s1 Commerce Week 6 & 7 - Loan & Overdraft

WEEK 6
COMMERCE
3rd TERM E-LEARNING NOTE
YEAR 10
TOPIC: COMMERCIAL BANKS

DURATION: 45 MINS
PREVIOUS KNOWLEDGE: Students have been exposed to

Central Bank
LEARNING OBJECTIVES: At the end of the lesson students should be

able to:
 Define and describe the Central Bank
 State the functions of the Central Bank
 List the functions of Money
 State the qualities of Money
 Describe the forms of Money
TEACHING/LEARNING STRATEGIES: Direct teaching, Pair work,

Students’ presentation.
KEY VOCABULARY: Distributive trade, producer, consumer
CONTENT:
 Definition and features of commercial banks
 Functions of Commercial banks
 Types of bank accounts and their features
 Procedures for collecting advances from banks etc
TOPIC:
COMMERCIAL BANKS
A commercial bank is a financial institution which accept deposits and
other valuables from the public for safe-keeping lend money to people
and firms and perform other auxiliary services with the sole aim of making
profit.
A commercial bank can be owned by private individual organizations or

government. It is a public limited liability company.
CHARACTERISTICS OF COMMERCIAL BANKS

 They are limited liability companies
 They are established and owned by individuals, organizations or
governments.
 The motive for its establishment is profit making
 Commercial banks are incorporated under CAMA (1990)
 They transact business with private individuals organizations and
governments
 They are members of the money market
FUNCTIONS OF COMMERCIAL BANKS

 Accepting deposits from customers
 Lending to customers - .i.e. they grant loans and overdrafts to their
customers
 Acting as an agent for payment
 Discounting bills of exchange
 Safekeeping of valuables e.g. wills, jewelries, certificates etc.
 Offering advise to customers
 Acting as executors or trustees
 Acting as referees/granting of performance bonds
 Issuing, buying and selling of securities e.g. shares
 Issuing of letter of credit
 Acceptance and discounting of bills of exchange
 Buying and selling of foreign currencies
 Funds transfers e.g. credit transfer services
 Lending money to importers and exporters
 Issuance of travelers cheques
 Acting as agents to both importers and exporters.
 Transfer and handling of vitals business documents
TYPES OF BANK ACCOUNTS
There are three types of accounts which customers can open in a bank.
These are:
1. Current Account: This is an account on which cheques are drawn. It
is also called Demand Deposit.
Features of Current Account.
 Money can be withdrawn at any time without notice to the bank.
 Money can be withdrawn as many times as possible in a month.
 Withdrawals are made through cheques
 Deposits are made through pay in-slip or tellers.
 The bank issue bank statement (statement of account) periodically to
the customer.
 No interest is paid to the current account holder
 The bank charges some commission for services rendered to
customers. This is called commission on turnover (COT).
 Other people can withdraw money from the account on behalf of the
customers.
2. Saving Account: - This account is opened by low-income earners

who are small savers.
Features of Saving Accounts
 Money can only be withdrawn occasionally
 The bank pays interest to the account holder
 Holders are issued with pass books
 Only the account holder can withdraw from the account
3. Fixed Deposit Account (Time Deposits): Here, money is saved in

the bank for a specific period of time to earn interest. Holders are
entitled to higher interest than savings account. The bank issues a
receipt or deposits account passbook and also pays interest to the
owners. The bank must be given between seven to fourteen days’
notice before money can be withdrawn.
PROCEDURES FOR OPENING A CURRENT ACCOUNT

 The customer will collect and fill an application form.
 Two referees, who are customers of banks must be provided to
recommend the applicant.
 Two referees, who are customers of banks must be provided to
recommend the applicant.
 The customer will submit his complete particulars (information) to the
bank showing his personal details – this is to enable the bank to
authenticate his identity.
 The bank will issue him with a pay – in – slip booklet.
 He will be issued an account number.
 He will pay in an initial deposits
 A cheque book will be given to him
BANK ADVANCES (COMMERCIAL BANKS CREDIT FACILITIES)

Bank advances may be made by way of
 Loans
 Overdrafts
 Discounting of bills of exchange
In the above instances, a bank will usually advance the money only
against security or collateral.
CHARACTERISTICS OF A GOOD BANKING SECURITY

The security deposited by a customer to cover a banker’s advances
should be;
 Durable
 Transferable with little expenses and inconveniencies i.e. readily
saleable
 Capable of easy and accurate valuation
 Easily realizable i.e. easy to convert to cash.
 Sate in value
 Has a value that is greater than the value of the loan
 Free from any legal claims by other parties.
TYPES OF SECURITIES TAKEN BY BANKERS

 Stock and Shares – e.g. ‘gilt edged’ and blue chip’ securities.
 Land Buildings
 Life Assurance Policies
 Documents of titles to goods e.g. bill of lading
 Guarantees
 Indemnity
 Deposit Account/Cash collaterals
 Fixed and floating changes on assets of the business.
Factors that a bank manager consider before granting loans or

advances to customers;
 The amount of the loan

 The type of account the customer operates
 The past financial dealings of the customer with the bank
 The purpose for which the loan is required
 The collateral security offered by the customer
 The period or tenor of the loan
 Government policy on bank lending
 The ability repay/viability of the project
 The financial reports (accounts) of the customer.
DIFFERENCE BETWEEN LOAN AND OVERDRAFT
Loan Overdraft
Tenor Short – term

1. Long-term/medium
(Durations)
Instalmentally as per Repayable on demand
2. Repayment
agreement
Type of Current Account
3. Loan Account
Account
Fluctuating; may
Relatively stable and
4. Balance swings from debit to
always a debit balance
credit and vice–versa
Only on that part of
Interest
On the full amount of the overdraft facility
5. charged by the
the loan utilized by the
bank
customer
Only to customers
6. Availability To any type of account having current
accounts
REVIEW QUESTIONS
1. Describe five ways by which commercial banks aid foreign trade.
2. Describe to Kola, a new recruit in your office, the steps he may
take to open a current account.
3. Explain any six factors whish a bank manager would take unto
consideration in evaluating an application for a loan.
WEEK 6
WEEKLY ASSESSMENT
MULTIPLE-CHOICE QUESTIONS
1. If a customer is allowed N1,000 overdraft and he receives a bank

statement showing an overdraft of N100. This means that he
(a) Cannot draw more cheques
(b) Is owed N100 by the bank
(c) Owes the bank at least N900
(d) Owes the bank N100 only
2. Which of the following is a loan, carrying a fixed rate of interest and

secured on the assets of a company
(a) Mortgage debenture
(b) Naked debentures
(c) Preference shares
(d) Deferred shares
3. To a commercial bank deposits are ____

(a) Liabilities
(b) Assets
(c) Capital
(d) Cash at hand
4. Discounting a bill of exchange means the bill is ____

(a) Cashed over the counter
(b) Sold on the stock exchange
(c) Bought for less than its face value
(d) Sold to the highest bidder
5. Banks issue chequebooks to customers holding ______ account

(a) Deposit
(b) Fixed deposit
(c) Current
(d) Savings
THEORY
1. State two features of savings account
2. Mention three collateral securities acceptable to banks o secure an
advance
REFERENCE
1. Essential Commerce for SSS by O. A Longe Page 80 – 86
2. Comprehensive Commerce for SSS by J. U. Anyaele Page 180 – 186.
GENERAL EVALUATION QUESTIONS
1. Explain five reasons why tariffs are imposed on imports
2. State five functions performed by the Customs Authorities
3. Give six reasons why manufacturers pre-package their products
4. Explain five factors that adversely affect the growth of Commerce in
West Africa
5. Mention and explain five ways by which the Central Bank regulates the
activities of commercial banks

s1 Commerce Week 6 & 7 - Loan & Overdraft

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WEEK 6

TOPIC: COMMERCIAL BANKS

PREVIOUS KNOWLEDGE: Students have been exposed to

LEARNING OBJECTIVES: At the end of the lesson students should be

TEACHING/LEARNING STRATEGIES: Direct teaching, Pair work,

KEY VOCABULARY: Distributive trade, producer, consumer

A commercial bank can be owned by private individual organizations or

CHARACTERISTICS OF COMMERCIAL BANKS

FUNCTIONS OF COMMERCIAL BANKS

2. Saving Account: - This account is opened by low-income earners

3. Fixed Deposit Account (Time Deposits): Here, money is saved in

PROCEDURES FOR OPENING A CURRENT ACCOUNT

BANK ADVANCES (COMMERCIAL BANKS CREDIT FACILITIES)

CHARACTERISTICS OF A GOOD BANKING SECURITY

TYPES OF SECURITIES TAKEN BY BANKERS

Factors that a bank manager consider before granting loans or

 The amount of the loan

DIFFERENCE BETWEEN LOAN AND OVERDRAFT

Tenor Short – term

1. If a customer is allowed N1,000 overdraft and he receives a bank

2. Which of the following is a loan, carrying a fixed rate of interest and

3. To a commercial bank deposits are ____

4. Discounting a bill of exchange means the bill is ____

5. Banks issue chequebooks to customers holding ______ account

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