Basic Banking Terms and Concepts

1. Bank Account: A record of financial transactions for an individual or organization held by a bank. Without a bank
account, you cannot access many major banking services. Common types include savings accounts, current
accounts, and investment/term certificate accounts.
2. Account Number: A unique number assigned to a bank account to identify it. This number is used to track and
manage the account and serves as your identifier with the bank.
3. IBAN (International Bank Account Number): An extended version of your account number used internationally. It
facilitates both local and cross-border transactions by providing a standardized format for identifying bank accounts.
4. Deposit: Money placed into a bank account. Deposits can be made in the form of cash, checks, or electronic
transfers.
5. Current Accounts ( CA): A type of bank account that does not earn interest on deposits. It is used primarily for
everyday transactions and provides easy access to funds through checks, ATMs, and electronic transfers.
6. Savings Account ( SA) : A bank account that earns interest on deposited funds. Banks pay interest to the account
holder, and the interest rate can change. Savings accounts provide easy access to funds through checks, ATMs, and
electronic transactions.

CASA is also called demand deposit. Demand deposit can be withdrawn without any advance notice

7. Fixed/Term Certificate Deposit (CD): A savings product with a fixed interest rate and maturity date. The depositor
agrees to leave a sum of money in the account for a specified period. Early withdrawal usually incurs a penalty. The
bank pays a higher interest rate on term deposits compared to savings accounts. Interest can be received monthly
or at maturity and is typically transferred to a current or savings account.
8. Bank Statement: Periodically the bank provides a statement of a customer's deposit account. It shows all deposits
made, all checks paid, funds transferred in/out, and other debits & credits posted during the period (usually one
month). Deposit can ask bank for bank statement any time, these days available on internet/Mobile banking.
9. Debit Card: A payment card that deducts money directly from the consumer's savings or current account to pay for
purchases. It uses the account holder’s own funds and is often referred to as an ATM card.
10. Credit Card: A payment card issued by a bank that allows cardholders to borrow money up to a certain limit to pay
for goods and services. Cardholders must repay the borrowed amount by the due date to avoid interest charges. If
not repaid on time, interest is charged. Supplementary credit cards can be issued to family members and are linked
to the main credit card account. Available Credit: The difference between the credit limit assigned to a cardholder
and the limit used.
11. Card Number: The unique number assigned to a debit or credit card, typically 16 digits long. This number is different
from the account number and is used for transaction processing.
12. Special Instructions on Account: Specific directions noted on a bank account, such as limitations on withdrawals or
designated beneficiaries. Account holders can instruct the bank to perform or restrict certain transactions, transfers,
or payments.
13. Payee:. The person or organization to whom a check, draft, or note is made payable. A person who is entitled to
receive the benefits or proceeds/ funds
14. A banker’s cheque (also known as a cashier’s cheque,demand ) is a cheque guaranteed by the bank, which means
the bank itself is responsible for paying the amount specified on the cheque. When you request a banker’s cheque,
you provide the bank with the amount, and the bank then issues a cheque drawn on its own funds. Since the
cheque is backed by the bank, it’s considered a secure form of payment. The recipient can be assured that the funds
are available. Normally when you trade/deal with an unknow person or you want a guaranteed payment you ask for
banker cheque, in Pakistan it also called demand draft or pay order etc.
15. The bank deducts the cheque amount from your account (if you’re issuing the cheque) or the amount is covered by
the bank’s own funds.
16. Joint Account: A bank account held by two or more individuals, allowing all parties to deposit and withdraw funds. A
joint account (e.g., between spouses) can be operated by either party or by a single person, depending on the
account holders' instructions.
17. Business Account: A bank account used by a business to manage its finances, separate from personal accounts.
18. Overdraft: A situation where an account holder withdraws more money than is available in the account, often
resulting in fees. Banks offer this facility to select depositors with a history of responsible banking.
19. Loan: Money borrowed from a bank that must be repaid with interest over a specified period.
20. Maturity:The date on which the principal balance of a loan, bond, or other financial instrument becomes due and
payable.
21. Fixed-Rate Loan: A loan with an interest rate that remains constant throughout the term of the loan, providing
predictable monthly payments.
22. Variable-Rate Loan: A loan with an interest rate that can change over time based on market conditions. This is also
known as a floating rate. Typically, the rate is determined by adding a margin (e.g., 5% or 8%) to a reference rate like
KIBOR (Karachi Interbank Offered Rate).
23. Principal Amount: The original sum of money borrowed or invested, excluding any interest.
24. Interest Rate: The percentage charged on a loan or paid on a deposit for the use of money.
25. Accrued Interest: Interest that has accumulated on a loan or financial product but has not yet been paid out.
26. Collateral: An asset offered by a borrower to secure a loan. If the borrower defaults, the lender can seize the
collateral to recover the loan amount.
27. Credit Score: A numerical representation of a person's creditworthiness, based on their credit history and financial
behavior.
28. Debt-to-Income Ratio: A personal finance measure that compares an individual's debt payments to their overall
income. It helps banks assess a borrower’s ability to repay loans and determine loan installments.
29. Loan-to-Value Ratio (LTV): The ratio of the loan principal (amount borrowed) to the appraised value (selling price)
of the security, collateral/mortgage. For example, on a rs. 100,000 security, if the loan approved is 80,000, the loan-
to-value ratio is 80 percent. Generally, the lower the LTV, the more favorable for lender/bank.
30. Amortization: The process of spreading out a loan into a series of payments over a specified period. Each payment
covers both principal and interest.
31. Secured Loan: A loan backed by collateral, reducing the risk for the lender. If the borrower defaults, the lender can
claim the collateral.
32. Mortgage: A loan used to purchase real estate, where the property itself serves as collateral. The borrower owns
the property but the lender holds a lien on it until the loan is fully repaid. If the borrower fails to repay, the lender
can foreclose on the property to recover the loan amount. (Lien: Legal claim against a property. if the property is
sold, the lien holder is paid the amount that is owed.)
33. Hire Purchase: A financing method where the buyer makes an initial down payment and then pays off the remaining
balance in installments while using the asset. Ownership of the asset is transferred only after all payments are
made. The seller/financier retains ownership until the final installment is paid. Commonly used for purchasing
vehicles and machinery.
34. Foreclosure: The legal process by which a lender takes control of a property from a borrower who has failed to
make loan payments.
35. Right of Offset: Banks' legal right to seize funds that a guarantor or debtor may have on deposit to cover a loan in
default. It is also known as right of setoff
36. Cash Flow: The total amount of money being transferred in and out of a business, affecting its liquidity.
37. Liquidity: The ease with which an asset can be converted into cash without significantly affecting its market price.
Examples of liquid assets include cash and government securities. Banks prefer liquid assets as collateral for loans.
They must also manage liquidity to meet deposit withdrawals and regulatory requirements.
38. Assets: Resources owned by a bank or individual, including cash, investments, loans, and property.
39. Balance Sheet: A financial statement that shows a company's assets, liabilities, and equity at a specific point in time.
40. Equity: The value of an owner's interest in a property or business, calculated as total assets minus liabilities. It
reflects the value that would be returned to shareholders if all assets were liquidated and all debts were paid.
41. Capital: Wealth in the form of money or assets used or accumulated for investment or to generate income. Capital
refers to financial resources used to fund operations and growth. It includes cash, investments, and borrowed funds.
Equity is a form of capital that reflects ownership value.
42. Underwriting: The loan approval process by which a bank assesses the risk of lending money to a borrower. It
involves evaluating the loan application, creditworthiness, repayment capacity, and loan terms.
43. Annual Percentage Rate (APR): The annual rate charged for borrowing or earned through an investment, including
any fees or additional costs. APR provides a comprehensive measure of the cost of borrowing.
44. Return on Investment (ROI): A measure used to evaluate the efficiency or profitability of an investment or project.
ROI = [(Ending Value - Initial Value) / Initial Value] × 100%. For example, if you invest $1,000 in a stock and it grows
to $1,200, the ROI is [($1,200 - $1,000) / $1,000] × 100% = 20%. ROI includes both income and capital gains or
losses.
45. Yield: The income generated from an investment relative to its cost or current market value, typically expressed as a
percentage. Yield = (Income / Investment Price) × 100%. For example, if a bond pays $50 annually and its market
price is $1,000, the yield is ($50 / $1,000) × 100% = 5%. Yield focuses on income relative to the current value,
whereas ROI considers both income and changes in value over time.
46. Delinquency: A debt/loan that was not paid when due.
47. Non-Performing Loans (NPLs): Loans where the borrower is not making interest payments or repaying principal.
Typically, a loan becomes non-performing if it is overdue by 90 days or more. Income accrued on NPLs is reversed,
and no further income is recognized until the loan is repaid or its status changes to performing.
48. Charge Off: A declaration by a bank that a debt is unlikely to be collected and is written off as a loss in the profit and
loss statement.
49. Prudential Regulations (PRs): Regulatory guidelines designed to ensure the stability, efficiency, and soundness of
the financial system. Issued by central banks or financial regulatory authorities, PRs must be adhered to by banks.
Non-compliance can result in penalties.
50. Islamic Banking: Banking operations that comply with Sharia (Islamic law), which prohibits interest (riba) and
promotes risk-sharing and ethical investments. Depositors earn profit based on a risk-sharing model, with profit
distributed accordingly.
51. Conventional Banking/Commercial Banks: Traditional banking operations involving the payment and receipt of
interest and the use of various financial instruments and products.
52. Microfinance Banking: Focuses on providing banking services to low-income individuals or those without access to
traditional banking services, often through small loans and financial inclusion efforts. While the primary focus is on
low-income populations, microfinance banks can also serve middle- and higher-income individuals. In Pakistan,
Microfinance Banks (MFBs)
53. Kiting: Writing a check in an amount that will overdraw the account but making up the deficiency by depositing
another check on another bank. For example, mailing a check for the mortgage when your checking account has
insufficient funds to cover the check, but counting on receiving and depositing your paycheck before the mortgage
company presents the check for payment.
54. Phishing: The activity of defrauding an online account holder of financial information by posing as a legitimate
entity
55. Point of Sale (POS): 1) The location at which a transaction takes place. 2) Systems that allow bank customers to
effect transfers/pay funds or bills from their deposit accounts to retail establishments/shops etc. The retailer have
POS machines and they swap your card and get their payments/bills from your account.