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Commercial Bank Facilities
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Current Accounts
Current accounts can be used by anyone provided they can supply a reference or references. The advantages of the account include cheque payments if there are funds in the account.
Among banking instruments there are bank cards which also act as cheque cards allowing money to be drawn from cash dispensers or ATMs even when the bank is closed.
Although cheques can be drawn immediately, they will take three working days before the amount is debited or credited to the account.
When depositing cash or cheques, a paying- in slip is used to record the deposit, the counterfoil with the bank’s stamp and cashier’s initials being proof that the deposit was made.
It is possible to overdraw an account, i.e. take out more money than there is in credit, but this can be only done with the bank’s manager’s agreement, otherwise the customer’s cheque may not be honoured. However many banks offer special current accounts where overdraft facilities are automatically included, for an extra charge.
As a rule, interest is not paid on current accounts. Credit balances and charges are made for transactions. However, there are special current accounts which have certain requirements, e.g. a minimum balance, which offers interest. Many firms have more than one current account, e.g. N1 account for paying wages and overheads and N2 accounts for paying suppliers.
Deposit Accounts
Deposit accounts do pay interest to a maximum established by the bank, but the customer can be asked to give notice of withdrawal, and can only withdraw on a withdrawal slip handed in at the branch where the account is kept. No chequebook is supplied, and there are no overdraft facilities.
Banks offer various types of other accounts, e.g. a budget account, where the bank will pay a customer’s bill spread over a twelve –month period. And there are numerous savings accounts on which interest is paid according to the credit balance of the account and the period that is left for. With some of these accounts there are penalties for withdrawing money before the agreed date.
Account Statements
Banks will normally give statements to both deposit and current holders about once every three months, or more frequently if required by the account holders. Statements give a detailed account, on a day-to-day basis, of all money and cheques will have either been paid into account or withdrawn from the account.
Credit Cards
Credit cards offer credit facilities to customers making purchases in shops, and for a basic charge plus interest, calculated monthly, the customer can buy goods up to a limit on most cards. Visa, Mastercard and others are internationally recognized and act as a cheque and cash card and can be used for automatic debiting when a customer pays for goods in a shop or effects other payments.
Standing Orders and Direct Debits
Customers making regular payments, such as rent or mortgage repayments, can ask the bank to transfer the money of the payee on a particular day every month. A standing order or direct debit is one method of doing this. In the latter case, however, once the instructions are given, for, say a period of a year, the order cannot be cancelled unless the payee agrees.
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Loans and Overdrafts
Loans and overdrafts for large amounts are usually allowed on a formal agreement. A loan will usually be covered by a negotiable security, e.g. shares with repayment specified on the agreement. Interest in some countries is controlled by law through imposing interest rates and by market forces. The money for a loan is immediately deposited in the customer’s account. With an overdraft, however, the customer is given permission to overdraw an account up to a certain limit.
Recently banks have had more freedom in lending and investing. They are allowed to offer mortgages to their customers. Mortgage is a type of lending money to customers to buy real estate with the bank buying the property for the customer and the customer repaying over a twenty/twenty- five-year period. In addition, there is a range of other financial and investment services the bank offer. For example, many banks in the world act as brokers and dealers on the stock market to buy securities on a customer’s behalf.
Checking accounts in commercial banks
Checking accounts in commercial banks called demand deposits by economists are a part of the money supply. Checks written by against these deposits can be used to buy things and the deposits are a store of value.It is true you may be asked to provide identification when cashing a check, but essentially you can use a check in the same way as paper money. What a cheque does is authorize the person to whom it is made to take part of the deposit in the bank. In January 2008 demand deposits totaled $265.3 billion.
The value of coins and paper currency together with the demand deposits total $372.6 billion and economists call this combination the money supply. In January 2008 the money supply was made up of 29 percent coin and paper currency and 71 percent demand deposits. These are the most liquid financial assets, which means that they can be used most easily and directly to buy things. Also, with one exception, they do not earn interest. You can take out of a checking account only the amount you have put in.
Savings Accounts
Savings accounts earn interest but in most cases you cannot write a check against them. Because they are less liquid than checking accounts, they cannot be used as money. (NOW accounts-negotiable orders of withdrawal-constitute the only exception to this; they are a form of savings account against which checks can be written.) At the same time, it is an easy matter for us to transfer a deposit from your savings account to our checking account; sometimes it only requires a phone call. In addition, there are time deposits in commercial banks that are a form of savings account generally held by businesses.
International banking
There are two internationally accepted methods of payment, i.e. bills of exchange and documentary credits.
A bill of exchange (B/E) is an order sent by the drawer (the person asking for the money/exporter) to the drawee (the person paying /importer) stating that the drawee will pay, on demand or at a specified time, the amount shown on the bill. If the drawee accepts the bill, they will sign their name on the face of it and date it.
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The bill can be paid to a bank named by the drawer, or the drawee can name the bank they want to use to clear the bill. In the latter case the bill will be kept at the drawer’s bank until it is to be paid. When the bill is due, it is presented to the paying bank. Such bills are said to be domiciled with the bank holding them.
It is possible to send the bill directly to the drawee, if they are well-known to the drawer.
A sight bill or sight draft is paid on presentation. In a document against payment (D/P) transaction, the sight bill is presented to the importer with the shipping documents, and the importer pays immediately, i.e. on presentation or at sight.
A bill paid days after sight (D/S) can be paid on or within the number of days specified on the bill. For example, 30 days after sight (or 30 D/S) means that the bill can be paid thirty days after it has been presented. A bill which is paid after a period of time is called a usance.
In a documents against acceptance (D/A) transaction, the bank will ask the drawee to accept the bill before handing over the shipping documents.
The bills of exchange drawn or payable in another country are known as foreign bills, and those used within the country in which they are drawn up as inland bills. A clean bill is one that is not accompanied by shipping documents.
The advantage to the exporter of payment by bill is that the draft can be discounted, i.e. sold to a bank at a percentage less than its value, the percentage being decided by the current market rates of discounting. So even if the bill is marked 90 days after sight, the exporter can get their money immediately by selling it to a bank. The bank, however, will only discount bill if the buyer has a good reputation. The advantage for the importer is that they are given credit, provided the bill is not a sight draft.
Bills can be negotiable if they are endorsed (signed on the back) by the drawer. For example, if the drawer of the bill wanted to pay another manufacturer, he could sign on the back of the bill, i.e. endorse it, and the bill would become payable to the person who owned it. The drawer can endorse it specifically, i.e. make it payable only to the person named on the bill.
A dishonoured bill is one that is not paid the due date. In this case the exporter will protest the bill, they will go to a lawyer, who will, after a warning, take legal action to recover the debt.
There is also a Cash Against Documents transaction (CAD), where the documents are handed over to the importer when cash has been paid. In these transactions, of course, there is no bill of exchange and the importer (buyer) is not given credit.
Documentary Credits
A bill of exchange might be dishonoured, or an order might be cancelled. However, these risks can be reduced by issuing a letter of credit, which is more binding form of payment.
Letters of credit (L/C) have been used for centuries in one form or another to enable travellers to obtain money from foreign banks. The process begins with the traveller asking their bank to open a letter of credit in their favour, i.e. for a specific amount of money to be debited to their account. The bank then drafts a letter, which will allow the traveller to draw money on foreign banks with whom the traveller’s home bank has an agreement. The foreign banks will then draw on the home bank to recover their payments.
For individual travellers, credit cards have largely replaced this method of obtaining money, but documentary credits (letters of credit accompanied by documents) are widely used in foreign trade.
There are two types of letter of credit: revocable, i.e. those that can be cancelled, and irrevocable, i.e. those that cannot be cancelled except with the agreement of the seller. The first type is very rarely used these days.
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Documentary credits are governed by the International Chamber of Commerce code of practice, known as the Uniform Customs and Practice for Documentary Credits. The current code is ICC publication No. 500 as is generally referred to as UCP 500.
Shipping Documents
The following are the essential documents which accompany a documentary credit:
- bill of lading;
- commercial invoice;
- insurance certificate.
Other documents which, in specific cases, it might also be necessary to include are:
-customs form;
-certificate of origin (i.e. a certificate showing where goods were made, which is used to prevent goods from outside coming into free trade area or customs union without being taxed);
-consular invoice (i.e. an invoice, or sometimes a stamp on the commercial invoice, giving permission for goods to be imported, issued by the consulate in the importing country);
-certificate of inspection (i.e. certificate signed by agents to ensure the customer is getting goods of the type and quality he ordered);
- health certificate.
With Electronic Data Exchange (EDI) many of the relevant documents can be completed on computer templates to the exporter’s specific requirements and transferred by email. In this case payment is made by SWIFT, the international bankers’ computerized transfer of funds.
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