Money & Banking

AlMoatassem Mostafa

Essay Two: Commercial

Banks

1. Definition of Commercial

Banks

2. Functions of Commercial

Banks

3. The Operation of Commercial

Banks

Lecture Outline

• Definition of Commercial Banks• Different Types of Bank Accounts– Transaction Accounts– Nontransaction Accounts

Learning Objectives

At the end of the lecture, students should be able to understand:• What are commercial banks?• What is a transaction account? What are the

different types of a transaction account?• What are the different types of nontransaction

accounts?

Commercial Banks

• Commercial banks play a major role in any economy.

• They represent an intermediary through which funds a transferred from savers to borrowers with potential investment opportunities.

• Commercial banks ensure that money is used efficiently by channelling this money to more productive investment projects.

• Through this activity, commercial banks guarantee a smooth and efficient operation of the economy.

Definition of Commercial Banks

• Commercial banks are financial institutions that receive money from savers and provide loans to borrowers.

• Both individuals and companies are the main customers of commercial banks.

• Commercial banks offer a wide a range of services to the savers, namely, savings accounts and certificates of deposit.

• In addition, they offer various types of loans to the borrowers, including business loans, housing loans, and auto loans.

Types of Bank Accounts

Transaction Accounts

Nontransaction Accounts

Types of Bank Accounts

• There are two main categories of accounts that can be opened in commercial banks: transaction accounts and nontransaction accounts.

• A transaction account, including a checkable account, is an account that possesses some degree of flexibility and liquidity because it is assigned for transactions.

• A checkable account allows its holder to use its funds immediately without any delays or waiting periods. It additionally allows its holder to issue checks to other parties.

Transaction Accounts

Checkable AccountDemand Deposits

(non-interest-bearing checking accounts)

Interest-Bearing Negotiable Order of

Withdrawal Accounts

Money Market Deposit Accounts

• If a checkable account holder requests the withdrawal of a certain amount of money from his account, the bank is forced to offer him this amount with no restrictions and on demand.

• Similarly, if a person holds a check on that checkable account and deposits this check at this bank, the bank is obliged to pay him/her the amount of money stated in that check immediately.

• As a result of this flexibility, checkable accounts offer no interest or lower interest than those of nontransaction accounts.

• Examples of checkable accounts include demand deposits (non-interest-bearing checking accounts), interest-bearing negotiable order of withdrawal accounts, and money market deposit accounts

Nontransaction Accounts

Savings Account Time Deposit

• Nontransaction accounts are related to savings rather than transactions.

• People open up nontransaction accounts and deposit their money as savings.

• In return for these deposits, the bank pays them money called interest. Interest is the price paid for using money.

• Interest is calculated as an annual percentage of the principal.

• Checks cannot be written on these accounts.• In addition, these accounts pay their holders a higher interest

than those paid by checkable accounts. • The most common forms of nontransaction accounts are

savings accounts and time deposits (known as certificates of deposits).

• A savings account allows its holder to deposit funds and withdraw them in a similar way as checkable accounts.

• All the operations related to this account, including withdrawals, deposits, and interest payments, are recorded by the bank tellers in a small book called the passbook that is held by the account holder.

Savings account Passbook

• A time deposit is a deposit that cannot be withdrawn before a fixed date called maturity date.

• The funds in this deposit are not accessible by the holder before the maturity date.

• In that case, if the deposit holder wishes to withdraw funds before the maturity date, he must notify the bank.

• In addition, early withdrawal of a time deposit might result in penalties in the form of losing the interest rate of several months.

• Maturity date of time deposits can range between several months to several years (up to over five years).

• A time deposit is a deposit that cannot be withdrawn before a fixed date called maturity date.

• The funds in this deposit are not accessible by the holder before the maturity date.

• In that case, if the deposit holder wishes to withdraw funds before the maturity date, he must notify the bank.

• In addition, early withdrawal of a time deposit might result in penalties in the form of losing the interest rate of several months.

• Maturity date of time deposits can range between several months to several years (up to over five years).

• In addition, time deposits are available in small denominations (less than 100,000 Egyptian Pounds) and large denominations (more than 100,000 Egyptian Pounds).

• The interest paid on time deposits would depend on its maturity date and denomination; the longer the maturity date and the higher the denomination, the higher the interest paid to the owner.

Difference between savings account and time deposit

Savings Account Time DepositLiquidity more liquid and

can be accessible by the account holder at any given time

not accessible without prior notice by the owner to the

bank Interest Rate Lower interest

rateHigher interest

rateTime of Interest

PaymentPaid annually Paid quarterly,

half-annually, or annually

Difference between Transaction and Nontransaction Account

Transaction Account Nontransaction AccountFlexibility More flexible and more

liquid because it is related to transactions

Less flexible and less liquid because it is related to savings

Interest Rate No interest Higher interest rateMechanism Offers checks Operations are written

in a PassbookExamples Checking Account,

Demand Deposit, Interest-bearing

Negotiable Order of Withdrawal, and Money

Market Account

Savings Account and Time Deposit

Practice Questions

1. Define the following terms: Commercial banks, transaction accounts, nontransaction accounts, checkable account, savings account, time deposit.

2. Compare between transaction and nontransaction accounts.

3. Explain in details checkable accounts as a major type of transaction accounts

4. What is the difference between a savings account and time deposit?

Office Hours and Contact Details

Office: Office 401, Faculty of law main building, fourth floor.E-mail: al_moatassem@mans.edu.egOffice hours: Saturdays 11:00 am-12:30 pm.

Mondays 12:30 pm- 2:30 pm.