and more convenient than using cash.

 It increases sales because customers do not need cash, and credit card is easy for the customer to use.
 Less cash on the premises reduces the damage of theft and could result in lower insurance premiums.

DISADVANTAGES

 A customer may spend more than he can afford.

 The rate of interest charged by credit card companies is higher than those on many forms of credit.
 Some retailers do not accept credit cards.
 If the credit card holder fails to inform the credit card company of a loss, he is liable for the expenses
where the card has been misused.
 Accepting payment of credit cards takes time and queues may form from which may deter cash
customers.
 There is more paper work involved and extra administration cost is created when the retailer has to
telephone the credit card company to check credit limit and stolen cards.
 The retailer receives payment from the credit card company at a later date, which reduces the cash flow
available to meet current expenses.

CASH DISPENSING MACHINES (AUTOMATED TELLER MACHINES):

Cash dispensing machine are placed inside or outside banks and allow current account holders to withdraw cash
without presenting a cheque. The holder is issued with cash which is inserted into the dispensing machine. The
holder then types in his own personal identification number (PIN) and the amount needed in cash. This facility
enables the customers to perform banking transactions anytime in the day. Some of the banking transactions
include withdrawals up to a certain amount each day transfer of funds between accounts, deposits of cash or
cheque, bank balance enquiry, request for cheque books and statements of accounts.

NIGHT-SAFE FACILITIES
A night safe allows businessmen to deposit money when the bank is closed. The money is put in a locked bag
which is dropped into the night-safe, located outside the bank and goes through a chute leading to the vault.
When the bank reopens the bag is opened with the businessman’s key and the money is credited to the account.

BANK LOAN
It is an advance given to all borrowers (customers and non-customers) on a fixed stayed sum of money. Interest is
charged on the whole amount of money granted whether utilized or not. The borrower then repays the bank or
regular installments. When a loan is agreed, a separate loan account is created for the customer. The loan account
is debited with the amount borrowed, while the customer’s account is credited with that same amount. Before a
loan is granted the bank manager will ask the customer to complete a loan application form, so that the manager
can assess the ability of the customer to repay. A security must be provided before the loan is granted.

BANK OVERDRAFT

15
This is an amount the Bank allows only current account holders of customers to withdraw more than what he has
in his account up to an agreed maximum. It is used by the Bank for lending to its customers without opening a
separate loan account. Interest is charged only on the actual amount of money overdrawn.

DIFFERENCES BETWEEN A BANKLOAN AND A BANK OVERDRAFT

 Loan is usually granted for longer periods but an overdraft is allowed for a short period.
 Interest on a loan is calculated on the whole amount granted. Interest on an overdraft is paid on the
actual amount overdrawn
 A loan is granted to any borrower whether a customer or not. An overdraft is allowed only to current
account holder (customer).
 A loan account is opened in the borrower’s name. No separate account is opened when an overdraft is
granted.
 Collateral securities are required before a loan is granted. Collateral securities are not required before
overdraft is allowed. Interest on the loan is usually lower than interest on an overdraft.
 The borrower has to go through the formal procedure of applying for a loan. Fewer formalities are
observed in granting an overdraft as borrower need not fill forms whenever he needs credit.
 If a borrower is not a customer of the bank, he needs references as to his financial standing when
applying for a loan. In an overdraft, borrower need not have references as to his financial standing since
he is already a customer of the bank.
 Any money paid into the customer’s account reduces the overdraft. Money paid into the borrower’s
account does not reduce the amount of loan.
 A loan is suitable for the borrower who is sure that he will require the loan for a certain time. An overdraft
is suitable for the customer who is not sure as to how much, when, and ho long he needs the credit.

FACTORS TO CONSIDER BEFORE GRANTING A LOAN OR OVERDRAFT

A bank has to take the following factors into consideration before granting overdraft or loan facilities:

 Borrowers or customer’s credit worthiness and personal integrity: The bank has to assess the customer’s
ability and reliability to pay the loan, his financial standing and his background. If the customer operates
an account with the bank the task is easier otherwise the bank can ask for references.

 Security offered: Where security is required, it should be made clear to the borrower. The security must
be sufficient, valuable, and marketable so that in the event of non-payment the bank can sell the security
easily with minimum losses.

 Guarantee for the loan: The bank may require the customer to get someone of strong financial standing
to guarantee the loan.

 Purpose of the loan: The purpose of the loan must conform to the central bank’s directives. Banks prefer
to give loans for productive purposes or for profitable projects not for risky projects.

 Amount of loan : The amount of loan must also be taken into consideration

16
  Repayment period: The bank prefers the loan to be repaid as soon as possible, so that the period of
repayment will be short. The borrower should be able to reduce the loan at current interest rates.

 Government’s policy in respect of lending by commercial banks is takes into consideration.

 Bank’s policy: The manager will consider his bank’s own policy in respect of lending at the time of the
request of the loan.
OTHER FINANCIAL INSTITUTIONS

SAVINGS BANKS
These are banks which mainly provide safe place for savings money. They offer very few services rendered by a
modern bank. They accept small deposit. Paying interest on each deposits and offer only limited withdrawal
facilities. They operate through the National network at post office eg. Post Office Savings Bank.

SPECIALIZED BANKS
These banks aim at providing a special type of service or serve a special type of customers eg. Co-operative Banks,
which serves co-operative societies, Agricultural Development Bank serves farmers and Housing finance or Building
Societies – provide finance for buying and building houses only.

MERCHANT BANKS
Merchant banks provide services to firms rather than to individuals. They deal mainly in medium term and long-term finance
for large companies and industrial projects. They also handle bills of exchange and payments in foreign trade and also finance
hire purchase.

FUNCTIONS
TRADE AND INDUSTRIAL FINANCE: Merchant banks provide fixed interest medium and long-tem loans to trade mining and
agricultural sectors.

FINANCE INTERNATIONAL TRADE: They give advice and information to exporters and importers who need them.

ACCEPTANCE OF FOREIGN BILL OF EXCHANGE: By accepting a bill of exchange, a merchant bank guarantees that the holder of
the bill will receive – full value at the date of payment.

ISSUING HOUSE SERVICE: Merchant Banks undertake the issue or fresh share for their clients by public issue in placing.

UNDER WRITING OF ISSUE OF SHARES: They underwrite shares for companies whose shares have not been fully subscribed i.e.
taking the remaining uncalled shares by paying for them.

HIRE PURCHASE AND EQUIPMENT LEASING SERVICES: Merchant banks buy durable equipment and give them to the lessee to
be used over a period of time. The lessee pays rent to the merchant bank.

SMALL-SCALE ENTERPRISE ADVICE – Merchant banks perform advisory services to small-scale industries and agriculture.

CORPORATE BANKING SERVICES: Merchant banks undertake the traditional functions of commercial banks of accepting
deposits from companies.
PORT FOLIO MANAGEMENT: The banks collect various securities which they manage. This reduces risk of loss by diversifying
port-folio of investment through the purchase of securities, commercial, industrial and Government stocks.

17