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P.O.B Business Finance Lesson Notes

The document discusses the various types of financial institutions including commercial banks, credit unions, insurance companies, building societies, microfinance agencies, mortgage companies, unit trusts, development banks, and stock markets. It describes their roles such as accepting deposits, offering loans, providing investment opportunities, and facilitating payments. It also outlines some key services offered by financial institutions like providing advisory services, safety deposit boxes, selling travelers checks, and offering credit cards, deposits, loans, money transfers, and settlement services.

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115 views4 pages

P.O.B Business Finance Lesson Notes

The document discusses the various types of financial institutions including commercial banks, credit unions, insurance companies, building societies, microfinance agencies, mortgage companies, unit trusts, development banks, and stock markets. It describes their roles such as accepting deposits, offering loans, providing investment opportunities, and facilitating payments. It also outlines some key services offered by financial institutions like providing advisory services, safety deposit boxes, selling travelers checks, and offering credit cards, deposits, loans, money transfers, and settlement services.

Uploaded by

nathaliamoses09
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Lesson Notes

Topic: BUSINESS FINANCE

The financial sector is made up of agencies such as:


 Government financing agencies
 Central bank,
 Commercial banks,
 Mortgage companies,  Credit unions
 Insurance companies
 Building societies - A building society is a type of financial institution that provides banking
and other financial services to its members. Building societies resemble credit unions in that
they are owned entirely by their members.  Micro-lending agencies– eg Island Finance 
Unit trust, stock market.
 Development banks (Caribbean Development Bank, Agricultural Development Bank)

ROLE OF FINANCIAL INSTITUTIONS


 Commercial bank accepts money deposits and therefore provides a safe place for saving
money.
 Offering loans and overdraft to persons who need financial assistance.
 Assisting customers to easily make payments through standing orders, current accounts and
debit cards.
 They also offer investment opportunities such as mutual funds, annuities and stocks and
bonds

Services offered by Financial Institutions


 Commercial banks provide advisory services to clients who wish to borrow a loan to
make investments and persons who wish to purchase securities.
 Safety deposit boxes at the bank are used to store safely items that individuals deem as
highly valuable.
 Selling travellers cheques.
 A credit card allows persons to purchase items by using funds that the bank makes
available. There is a limit to how much the bank makes available to credit card holders.
 Offer a variety of deposits- Money can be deposited in a current account upon which
cheques can be drawn or a fixed deposit account where a higher interest rate is earned.
Foreign currency can also be deposited.
 Credit facilities (loans) can be provided through deposits where through using a cash
ration a portion of the deposits are kept in the bank while the rest are loaned.
 Money Transfers (remittance services) from depositors account to another account. This
called a standing order. They also facilitate bank drafts and letters of credit.
 Trustee work - Any individual or company who manages assets on behalf of another.
For example, a bank may hire a trustee to distribute funds from a loan to the borrower.
 Offering settlement services such as authorizing credit card payments

The Central Bank does not offer banking services to private individuals and other
businesses. It is a government institution that carries out the following functions.
1. Responsibility for issuing notes and coins to commercial banks. It will also redeem
(replace) damaged notes or coins that have been collected by commercial banks.
2. Banker to the government and offer services to the government that are similar to those
offered by commercial banks
3. Banker to commercial banks; this involves holding the cash reserves of the commercial
bank. The amount of the cash reserves is based on the cash ratio.
4. Centre of the Clearing House System and ensures a smooth exchange between the
different commercial banks.
5. Management of the foreign exchange reserves of the country to ensure a stable buying
and selling rate for foreign currency. If the country has a fixed foreign exchange rate
then this is set by the Central Bank.
6. Regulator of the activities of (supervises) the Commercial Banks.
7. ‘Lender of last resort’ which means that the Central Bank will assist the commercial
banks with loans when necessary

Commercial Banks: A commercial bank is a for profit financial institution that provides
a range of financial services to individuals and business clients. Basic functions and
services of commercial banks include: accepting clients’ deposits; lending to individuals
and businesses (short term loans and long term loans, mortgages); processing payments
on customers’ behalf; providing night safe deposit services for business clients; online
banking services (using the internet); tele-banking services (using the telephone);
investment services; foreign exchange transactions e.g. money orders, bank draft; credit
facilities e.g. overdrafts; credit cards and debit card facilities; mobile money facilities;
ATM facilities or automatic teller machine facilities e.g. deposit and withdraw cash
Credit Union: A non-profit co-operative controlled by member/owners. Members are
able to access lower cost services e.g. low interest loans, credit cards and deposit at a
higher interest rate than market rates. The members are the depositors, borrowers and
shareholders

Insurance Companies: Insurance companies operate by collecting premiums from large


groups of people or pooling risk against the possibility of an event occurring. Insuring
large numbers of people allows the companies to pay claims and at times turn over a
profit. These companies use utilize statistics to project the likelihood of an event
occurring. They provide coverage against risks such as, fire, car accidents, illness,
disability, death. Some insurance companies also provide annuities and investment
services;
Building Societies: An institution that provides banking and other financial services such
as, mortgages and demand deposit accounts (investopedia.com). Building Societies tend
to focus on savings and mortgages.
Microfinance Agency: A financial institution that provides banking services to low income
groups and individuals (www.investorwords.com). These agencies tend to provide loans to
members (low income earners or groups), offer insurance and deposits. The aim is to
improve the quality of life of the poor.
The persons who access the services of microfinance agencies would usually have no
access to traditional banking institutions.

Mortgage Company: A firm engaged in originating and or funding mortgages for


residential or commercial properties. Some mortgage companies offer 'turnkey mortgage
services'.
These include origination, funding and servicing mortgages' (investopedia.com).
Origination is the process the individual has to go through to obtain a mortgage or home
loan.

Unit Trusts: An unincorporated mutual fund structure that allows funds to hold assets
and provide profits for the individual unit holder. The investment fund is set up under a
trust deed e.g. Trinidad and Tobago Unit Trust provides a series of mutual funds both
TT$ and US$, asset management, financial advisory, bureau de change, ATM services,
call centre, card services;

Development Bank E.g. Caribbean Development Bank (CDB): The CDB services include:
assisting borrowing member countries to develop their economies; assist in expanding
production and trade; promote investment, mobilize financial resources for development,
provide technical assistance to borrowing members; to support regional and local financial
institutions, support and stimulate the development of capital markets.
(www.caribank.org)

A development bank is a financial institution established 'to fund new and upcoming
businesses and economic development projects by providing equity capital and or loan
capital' (www.businessdictionary.com)

Stock Market: The collection of markets and exchanges where the issuing and trading of
equities, bonds and securities takes place (investopedia.com). Its benefits include:
For firms:
 Raising capital for business
 Facilitate growth through share acquisition e.g. mergers For investors:
 Although investment in the stock market is risky by nature, it provides higher
capital gains in the long term.  Provides a diversified portfolio For the economy:
 Promotes economic growth through investment in business
 Used as an indicator of the economy’s performance in terms of share price performance
 Provides for good corporate governance in terms of record keeping for publicly listed firms
 Provides an avenue for government to access funds

ACTIVITY

Explain THREE services offered by Financial Institutions

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