Business Finance

8.1 Identify various financial institutions

Financial institutions
A financial institution is an establishment in the business of dealing with financial and monetary
transactions such as deposits, loans, investments and currency exchange.
The financial sector is made up of many different institutions including:
Central Bank
The central bank is set up by the government. It’s acts as an adviser to the government on the
formation of monetary policy, it controls the issue of currency and it acts as lender of last resort
to the commercial banks.
The central bank does not hold deposits and lend to the public.
The functions of the central bank include:
• It is the government’s bank
• Issue currency
• Act as a lender of last resort to financial institutions
• It acts as an advisor to the government on the formation of monetary policy
Commercial Banks
A commercial bank is a financial institution which accepts deposits from customers and
safeguard them until required. They also lend money to customers at an interest. E.g.
ScotiaBank, Republic Bank
The main functions of the commercial bank are
• Accepting deposits
• Providing loans
• Offering safety deposit boxes for items and documents
• Processing payments
Non-bank financial institutions
Some financial institutions are not classified as banks. These include

• Credit unions
Credit unions financial cooperatives. An organisation owned by its members. Members
are encouraged to save and in return members can borrow at interest rates that are usually
lower than commercial banks. Examples of credit unions in Barbados are City of
Bridgetown Cooperative Credit Union (COB), Barbados Public Workers Cooperative
Credit Union
 • Insurance companies
Insurance companies sell policies that provide protection to individuals and businesses
against various kinds of risk. E.g. Sagicor

• Building societies
A building society is a financial institution, owned by its members that provides financial
services, especially mortgage lending to it members.

• Micro-lending agencies
These are firms that provide small loans and other banking services to very small
businesses or individuals that do not have the collateral to obtain financing from regular
lending agencies. E.g. Axcel Finance

• Government agencies
The government provides funding for businesses through various agencies. E.g. Fund
Access was set up by the government to provide financing and business development
services for micro, small and medium enterprises in Barbados.

Functions offered by financial institutions

8.2 Describe the functions and services offered by financial institutions

Loans/Credit facilities – Individuals and businesses may borrow to finance expensive purchases
or projects. Some method of borrowing are:-

Loans – borrowing a fixed sum of money to be repaid over a set period of time usually at an
agreed rate of interest.

Credit- Credit is a more flexible form of financing where a maximum borrowing limit is set but
the customer can use all or part of it as at any given time. As the money is repaid, more
becomes available
up to the maximum limit. Credit financing usually carries a higher interest rate than a loan. E.g
line of credit, credit card

Savings and deposits

Making payments – Banks and other financial institutions process payments for their customer
through standing orders, bank drafts, wire transfers, etc
Investments – financial institutions also provide a means of investing eg mutual funds, stocks,
bonds

Services offered by financial institution

Some services offered by financial institutions are:
• Night safe deposits
• Online banking
• Advisory services – Offering financial advice to clients who wish to borrow to make
investments or person who wish to purchase securities
• Credit and debit cards
• Trustee work – A trustee is an individual or company who manages assets on behalf of
another. For example, a bank may act as a trustee for a deceased person, managing the
financial assets in the will on behalf of the future beneficiaries.
• Deposit boxes
• ABM/ABM services
• E-trade – Also known as electronic trading. This is executing trading using one’s smart
phone, computer or any other electronic device. A typical operation requires a user to
log in to a website and make their transactions. This data is routed to traders and
exchange specialist. E-trade companies facilitate this kind of operation by managing the
portfolios of investors and carrying out trading at their discretion.
• Settlement services – Settling transactions between banks. This allows a customer from
one bank to transfer funds to a customer of another bank
• Remittance services – Facilitating the transfer of funds from one country to another

Role and function of financial regulatory bodies

8.3 Describe the role and function of financial regulatory bodies
The role of regulatory bodies such as the Central Bank, the Financial Services Commission and a
Deposit Insurance Corporation e.g Jamaica Deposit Insurance Corporation is to monitor, control
and guide the activities of institutions in the financial sector in order to protect depositors and
consumers in an effort to maintain stability in the national economy.
The function of these regulatory bodies is to enforce regulations and licenses of various financial
activities, including depository, lending, collection and money transmission activities. This is
aimed at ensuring that these institutions function within the confines of legislation.

The Central Bank

The central bank is the government’s bank. It is the central authority regulating the financial
sector in the economy and managing the public debt.
Key roles of the central bank includes:-
• Issuing notes and coins
• Lender of last resort to commercial banks
• The government’s bank
• Supervises the operations of financial institutions
• Advises the government on monetary policy
Jamaica Deposit Insurance Corporation (JDIC)

JDIC was created by the Government of Jamaica to protect depositors and promote stability and
confidence in Jamaica’s financial system. Its primary objective is to establish and manage a
deposit insurance scheme to protect depositors from loss, up to a specified limit.)

Financial Services Commission (FSC)

The mandate of the Financial Services Commission (FSC) is to supervise and regulate non-
banking financial institutions in Barbados, such as insurance companies, credit unions, securities,
private pensions industries.

In doing so the FSC oversees the registration, solvency and conduct of firms and individuals
doing business in the securities and insurance (Life and General) industries.

The FSC oversees these entities by administering a number of statutes and accompanying
regulations.

The FSC also handles customer complaints and provides the public with important financial
information

See www.fsc.gov.bb

8.4 Describe the relationship between financial institutions and regulatory bodies
Relationship between the central bank and commercial banks
The central bank regulates and monitors the commercial banks.
The central bank may regulate commercial banks by
1. varying the liquid asset ratio
2. Varying adjusting the bank rate
3. Changing the minimum reserve requirement
Commercial banks are legally required to hold a percentage of their total deposits in cash or
near-cash assets. This is called the Reserve requirement. This allows the central bank to
control the money supply. An increase in this requirement would limit the amount of loans that a
bank is able to extend to its clients, whereas a reduction would increase the amount of funds
available for lending.
The central bank may also impose another reserve on banks called the Liquid Asset Ratio. This
requires commercial banks to maintain an average ratio of liquid assets in relations to their
deposits.
Liquid assets are cash or assets that can be converted into cash quickly.
The central Bank has its own interest rate called the Bank Rate. This is the interested rate it
charges commercial banks when they borrow from the central bank. The commercial banks use
that rate to determine the interest rate they will charge customers who borrow from them.
The central bank uses the Bank Rate to influence the flow of money and credit. An increase in
the Bank Rate would lead commercial banks to increase their own interest rate to lenders, this
would result in a decrease in loans to the public as higher loan rates will likely discourage people
from borrowing.

The regulatory role of the financial services commissions

The financial Services commission of a country regulates the financial services providers that are
not monitored by the central bank. In Barbados the Financial Services Commissions is the
regulatory body for all non-bank financial institutions. It administers licences, supervises the
financial institutions and promotes awareness and public confidence in the sector.

The regulatory role of the supervisor of insurance

The supervisor of insurance is responsible for the overall regulation of the insurance industry in
the country, in conjunction with the financial services commission.