Home ADVANCED LEVEL TOPIC 14: FINANCIAL INSTITUTION ~ ECONOMICS FORM 6

TOPIC 14: FINANCIAL INSTITUTION ~ ECONOMICS FORM 6

42
0
SHARE

TOPIC 14: FINANCIAL INSTITUTION ~ ECONOMICS FORM 6

These are institution which stands between surplus spending unit and deficit spending units.

These are institution which acts as a goal between transferring funds from those who have surplus to those who are spending.

THEY PLAY THE FOLLOWING ROLES

They transfer funds from those with surplus to those who are in need

They facilitate the pooling of risks.

They provide the public with more liquid and less risks on assets

They help to increase efficiency by applying special technology and other assistance in investment

They increase the liquidity of financial institution by giving loans.

FINANCIAL INTERMEDIARIES ARE CATEGORIZED INTO TWO

Banks

These are financial institution which provide short term loan, accept and maintain deposit, undertake less risk investment, create credit and their aimed at making profit.

Non banking financial institution (NBFIs)

These are institutions that carry out financial activities by their resources and are not directly from the savers as debt instead they mobilize the public saving for providing financial services.

Are institutions that provide banking services without meeting definition of bank for example development bank, life insurance Company, PPF, NSSF, Building society, post offices, saving banks etc.

DIFFERENCE BETWEEN BANKS AND NON BANKS.

Banks
Non Banks
i)They operate different account for their customer example saving, fixed and current account
ii)Bank use saving to advance loans
iii)They make profit from loan inform of interest
iv)Banks are aimed at making profit
-They do not operate account for their customers
– They do not use saving to advance loan
-They depend on revenue obtained from investment.
– They are not aimed at profit making.

Banks can be categorized into

Commercial Banks

Central Banks

Saving Banks

Specialized Banks

Merchant Banks

COMMERCIAL BANK

Is a profit making financial institution, it obtains its profit from charging high interest on loan, charging a commission on service rendered and investing in short term and medium investment.

FUNCTION OF COMMERCIAL BANK

Accepting and keeping deposits

Maintaining different accounts, these are saving current and fixed deposit a/c

They keep valuable articles and documents in self custody

They give loans and overdraft to customers.

They exchange currency

They facilitate quick and payment through cheque, standing orders

Banks manager deceased customer property and distribute it according to the will

They give advice to customers on investment

They assist the government in receiving money from tax payer

They create credit

They help central bank to implement monetary policy

They acts as referees to credit worth customers

NATIONAL BANK OF COMMERCE (NBC)

It was established in 1967 after the Arusha Declaration following the nationalization of private foreign bank. NB was aimed at solving the following problems:

The problem of low finance to domestic sector

There was too much domestic credit to foreigners

There was low savings mobilization to citizens

There was high level of dependency on foreign managerial skills

There was lack of support to the government during deficit budget

FUNCTIONS OF NBC BY THEN.

To provide loans to investors

To mobilize savings

To transfer funds/money from one area to another

To provide technical advice to the investors

Custodian of valuable commodities

It provides other commercial bank services.

After privatization in 1997 NBC was divided into two

National bank of commerce limited ( NBC 1997 ltd)

National micro finance bank (NMB)

NBC was to provide services to big businessmen while NMB was to provide services to low income earners and small businessmen

COOPERATIVE AND RURAL DEVELOPMENT BANK (CRDB)

It was established in 1947 for provision of local development loan fund which was to assist food production and for African productivity loan fund in assisting European farmers.

FUNCTIONS OF CRDB OF 1947.

To promote rural development

To monitor projects

To easy the purchase of crops in the rural areas

To provide technical advice to farmers

To provide loans to cooperative unions.

2) SPECIALIZED BANKS

Are banks that deal with specific function or specific sectors.

They include:-

i) T.I.B – Tanzania Investment Bank, the bank was established in 1971 to bring all means of production to the public. It other functions were as follows;

a) To finance large scale agriculture

b) To provide advice on industrial development

ii) T.H.B – Tanzania Housing Bank: The bank was established 1973 in order to receive deposit and provide account services to provide all banking services and provide credit for residential and commercial premises.

CREDIT CREATION

This is a process through which commercial banks use cheque to expand the volume of money lent.

NB: The expanded credit is only in the form of book entry.

Example:-

Assuming the cash ratio/ reserve ratio is 20% and initial deposit is 1000. When people get loan they deposit cheque in their a/c in the same bank. If there are 4 people who are able and willing to borrow money the credit creation process will be follows.

Person
New deposits
Reserve current ratio
New loan
A
1000
200
800
B
800
160
640
C
640
128
512
D
512
102.4
409.6

Total credit is equal

The number of times the money increase is called the credit multiplier

LIMITATION OF CREDIT CREATION

Leakage of money out of bank system
Liquidity ratio / reserve ratio, if ratio is low credit creation in high
Illiteracy and altitude where by some people do not keep money in the bank
Regulation of central bank which reduce the amount lent
High interest rate which discourage borrowing
Very low interest rate which discourage savings
Lack credit worth. Customers making it difficult to give out loans.

PROBLEM FACING COMMERCIAL BANKS.

Shortage of funds for loans to customers
Illiterate customers
Insecurity of commercial banks, constant invention by robbers
Most banks are under capitalized hence the level of operation is restricted
Inflation discourages lending
Most of the bank are allocated in towns facing steep competition
Collapse of banks resulting from failure of shareholders to pay back the loans

3. CENTRAL BANK.

Is a financial institution which controls all other financial institution and implements monetary policies. The central bank of Tanzania (BOT) was established 1965 replacing the existing East Africa currency board. The Bank of Tanzania BOT started issuing currency in 1966.

FUNCTIONS OF B.O.T

1. Banking function, the BOT does the following

It acts as the clearing houses for commercial banks
Banker to the government in terms of account and loan
Banker to other banks ( all commercial bank should have a/c in central bank)
It is a lender of last resort
Issuing of currency

2. Development function the central bank stabilize the economic by

It formulate and implement monetary and fiscal policy
It supervises commercial bank and non banks in their activities
It provides employment

3. Domestic monetary management functions

-BOT acts as adviser on all financial institutions

-It is responsible for financing the government in case of deficit budget

-It manages all government debts

4. External monetary management function

It controls the foreign currency and exchange rates.

Difference between central bank and commercial bank

Commercial bank
Central bank
  1. They aimed at making profit
They aimed at serving the public
  1. They provide safety custody for valuable goods
Does not provide safe custody for valuable goods
  1. They create credit
They do not create credit
  1. They do not control financial institution
They control other financial institution
  1. They accept deposit from public
They accept deposit from government institution and banks
  1. Take care of property of the deceased
They so not take care of the property of deceased
  1. They do not print money
They print and organize printing
  1. They are owed by individuals and government
Owned by the government

Qn. 1. Discuss the objectives of monetary policy

2. What are the problems of implementing monetary policy in LDC’S.

NONE BANKS FINANCIAL INSTITUTIONS.

Non banking institutions perform the following roles

They advance loan to entrepreneur
They invest on physical investment such as buildings, factories etc
They stimulate and promote financial and capital market through investment in shares.
They provide socio security
They provide life assurance and pension services to the public
They mobilize saving among the public
They help to control poverty (poverty alleviation.)

NATIONAL INSURANCE COMPANY (N.I.C)

It was established in 1967 after Arusha declaration which speculates nationalization policies.

The main objectives of NIC where

To collect premium from member/ clients
To invest in productive activities like buildings
To provide compensation to client against risks
To fight against poverty alleviation
Income distribution

Qn. Discuss the roles of PPF?

Privatization of financial institutions.

To reduce the government burden
To increase the amount of profit
To eliminate beau racy
To make the institution more efficient in their operation
To increase capital hence expand their institution
To allow the use of advance technology
To enable the consumer to make choice.
To reduce embezzlement of fund.
To reduce political interference brought about the existence of public institutions.
To allow technical assistance in the management from abroad

READ NEXT TOPIC

TOPIC 15: MARKETING AND DISTRIBUTION ~ ECONOMICS FORM 6

LEAVE A REPLY

Please enter your comment!
Please enter your name here