Financial institutions are organizations that help people and businesses manage money through services such as saving, lending, and transferring funds. The most common type is the commercial bank, which keeps deposits, gives loans, and supports trade within and outside the country.
These institutions make it easier for individuals to handle everyday financial needs and for businesses to grow and operate smoothly. In this lesson, learners will explore the basic functions of commercial banks and understand how they contribute to economic activities.
Table of Contents
Types of Bank Accounts
Bank accounts are records that show how much money a customer has in the bank. There are three major types of accounts used by individuals and businesses.
Current Account
A current account is meant for people or businesses that make frequent payments and withdrawals. It allows the account holder to deposit money at any time and withdraw it whenever needed. One of its important features is the use of cheques, which makes payments easier and safer, especially for business transactions. Current accounts usually do not earn interest because the money moves in and out regularly. They are suitable for traders, companies, organizations, and individuals who need a reliable way to handle daily financial transactions. This account helps users settle bills, pay suppliers, and receive payments quickly.
Savings Account
A savings account is designed to encourage people to save money for the future. It is commonly used by students, workers, and anyone who wants to keep money safe while earning a small interest. The bank usually sets a limit on how many times the customer can withdraw money to help promote saving habits. Savings accounts require a minimum balance, which is often small, making them easy to open. Interest is paid on the account balance, so the more money saved, the more interest earned. This type of account is best for people who do not make many transactions and prefer to keep money aside for emergencies or long term goals.
Fixed Deposit Account
A fixed deposit account is for people or businesses that want to invest a certain amount of money for a specific period. The period could be three months, six months, or even one year. During this time, the customer cannot withdraw the money until the agreed date. In return for keeping the money untouched, the bank pays a higher interest rate compared to savings accounts. The longer the deposit period, the higher the interest earned. This account is suitable for those who have extra money they do not need immediately and want to earn more returns from it. It is a safe and secure form of investment, especially for long-term financial planning.
The Role of Commercial Banks in International Trade
Commercial banks help countries trade goods and services. They make transactions safe, fast, and reliable.
Main roles include:
- Providing Foreign Exchange: International trade involves buying and selling goods between countries that use different currencies. Commercial banks help by providing foreign exchange to importers who need to pay foreign suppliers. They also help exporters convert the foreign currency they receive into the local currency. This service makes it possible for traders to settle their transactions without worrying about currency differences.
- Issuing Letters of Credit: A letter of credit is a document issued by a commercial bank to guarantee that the importer will pay the exporter once all conditions of the agreement are met. This gives the exporter confidence to release goods because the bank stands as a trusted middleman. It reduces the risk of nonpayment and helps both parties trade smoothly, even when they do not know each other personally.
- Facilitating International Payments: Commercial banks make it easy to transfer money from one country to another. They use systems such as telegraphic transfers, electronic transfers, and international money orders. These methods ensure that payments reach foreign sellers quickly and safely. The ability to send and receive money across borders supports trade relationships and prevents delays in business transactions.
- Financing International Trade: Importers and exporters often need money to carry out their transactions. Commercial banks provide trade finance through loans, overdrafts, and discounting bills of exchange. Importers may need money to pay for goods before selling them locally, while exporters may need funds while waiting for buyers to pay. By providing this financial support, banks make it possible for businesses to remain active in global markets.
- Offering Trade Advice and Information: International trade can be confusing because countries have different rules, currencies, and payment methods. Commercial banks advise customers on how to complete international transactions, the safest payment methods, and the best timing for currency exchange. They also inform traders about global market conditions. This guidance helps both importers and exporters avoid risks and make better decisions.
- Safeguarding Documents and Goods: Commercial banks also act as custodians of important trade documents such as bills of lading, shipping documents, and insurance papers. They release these documents only when the right payments are made. By doing this, banks protect both the buyer and the seller from fraud. Some banks also help arrange for warehousing of goods until payment is completed, making the trade process more secure.
- Helping With Export Promotion: Commercial banks support exporters by offering incentives such as lower interest rates, export financing, and assistance in accessing export promotion programmes. They may also partner with government agencies to help exporters compete internationally. This support encourages more businesses to trade across borders and helps the country earn foreign exchange.
Credit Facilities Provided by Commercial Banks
Credit facilities are ways banks allow customers to borrow money.
Loan:
A loan is a fixed amount of money that the bank gives to a customer for a specific purpose and time. When a bank grants a loan, the borrower agrees to repay the money in installments or as a lump sum at the end of the period. The customer also pays interest, which is the extra amount charged for using the bank’s money. Loans can be used for many purposes such as buying machinery, expanding a business, paying school fees, or constructing a building. Once the bank approves a loan, the money is credited to the customer’s account, and the borrower cannot withdraw more than the agreed amount. Loans are usually backed by collateral, which is property or assets that the bank can claim if the borrower fails to repay.
Overdraft:
An overdraft is a credit facility that allows a customer to take more money from a current account than the balance in the account. This means the customer can spend beyond what they have saved, up to a limit set by the bank. Overdrafts are usually short term and are mostly granted to individuals and businesses that use current accounts. The bank charges interest only on the extra amount withdrawn above the account balance, not on the entire account. Overdrafts help people settle urgent needs or meet business expenses while waiting for money to come in. However, they must be repaid quickly to avoid high charges. The bank may require collateral or a strong account history before granting an overdraft.
Discounting Bills of Exchange:
Discounting bills of exchange is a credit facility where the bank pays the holder of a bill of exchange before the bill matures. A bill of exchange is a written order that one person gives to another person to pay a certain amount of money at a future date. Instead of waiting until the date of payment, the holder can take the bill to the bank. The bank pays the value of the bill immediately after subtracting a small fee known as the discount. When the bill reaches its maturity date, the bank collects the full amount from the person who is supposed to pay. This service helps businesses get quick cash when they need it, especially when they are waiting for payment from customers. It also encourages smooth flow of business activities and reduces delays in transactions.
Final Thoughts
- Financial institutions help people and businesses manage money.
- Current account: for frequent transactions, no interest, uses cheques.
- Savings account: encourages saving, pays interest, limited withdrawals.
- Fixed deposit account: large sum saved for a fixed period, high interest.
- Roles of commercial banks in international trade include providing foreign exchange and letters of credit, facilitating payments for imports and exports, and financing international trade through loans and overdrafts
- Credit facilities provided by banks include loan, overdraft, and discounting bills of exchange.
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