BANKING TECHNIQUES AND INDIVIDUALS MARKETS

Chapter One: Opening, Operations and closing of a bank accounts

What is a bank account?
A Bank Account is an arrangement made with a bank where by one may deposit and withdraw
money and in some cases be paid interest.
Main types of bank account;
- Current account
- Savings account
- Fixed deposit account
- Recurrent account
1. Current Account
Purpose: Designed for businesses and individuals who need to make frequent
transactions.
Features:
- Unlimited Transactions: Allows for an unlimited number of deposits and
withdrawals.
- Overdraft Facility: Often offers an overdraft option, enabling account holders to
withdraw more than the available balance (up to a certain limit).
- No Interest: Typically, does not earn interest on the balance.
- Fees: May have service fees or minimum balance requirements.
- Accessibility: Often comes with a checkbook and debit card for easy access to funds.
2. Savings Account
Purpose: Aimed at individuals looking to save money while earning interest.
Features:
-Interest Earnings: Generally, offers interest on the balance, which can vary based
on the bank and account type.
- Limited Transactions: May limit the number of withdrawals or transfers per month.
- Low Minimum Balance: Usually requires a low minimum balance to maintain the
account.
- Safety: Funds are typically insured (e.g., by the FDIC in the U.S.) up to a certain
limit.
- Accessibility: Provides easy access to funds through ATMs and online banking.
3. Fixed Deposit Account
Purpose: Ideal for individuals and businesses looking to invest a lump sum for a fixed
period.
Features:
- Higher Interest Rates: Typically offers higher interest rates compared to savings
accounts.

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 - Fixed Tenure: Funds are locked in for a predetermined period (e.g., 1 month to 10
years).
- Penalty for Early Withdrawal: Withdrawing funds before maturity usually incurs
a penalty.
- Predictable Returns: Interest is paid at maturity or at regular intervals, depending
on the terms.
- No Cheque Book: Generally, does not come with a checkbook or debit card.
4. Recurrent Account
Purpose: A savings account designed for regular savings through periodic deposits.
Features:
- Regular Deposits: Requires account holders to make fixed monthly deposits over a
specified tenure.
- Interest Earnings: Typically offers interest on the accumulated balance, which may
be higher than a regular savings account.
- Maturity Amount: At the end of the term, account holders receive the total amount
deposited plus interest.
- Early Withdrawal Restrictions: May have restrictions on withdrawals before
maturity.
- Encourages Saving: Promotes disciplined savings habits by requiring regular
contributions.
The basic function of a banker is accepting money from the public by way of deposits and
deploying the same by means of loans and investments. The relationship between a banker and
his customer begins with the opening of an account by the customer in the bank. Initially all
the accounts are opened with a deposit of money and hence these accounts are called deposits
accounts. To accept deposit from public is an important function of banks. The banks provide
various facilities and privileges to customers through two types of deposits. They are i) Demand
Deposits, and ii) Time Deposits. These deposits are further classified into savings deposits,
current deposits, fixed deposits etc. All these deposits have special features.
 OPENING OF A BANK ACCOUNT:
Procedures for Opening of a new Bank Account or Steps for opening a new bank
account
Today Banks have emerged as important financial institutions. Banks provide a safe
environment and helps us manage our financial transactions. To avail professional banking
service, it is mandatory for every individual to open a bank account. Opening a bank account
is not a difficult task. It takes only seven easy steps to open a bank account. The procedures or
steps to open a new bank account include;
1. Decide the Type of Bank Account you want to Open

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There are several types of bank accounts such as Saving Account, Recurring Account, Fixed
Deposit Account and Current Account. So a decision regarding the type of account to be opened
must be taken.
2. Approach any Bank of choice & meet its Bank Officer
Once the type of account is decided, the person should approach a convenient bank. He has to
meet the bank officer regarding the opening of the account. The bank officer will provide a
proposal form (Account Opening Form) to open bank account.
3. Fill up Bank Account Opening Form - Proposal Form
The proposal form must be duly filled in all respects. Necessary details regarding name,
address, occupation and other details must be filled in wherever required. Two or three
specimen signatures are required on the specimen signature card. If the account is opened in
joint names, then the form must be signed jointly. Nowadays the banks ask the applicant to
submit copies of his latest photograph for the purpose of his identification.
4. Give References for Opening your Bank Account
The bank normally required references or introduction of the prospective account holder by
any of the existing account holders for that type of account. The introducer introduces by
signing his specimen signature in the column meant for the purpose The reference or
introduction is required to safeguard the interest of the bank.
5. Submit Bank Account Opening Form and Documents
The duly filled in proposal form must be submitted to the bank along with necessary
documents. For e.g. in case of a joint stock company, the application form must accompany
with the Board's resolution to open the account. Also certified copies of articles and
memorandum of association must be produced.
6. Officer will verify your Bank Account Opening Form
The bank officer verifies the proposal form. He checks whether the form is complete in all
respects or not. The accompanying documents are verified. If the officer is satisfied, then he
clears the proposal form.
7. Deposit initial amount in newly opened Bank Account
After getting the proposal form cleared, the necessary amount is deposited in the bank. After
depositing the initial money, the bank provides a pass book, a cheque book and pay in slip book
in the case of savings account. In the case of fixed deposits, a fixed deposit receipt is issued. In
the case of current account, a cheque book and a pay in slip book is issued. For recurring
account, the pass book and a pay in slip book is issued.
 KNOW YOUR CUSTOMER CONCEPT
With the opening of an account in a bank, a customer enters into relationship with a bank. This
relationship imposes several obligations on the bank. So, a banker should be very careful in
opening an account in the name of a customer. Though any person may apply for opening an
account in his name but whether to accept a deposit is at the discretion of the bank. Due care

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is to be taken while opening an account. This is to make sure that the bank is not dealing with
a high risk customer. Know your customer (KYC) entails;
1) Procedures to verify the identification of individuals / corporations opening an account.
2) Processes and procedures to monitor high value transactions and transactions of
suspicious nature in accounts.
3) Systems for conducting due diligence and reporting of such transactions.
Need of KYC Norms
The main objective of the KYC policy is to prevent banks from being used, intentionally or
unintentionally, by criminal elements for money laundering activities. In order to arrest
money laundering, where Banks are mostly used in the process, it is imperative that they know
their customers well. Central banks provide KYC guidelines so any violation of these
guidelines will attract penalties under the relevant provisions. Thus, the Bank has to be fully
compliant with the provisions of the KYC procedures also enable Banks to know and
understand their customers and their financial dealings better which in turn help them manage
their risks prudently. Know Your Customer is the principle on which the banking system
operates to avoid the drawbacks of operational, legal and reputation risks and consequential
losses by conscientiously adhering to the various procedures laid down for opening and conduct
of accounts.
 Requirements for opening a new bank accounts
Individuals wishing to open a check account are required to produce the following documents:
 identification documents (passport or identity card)
 at least two 4x4 photos
 a deposit (varying from one bank to another).
Other documents may be requested according to the bank's policy
 Documents used for Operating or running a Bank Accounts
The word operate in relation to a bank account means that the customer deposits further sums
of money and cheques etc., into the bank and withdraws money according to his need or
convenience. A special feature of banking business is that each and every transaction of money
with the customer is supported by a separate slip or document. A customer is, therefore,
required to make use of pay in slips for depositing money and withdrawal slip of cheques for
withdrawing money from the bank. The operations of deposit accounts involve the following
documents.
i. Pay in slip
ii. Withdrawal form
iii. Pass book
iv. cheque book
v. fixed deposit receipt etc

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  Closure of a Bank Account
An individual’s bank account can be closed by the following key ways: either voluntarily by
the individual, the bank’s desire to close it or by Law. These modes of termination are described
below.
Why a bank account may be closed
1. Voluntary Closure by the Customer
The customer has a right to close his demand deposit account because of change of residence
or dissatisfaction with the service of the banker or for any other reason, and the banker is bound
to comply with this request. The banker also may decide to close an account, due to an
unsatisfactory conduct of the account or because it finds the customer undesirable for certain
reasons.
However, a banker can close an account only after giving a reasonable notice to the customer.
However, such cases of closure of an account at the instance of the banker are quite rare, since
the cost of securing and opening a new account is much higher than the cost of closing an
account. If a customer directs the banker in writing to close his account, the banker is bound to
comply with such direction. The latter need not ask the reasons for the former’s direction. The
account must be closed with immediate effect and the customer is required to return the unused
cheques.
2. The Bank’s desire to close the account
If an account remains un-operated for a very long period, the banker may request the customer
to withdraw the money. Such step is taken on the presumptions that the customer no longer
needs the account. If the customer could not be traced after reasonable effort, the banker usually
transfers the balance to an “Unclaimed Deposit Account”, and the account is closed.
The balance is paid to the customers as and when he is traced. The banker is also competent to
terminate his relationship with the customer, if he finds that the latter is no more a desirable
customer. The banker takes this extreme step in circumstances when the customer is guilty of
conducting his account in an unsatisfactory manner, i.e. if the customer is convicted for forging
cheques or bills or if he issues cheques without sufficient funds or does not fulfil his
commitment to pay back the loans or overdrafts, etc. The banker should take the following
steps for closing such an account.
(a) The banker should give to the customer due notice of his intention to close the account
and request him to withdraw the balance standing to his credit. This notice should give
sufficient time to the customer to make alternative arrangements. The banker should
not, on his own, close the account him to withdraw the balance standing to his credit.
This notice should give sufficient time to the customer to make alternative
arrangements. The banker should not, on his own, close the account without such notice
or transfers the same to any other branch.

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 (b) If the customer does not close the account on receipt of the aforesaid notice, the
banker should give another notice intimating the exact date by which the account be
closed otherwise the banker himself will close the account. During this notice period
the banker can safely refuse to accept further credits from the customer and can also
refuse to issue fresh cheque book to him. Such steps will not make him liable to the
customer and will be in consonance with the intention of the notice to close account by
a specified date.
The banker should, however, not refuse to honour the cheques issued by the customer,
so long as his account has a credit balance that will suffice to pay the cheque. If the
banker dishonours any cheque without sufficient reasons, he will be held liable to pay
damages to his customer
In case of default by the customer to close the account, the banker should close the account and
send the money by draft to the customer. He will not be liable for dishonouring cheques
presented for payment subsequently.
3. Termination by Law: The relationship of a banker-customer can also be terminated by the
process of law and by the occurrence of the following events:
(a) Death of customer: On receiving notice or information of the death of a customer, the bank
stops all debit transactions in the account. However, credits to the account can be permitted.
The balance in the account is given to the legal representative of the deceased after obtaining
the letters of administration, or succession certificate, or indemnity bond as per the prescribed
procedure, and only then, the account is closed.
(b) Bankruptcy of customer: An individual customer may be declared bankrupt, or a company
may be wound up under the provisions of law. In such an event, no drawings would be
permitted in the account of the individual. The balance is given to the Receiver or Liquidator
or the Official Assignee and the account is closed thereafter.
(c) Garnishee Order: After receiving a garnishee order from a court or attachment order from
income tax authority, the account can be closed as one of the options after taking the required
steps.
(d) Insanity of the customer: A lunatic/person of unsound mind is not competent to contract.
Since banker-customer relationship is contractual, the bank will not honour cheques and can
close the account after receiving notice about the insanity of the customer and receiving a
confirmation about it through medical reports.
4. On insolvency of the customer; when the bank comes to know of the insolvency of the
customer, she may close the account since the customer may not have money to continue
running the account.
5. On the insanity of a customer; when the bank receives information of the insanity of the
customer, she can close the account.

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6. On receipt of notice of customer’s death; when the bank receives information of the death
of the customer, she must stop operation of the account as death of the customer terminates his
authority.
 Steps or procedures to close a bank account
1. Open your new account before you close the old one
This ensures you won’t miss any deposits or payments.
2. Change your bank details for any direct deposits
If your pay is deposited directly into your account, give your employer your new account
information. Inform the government of your account change if you get government benefits or
payments (including income tax refunds) deposited automatically into your account.
3. Change your bank details for any pre-authorized debits
If you pay bills by pre-authorized debits (PADs), make sure everyone you pay has your new
account information. Ask your bank if it can do this for you. You may be charged an NSF (not
sufficient funds) fee each time a PAD is taken out of your old account and there’s not enough
money to cover it.
4. Stop writing cheques on your old chequing account
Make a list of any cheques that haven’t been cashed. Then wait until they clear before closing
your account.
5. Monitor your accounts carefully
Make sure that everything has been switched over and is running smoothly in your new
account. Also confirm that the cheques you wrote on your old account have all been cashed.
You can do this by looking at statements or accessing your account online.
6. Close your old account
Call the financial institution and tell them you are planning to close your account. Find out how
long it will take to close, and if there will be a fee. If there’s any money in the account, you can
either withdraw it or move it to your new account.

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 CHAPTER TWO: BANKING PRODUCTS AND SERVICES
Introduction
Commercial banks are financial institutions whose most important function is to accept
deposits for reinvestment in form of loans and banking facilities. Bank developments have
evolved in different historical stages, but main function of banks is to safeguard funds.
Developments that have occurred have enlarged its services to varied services from old to
modern contemporary, in order to serve their customers, motivate and remind them Cameroon
commercial banks offer the following services:
1. Accepting deposits from clients; private and public institutions in form of current
accounts or deposits payable upon demand. Commercial banks grant loans to all the
various economic sectors in different formats with certain guarantees. They offer this
service for a reasonable return.
2. Commercial banks in Cameroon Buy and sell of all kinds of checks, securities,
letters of credit and purchase of personal foreign exchange, sale and purchase of
traveler’s checks as well as internal and external transfers.
3. They collect of all types of bonds and checks through clearing house and payment of
checks drawn upon other banks.
4. Leasing funds for retail customers and putting at their disposal work in operations of
stocks and bonds, and securities and acceptance of secretariats and resolution of
commercial paper and acceptances, guarantees and letters of guarantee.
5. Advising clients with regard to their work and development projects to achieve
confidence in bank.
6. Management of customer operations by proxy.
7. Service cards and from which bank card automation of any immediate cash withdrawal,
to inquire about balance and account statement request, checks and transfer funds, as
well as bank cards, which includes all previous services, in addition to immediate
servicing of loan automation and deposit foreign and local currency Mohammed
(2001).
 Products and Services of Case Banks in Cameroon (BICEC and NFC).
Till date, BICEC has stood tall in a competitive bank marketing sector. This is because
it has constantly developed its activities, products and services to meet customer expectations
and needs which have enable it to gain competitive advantage over other commercial banks in
Cameroon. This has been possible because BICEC has chosen appropriate business strategy to
convey value to its customers.
i. Products and services of BICEC at the National level
BICEC offers a variety of products and services to its customers according to the strata
of the society in which they are found. These societal segments include Civil Servants,
Students, Farmers, Large Firms, Institutions, Professionals of Small and Medium Size Firms
and/or Small and Medium size Industries. This strategy has created a personal approach which
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plays a pivot role in enhancing cordial relationship between the bank and its customers. From
this, we can earmark the fact that BICEC’s products and services are opened to both individuals
and corporate bodies.
a. BICEC Individual Customers
As regards individuals otherwise known as private customers, BICEC is aware of their
financial transaction needs and offer lasting solutions to them. Such solutions include amongst
others;
1. Accounts
Base on the needs of the customers, BICEC offers its customers savings and current
account.
2. Banking Insurance:
Depending on the need of the customers, BICEC offers insurance services. For
example, BICEC offers the Schengen Insurance to customers who wish to travel to Schengen
space. It also offers Sécuricartes which is insurance for bank cards, sécurité découvert for
customers who are subscribed to overdraft, Super Rétraite and Rétraite Plus to help income
earners save and prepare for their retirement.
3. Funding
This service is aimed at financing projects. BICEC offers these services to customers
on a range of varied credit or loan to suit their individual needs.
Consumption credit (30 months) for customers willing to purchase house equipments,
vehicles, prepare for marriage ceremonies, baptism, funerals etc.,
CRESCO- crédit scolaire – university loan (10 months),
Personal loan (48 months) for customers willing to purchase land property or ameliorate their
habitat.
BICEC IMMO which is a medium term financing offer and a financing formula to help
their customers save and build their own property house.
Cash vouchers ‘Bon de Caisse’ which is a long term loan offered at BICEC.
4. Banking Cards
BICEC offers banking cards to its customers in other to permit them pay for their
purchases nationally and internationally and also withdraw money from their accounts at any
time of the day and every day of the week. BICEC has nine different types of cards which are
offered to different customers based on their income level and the account type. These types of
cards are;
 Comfort card
 Comfort plus card
 Moov card
 Express card
 Visa electron card
 Visa classic card
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  Visa gold card
 Visa business electron card
 Visa business gold card
These cards mentioned above have a two years’ validity period each and are renewable
automatically. When it is automatically renewed and customers do not come for it within the
space of 6 months, they are then destroyed. The visa cards are universal withdrawal and
payment cards capable of being used world over and at all times. The payment aspect means
that, the card can be used to settle ordinary and hotel bills, buy goods at shopping malls and
buy internet data through the BICEC Electronic Payment Terminal: E-PAY BOX. They are
also prior to sécuricard insurance.
On the other hand, the express, comfort, comfort plus cards are delivered by BICEC to
enable its clients withdraw money from any BICEC Automatic Teller Machines (ATM).
5. Wealth Management
The management of wealth needs a good knowledge of financial analysis of a situation,
regulations, skills and listening skills. At BICEC, there exist specialists on heritage who guide
customers in their undertakings.
6. Mobile Banking
ORANGE MONEY: this service is offered in collaboration with ORANGE which is a
telecommunication operator in Cameroon and ENEO. The brain behind this product is to
stimulate the customer, the habit of using an electronic purse to pay electricity and ORANGE
bills, payments of services like insurance premiums and TV subscriptions. This idea originated
from the difficulty to pay bills, difficulty to successfully transfer money and the low banking
rate in Cameroon. Besides, the rapid upspring of mobile phones encouraged this vision.
BICEC. INFO: this is a service which permits customers to seek account information.
Distant banking services for customers. It started as ALLO BICEC where text messages were
sent to its customers informing them of the availability of salaries and updates on their account
situations but was recently changed to BICEC INFOS. BICEC carries out distant banking
through M-Banking and e-banking in order to monitor and manage their accounts anywhere
and anytime.
7. Electronic Banking
Automatic Teller Machines: Also known as Cash Points, it allows bank customers to
conduct their banking transactions from almost every other ATM machine in the world. It is
an unattended electronic machine in a public place connected to a data system; that dispenses
cash immediately to a customer in a bank lobby. BICEC ATMs are activated by inserting a
cash card that contains the user’s account number and PIN on a magnetic stripe. The ATM
calls the bank’s computers to verify the balance, dispense the cash and then transmit a complete
transaction notice. BICEC has an overall total of 93 ATM machines in all its branches. They
are very easy, simple to use and available 24/7.

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Unsuccessful withdrawals at BICEC ATMs are regularized at the end of each day, and cards
that have been swallowed by the machine (not for validity purpose) are returned to the customer
via the card and checks sub-service. The collaborator responsible here effectuates a daily
security control for the VISA cards and operations online through his data base; that records
the time, place and amount of a transaction.
E-PAY BOX: this is an Electronic Payment Terminal, a distant banking service as well
as a touch point that facilitates customer transactions. It is a payment instrument that is placed
at the disposition of businessmen permitting them to accept payment via VISA card at their
sales points from customers who have BICEC accounts. Two cards are delivered after
transaction, one to the customer and another with the customer’s signature to be kept by the
businessman. This is in turn returned to the bank to proof the customer’s transaction. The
person in charge of this service also follows up and treats claims of customers who have
effectuated a transaction with E PAY BOX and their accounts have not been impacted. In some
cases of pre-authorization, the amount impacted does not correspond to the amount of
transaction. This creates tensions between customers and bank therefore it is very crucial to the
relationship aspect of banking.
BICEC.COM: this is an online banking service that BICEC bank offers to enable her
customers to access their accounts online via subscription.
b. BICEC Corporate Customers
As far as corporate customers are concerned, BICEC offers the following products and
services:
- Financing of certain entrepreneurial projects
- Assuring payment to their suppliers
- Executing transfer orders of employee wages
- Shelter their funds
- Propose long term deposits to outstanding firm profits in order to yield interests
- Loan banking to small and medium size enterprises/industries which is very risky.
ii. BICEC products and services at the International level
With the help of account managers who sufficiently master customer knowledge and
accompany them on a daily basis, BICEC has developed with her network of experts offers
revolving around her global customers’ major concerns. BICEC offers these products and
services to both individual and corporate customers.
For corporate customers, the following services are offered:
- Short and medium term financing
- Cash management
- Export Strategy; issues CREDOC, letters of standby
- Regulations on the import, export
- Management of foreign exchange risk
- Remote banking
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Regarding individual customers, BICEC offers the following services:
- Funds transfer to family
- Purchase of foreign currency
- Remote banking
- Electronic Banking Services such as ATM (VISA card), internet banking.
 NFC BANK’S Products and Services
National Financial Credit Bank offers a variety of products and services to its customers
both at the national and international level.
i. Products and services at the National Level
NFCB provides the following products and services to both its private and corporate
customers;
a) Private Customers
To her individual or private customers, NFCB offers the following products based on
the needs of the customers.
1. Accounts
Based on the needs of customers, NFCB offers the savings and Checking (current)
accounts.
2. Funding
With the aim of financing various individual projects, varied Credit facilities are offered
to individual account holders to suit their needs as follows;
NFC SOFT: Personal loans granted to civil-servants with a maximum duration of 24months.
School fee loan: Short term loan granted to salary earners (civil servants, pensioners, workers
in state parastatals) to enable them satisfy their children school needs.
Overdraft: For all civil servants who are account holders, they have the possibility to overdraw
their accounts by up to 50% of their monthly salary. Other current account users can also
benefit, but will need to do a request and get approval from the credit committee.
Fixed deposits (Bon de Caisse): it is a type of medium term loan offered at NFCB.
3. Bank Insurance
NFCB offers insurance services like Automobile, accidents, industrial risk, health and
transportation insurance.
4. Bank cards
These are cards which permit customer access their accounts through ATMs. It is
actually a new product in this bank and so far only the debit card of three different types.
5. Electronic Banking
NFCB offers SMS and Internet banking services to its customers updated them on their
account balances and new product availability.
b) Corporate Customers
NFCB makes available the following services to its corporate customers;

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 - Financing of some entrepreneurial projects
- Executing transfer orders of employee wages
- Loan banking to small and medium size enterprises/industries which is very risky.
- Bill discounting
- Safeguard of Funds
ii) NFC products and services at the International level
With the help of account managers, customer care officers who all master customer
knowledge and accompany them on a daily basis, NFC like most banks has developed with her
network of experts offers revolving around her global customers’ major concerns. Both
individual and corporate customers benefit from these products.
For corporate customers, the following services are offered:
- Short and medium term financing
- issues CREDOC
As far as individuals are concern, NFC offers the following;
- NFC operates the Non Resident Cameroonians savings accounts
- Purchase of foreign currency
- Funds transfer to family
With NFCB’s mission of being a model for African banks by adding value to customers,
shareholders and all other stakeholders through sustained growth, product development,
control, compliance and care, and its vision of being a dominant player in the retail banking
business in the sub region and a reliable partner to SMEs, SMIs and Corporate customers, it
tells us clearly that NFCB has prospects of one day going international.

 GENERAL BANKING PRODUCTS AND SERVICES

In the modern world, banks offer a variety of services to attract customers. However, these
bank services usually attract bank charges. Some basic modern services offered by banks are
discussed below:
A). Bank products and services
1. Advancing of Loans. Banks are profit-oriented business organizations. So they have to
advance a loan to the public and generate interest from them as profit. After keeping certain
cash reserves, banks provide short-term, medium-term and long-term loans to needy borrowers
or deficit individuals.
2. Overdraft. Sometimes, the bank provides overdraft facilities to its customers through which
they are allowed to withdraw more than their deposits. Interest is charged from the customers
on the overdrawn amount not on the whole amount.
3. Accepting Deposit. Accepting deposit from savers or account holders is the primary
function of a bank. Banks accept deposit from those who can save money but cannot utilize in

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profitable sectors. People prefer to deposit their savings in a bank because by doing so, they
earn interest. Deposits are accepted into;
 Savings account
 Current account and
 Fixed deposit account
4. Discounting of Bills of Exchange. This is another popular type of lending by modern banks.
Through this method, a holder of a bill of exchange can get it discounted by the bank, in a bill
of exchange, the debtor accepts the bill drawn upon him by the creditor (i.e., holder of the bill)
and agrees to pay the amount mentioned on maturity. After making some marginal deductions
(in the form of commission), the bank pays the value of the bill to the holder. When the bill of
exchange matures, the bank gets its payment from the party, which had accepted the bill.
5. Check/Cheque Payment. Banks provide cheque pads to the account holders. Account
holders can draw cheque upon the bank to pay money. Banks pay for cheques of customers
after formal verification and official procedures.
6. Collection and Payment of Credit Instruments. In modern business, different types of
credit instruments such as the bill of exchange, promissory notes, cheques etc. are used. Banks
deal with such instruments. Modern banks collect and pay different types of credit instruments
as the representative of the customers.
7. Foreign Currency Exchange. Banks deal with foreign currencies. As the requirement of
customers, banks exchange foreign currencies with local currencies, which is essential to settle
down the dues in the international trade.
8. Consultancy. Modern commercial banks are large organizations. They can expand their
function to a consultancy business. In this function, banks hire financial, legal and market
experts who provide advice to customers regarding investment, industry, trade, income, tax etc.
9. Bank Guarantee. Customers are provided the facility of bank guarantee by modern
commercial banks. When customers have to deposit certain fund in governmental offices or
courts for a specific purpose, a bank can present itself as the guarantee for the customer, instead
of depositing fund by customers.
10. Remittance of Funds. Banks help their customers in transferring funds from one place to
another through cheques, drafts, etc.
11. Credit cards. A credit card is cards that allow their holders to make purchases of goods
and services in exchange for the credit card’s provider immediately paying for the goods or
service, and the cardholder promising to pay back the amount of the purchase to the card
provider over a period of time, and with interest.
12. ATMs Services
ATMs replace human bank tellers in performing giving banking functions such as deposits,
withdrawals, account inquiries. Key advantages of ATMs include:
 24-hour availability
 Elimination of labor cost
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  Convenience of location
13. Debit cards
Debit cards are used to electronically withdraw funds directly from the cardholders’ accounts.
Most debit cards require a Personal Identification Number (PIN) to be used to verify the
transaction.
14. Home banking. Home banking is the process of completing the financial transaction from
one’s own home as opposed to utilizing a branch of a bank. It includes actions such as making
account inquiries, transferring money, paying bills, applying for loans, directing deposits.
15. Online banking. Online banking is a service offered by banks that allows account holders
to access their account data via the internet. Online banking is also known as “Internet banking”
or “Web banking.” Online banking through traditional banks enable customers to perform all
routine transactions, such as account transfers, balance inquiries, bill payments, and stop-
payment requests, and some even offer online loan and credit card applications. Account
information can be accessed anytime, day or night, and can be done from anywhere.
16. Mobile Banking. Mobile banking (also known as M-Banking) is a term used for
performing balance checks, account transactions, payments, credit applications and other
banking transactions through a mobile device such as a mobile phone or Personal Digital
Assistant (PDA),
17. Priority banking
Priority banking can include a number of various services, but some of the popular ones include
free checking, online bill payment, financial consultation, and information.
18. Private banking
Personalized financial and banking services that are traditionally offered to a bank’s digital,
high net worth individuals (HNWIs). For wealth management purposes,
HNWIs have accrued far more wealth than the average person, and therefore have the means
to access a larger variety of conventional and alternative investments.
Private Banks aim to match such individuals with the most appropriate options.
19 Letters of credit and bank draft
 Letters of credit. A standard, commercial letter of credit is a document issued mostly
by a financial institution, used primarily in trade finance, which usually provides an
irrevocable payment undertaking. A letter from a bank guaranteeing that a buyer's
payment to a seller will be received on time and for the correct amount. In the event
that the buyer is unable to make payment on the purchase, the bank will be required to
cover the full or remaining amount of the purchase. The letter of credit can also be
source of payment for a transaction, meaning that redeeming the letter of credit will pay
an exporter. Letters of credit are used primarily in international trade transactions of
significant value, for deals between a supplier in one country and a customer in another.
In such cases the International Chamber of Commerce Uniform Customs and Practice

15
 for Documentary Credits applies. The parties to a letter of credit are usually a
beneficiary who is to receive the money, the issuing bank of whom the applicant is a
client, and the advising bank of whom the beneficiary is a client. Almost all letters of
credit are irrevocable, i.e., cannot be amended or cancelled without prior agreement of
the beneficiary, the issuing bank and the confirming bank, if any. Typically, the
documents a beneficiary has to present in order to receive payment include a
commercial invoice, bill of lading, and documents proving the shipment was insured
against loss or damage in transit. However, the list and form of documents is open to
imagination and negotiation and might contain requirements to present documents
issued by a neutral third party evidencing the quality of the goods shipped, or their place
of origin.
 Bank draft. A bank draft, also called a bank check, is a method of payment that
involves a document issued by a bank guaranteeing that the amount stated on the
certificate will be paid to the recipient of the document. A bank draft is used as a type
of check which is more reliable than a personal check as it is backed by the bank itself
on behalf of the payer; hence, it ensures that the person who the draft is addressed to,
will receive the money. It is usually used in international trade to pay the exporter of
goods.

16
CHAPTER THREE: MANAGEMENT OF MEANS OF PAYMENTS
All instruments that allow anyone to transfer funds regardless of the medium or technical
procedures used are considered instruments of payments or means of payments.
Means of payments refer to the different tools used in effectuating payment in the banking
business. There exist many different payment methods such as Cash, Cheque, electronic cards,
e-money, Standing Orders, Bank Transfers or Giros, Bankers Drafts, Promissory notes and
Bills of exchange. The management of means of payment thus refers to the efficient and
effective use of these tools (mechanisms) to settle business transactions. We shall begin with
cash management.
Definition
What is ‘Cash’?
Before detailing on cash management, it is imperative to understand what we actually mean by
cash. Sometimes we really do mean cash i.e. notes and coins. Cash simply refers to balances
in bank accounts that are useable funds in, say, current accounts or demand deposit accounts
that are instantly, or nearly instantly, available.
Form this definition, we can introduce a technicality here and discuss what we mean by
‘useable’. Useable has two sub divisions
- Good value and
- Availability
Good value means that the bank will allow those funds that have good value to earn interest or
reduce an overdraft but one may not have access to them. Availability means that the funds
may actually be withdrawn. For example, suppose you receive a cheque for 5,000 FCFA. When
you pay it into your account, your account statement would show 5,000FCFA as being credited
to your account on the day you paid it in but, and it’s a big but, this is not the same as the funds
being good value. If for example you had an overdraft of 5,000FCFA on that account you
would be charged interest until the bank gave you ‘good value’ on the cheque deposited. Thus
value dating i.e. the date the bank says you may have use of the funds, is an important issue as
banks may forward value i.e. give value a day (or more) after the funds have arrived in your
account, as in the case above or back value i.e. you instruct your bank to pay away funds today
but they debit your account as of yesterday.
Definition of Cash Management
According to a Chartered Institute of Accounting Handbook titled ‘Guidance to Good Practice
Cash Management’, Cash Management is ‘the effective planning, monitoring and management
of liquid/near liquid resources which includes:
 day to day cash control, i.e. monitoring bank balances and the ability to manage
liquidity to ensure that the company has enough cash or access to credit to meet its
obligations

17
  money at the bank, i.e. having an efficient structure of bank accounts such that the
efficient collection, concentration and eventual payment of funds may be attained thus
minimising borrowing costs and maximising investment returns
 receipts and items in the course of being collected (receivables)
 payments and items in the course of being paid (payables)
 short-term investing
 short-term borrowing

Notwithstanding the definition above, cash management is one of those rather all-embracing
terms and to an extent is interchangeable with liquidity management and working capital
management. Strictly speaking cash management would just be the management of cash but as
will be seen, cash itself is rarely used and we really mean movement from and to bank account
balances, when we talk about payments and receipts. Liquidity means having the funds
available to meet all known and unknown requirements. Working capital management refers
to the management of the short-term part of the balance sheet. From a treasury point of view
the important items are receivables (or debtors), payables (or creditors), cash in hand and at
bank, short-term investments and short-term debt.

Importance of Cash Management

Before considering the various aspects of cash management it is important pause to reflect on
the value of good cash management to any organisation including banks. The main benefits of
cash management are as follows:
- Improved ratios. If all the items in working capital are well managed, this will send a
message to those who are analysing the balance sheet that the company is well
managed. This will result in increased confidence in those who wish to do business with
that company.
- Suppliers will be more willing to supply on credit or at better prices if they know they
will be paid, banks similarly will have confidence to lend at good rates and customers
will be confident to purchase from the company if they believe they will still be in
business in 12 months’ time (Going concern status).
- Analysts will be more confident in management’s ability to manage the company well
and deliver on their promises and so will be more disposed to make a buy
recommendation on the shares.
- shareholders will be interested in the company’s ability to pay dividends
- shorter receivables times and controlled payments will give rise to profit opportunities,
either through increasing returns on cash balances or by reducing borrowing costs
- risk will be easier to manage e.g. as we shall see, knowing when a currency
denominated cash flow is going to take place makes it easier to manage

18
 - in times of credit rationing reducing the need to borrow not only saves on interest cost
but preserves credit lines
Management of Cheques as Means of Payments
Definition of a Cheque
A cheque is referred to as:-
i. A bill of exchange drawn on a specified banker
ii. Payable on demand
iii. Drawn on a specified banker
iv. Electronic image of a truncated cheque is recognized under law. The Information
Technology Act, recognizes (a) digital signatures and (b) electronic transfer as well
A cheque is an unconditional order in writing, addressed by one person to another
requiring him to pay on demand a certain sum of money on a fixed or determinable future
date.
A cheque is nothing but a bill of exchange with special features (i) It is always payable on
demand (A bill of exchange can be payable on demand/at sight and/or after a specific term
called as usance bill) (ii) always drawn on a specified banker i.e., the drawee of a cheque is the
banker on whom the cheque is drawn. The banker with whom the customer holds his/her
account. This drawee bank is called the paying bank.
There are three main parties to a cheque as follows:

Apart from the above three parties, others involved in payment and collection of cheques are :
Endorser: The person who transfers his right to another person
Endorsee: The person to whom the right is transferred
MAIN TYPES OF CHEQUES
(1) Open Cheque: A cheque is classified as ‘Open’ when cash payment is allowed across the
counter of the bank.
(2) Bearer Cheque: A cheque which is payable to any person who holds and presents it for
payment at the bank counter is called a ‘Bearer cheque’. A bearer cheque can be transferred by
mere delivery without any endorsement.

19
(3) Order Cheque:
An order cheque is a cheque which is payable to a particular person. In case of order cheque,
the word ‘bearer’ might have been cancelled and the word ‘order’ is written. The payee can
transfer an order cheque by endorsement to another person by signing his name on the back of
the cheque.
Cheque Operations: the following operations can be carried out on a cheque:
- Certification
- Clearing
- Transfer (just once)
- Deposit against payment
- Payment at sight
- Drawn on a bank
- Opposition
- Barred
 CROSSING OF CHEQUES
Crossing is an ‘instruction’ given to the paying banker to pay the amount of the cheque through
a banker only and not directly to the person presenting it at the counter. A cheque bearing such
an instruction is called a ‘crossed cheque’; others without such crossing are ‘open cheques’
which may be encashed at the counter of the paying banker as well. The crossing on a cheque
is intended to ensure that its payment is made to the right payee.
1. General Crossing
Where a cheque bears across its face an addition of the words “and company” or any
abbreviation thereof, between two parallel transverse lines, or of two parallel transverse lines
simply, either with or without the words “not negotiable”, that addition shall be deemed a
crossing, and the cheque shall be deemed to be crossed generally
2. Special Crossing
Where a cheque bears across its face an addition of the name of a banker, either with or without
the words “not negotiable”, that addition shall be deemed a crossing, and the cheque shall be
deemed to be crossed specially, and to be crossed to that banker.

20
CHAPTER FOUR: RISK MANAGEMENT IN BANKS
Introduction
It is rare to find a successful man who has never had set backs, therefore setbacks are part and
parcel of every good business. Business people who are liable to be successful are those who
are capable of taking risk and managing losses where as poor people fear to take risk and so
remain poor. It is difficult to find a good business man who is unable to take risk, therefore
financial institutions must take all measures to manage risk as a guaranty of their success. Risk
can be defined as the probability that the intended goals may turn out to be otherwise. A clear
line should be drawn between risk and uncertainty even though they are at times used
interchangeably. The difference between risk and uncertainty stems from the fact that:
Risk contains many possible outcomes and a business man can determine the probability that
an event will occur whereas uncertainty equally has many possible outcomes but the business
man cannot determine the probability that an event will occur. Also, risk can be managed and
quantified where as uncertainty is uncontrollable cannot.
Risk taking is part and parcel of the daily activities of a good manager. However, it should not
be taken irrationally. A good manager must calculate risk by balancing risk against returns. A
manager who is not able to take risk is a manager who will be unable to realise any meaningful
returns. In such a situation, he is trying to maintain the existing situation and the end results is
stagnation. This can show up in lack of innovation, backwardness and subsequently business
collapse. It is difficult to avoid risk. However, the manager should be able to:
- Agree on acceptable level of risk
- Identify the area where risk can occur
- Measure the degree of risk
Classification of Risk
Risk can be classified in two main ways. It either classified as systematic and unsystematic risk
or under strategic, Operational and financial risk.
Definition of Financial Risk Management
Financial risk management (FRM) refers to the creation of economic value in a firm by using
financial instruments to manage exposure to risk especially credit and management risk. Other
types of risk include foreign exchange, liquidity, and inflation risk among others. To effectively
manage financial risk, the source of the risk must be identified, measured and necessary steps
taken to counteract it. FRM can be done quantitatively and qualitatively. It focuses on when
and how to use financial instruments to control risk and to eliminate unnecessary exposures to
risk.
Categories of Financial Risk
FR can be categorised as follows;

21
 a. Liquidity risk
This is the risk that a given security or asset cannot be sold quickly enough in the market to
prevent a loss or make the required gain. This is the possibility of negative effects on the interest
of owners, customers and other stake holders of the business. It results from the inability to
meet current cash obligations on a timely and cost effective manner. This type of risk most
often comes due to the manager’s short sightedness in adequately anticipating and planning for
changes in sources of funds to meet cash needs. To manage liquidity risk, the manager must
ensure that he maintains a significant reserve of cash in other to disburse loans and guaranty
clients’ withdrawals. The manager must also diversify investment as a means of maximising
cash flow into the business.
b. Market risk
Market risk is an umbrella term which involves foreign exchange risk, investment portfolio
risk and interest rate risk. It is the possibility that foreign exchange rate, probability of future
changes in interest rates may reduce the value of investments.
c. Profit risk
Profit risk refers to the risk management tool that focuses on understanding the concentrations
with the income statement and assessing the risk associated with those concentrations from net
income perspective.
d. Credit risk
This is the risk that arises as a result of losses incurred resulting from the inability or
unwillingness of a debtor to repay his loan as agreed. Such a situation is known as default in
loan payment. In some situations, investors loss both principal and interest. Credit risk is the
probability that the borrower will be unable to pay the interest and principal on time or may
never pay both. The main goal of business institutions is to give out loans, and all measures
must be taken to ensure that the risk of customers defaulting in payment should be reduced to
an acceptable minimum. This is the most frequently addressed risk in banks and microfinance
institutions. Credit risks include transaction risk and portfolio risk.
- Transaction risk
This refers to risk which results from the inappropriate management of individual loans. This
risk is mitigated in Banks and MFIs through the borrower screening techniques, underwriting
criteria and quality procedure of loan disbursement, monitoring and collection.
- Portfolio risk
This refers to risk found in the composition of the overall loan portfolio. Policies on
diversification (avoiding concentration in a particular sector), maximum loan size, types of
loans and loan structure lessen portfolio risk.
The most efficient manner of credit risk management is by creating a set of written policies
and procedures for processing each loan request. The written policy should describe the type
of loan a particular set of borrowers will or will not take. These policies should explain clearly

22
the terms of each loan, stipulate the necessary documents needed for the loan to be granted,
explain how the collateral will be evaluated. The effective approval to manage credit risk
includes the following;
- Establishment of clear collection procedures
- Close monitoring of the debtor from time to time from when the loan is granted to the
recovery period
- Realistic structuring of the manner in which the loan will be paid
- Adequate borrowing screening
- Good portfolio reporting that accurately reflects the status and monthly trends in
delinquency
- Cases of delinquency are identified and promptly addressed.
Specific methods used to Mitigate or hedge credit risk
The credit risk is not only measured and monitored by banks, but banks also actively seek to
control and reduce it.
The risk arising from the investment portfolio is constrained by limits on the amount,
distribution of responsibilities, control and separation front- and back - office. Among the
hedging techniques belong risk diversification, risk sharing and risk transfer.
Credit insurance or credit derivatives: Bond holders and other lenders may mitigate the
credit risk by purchasing credit insurance or derivatives. These contracts transfer the risk from
the lender to the seller (insure) in exchange for payment. Credit swap is the most common
credit derivative used.
Risk Diversification: Risk lenders to a small number of borrowers face a high degree of
unsystematic credit risk called concentration risk. This risk is reduced or controlled by
diversification of the borrower pool. Here, diversification refers to the spreading of the loan
portfolio over a wide range of segments to avoid serious losses if a recession is localised to one
segment of activities.
Use of the 7Cs: financial institutions must carefully access the credit worthiness of the
customer in order to limit or reduce exposure to credit risk.
Risk based pricing: lender generally charge a higher interest rate to borrowers who are more
likely to default, a practice called risk based pricing. Lenders consider factors relating to the
loan-to-value ratio and estimate the effects on yield.
Continuous follow up of customers: the credit officer should continuously follow the
customer up till the loan is paid.
Besides all these factors, credit limits should be fixed after due assessment of many risks
associated with the type of borrower, nature of industry among other factor. Such limits should
be subject to sufficient and appropriate collateral requirements to safeguard the bank’s interest.

23
CHAPTER FIVE: THE SALE OF CREDIT (LOANS) TO INDIVIDUALS
Introduction
The most profitable activity of financial institutions is loan or credit allotment. The interest on
loans given to customers serves as the highest income of any financial institution.
A Loan is a contractual agreement between a lender and a borrower on an amount loaned at a
specific interest rate to be repaid over a specified period of time. Loans have the following
characteristics:
a. Loan Amount
This refers to the sum that the debtor receives upon signing a loan contract
b. Schedule for repayment
This states how the loan will be repaid. The manners in which loans are repaid differ. Some
are paid in instalments over a length of time; others are paid as lump sum at the terminal date
of the contract.
c. The loan term
This refers to the time given to the debtor to repay the loan. It can also be referred to as the
term or maturity.
d. Contract of interest
This refers to the extra money the borrower pays as interest rate to the lender in exchange for
having the money borrowed. It is also referred to as the cost of the loan.
 Fundamentals of Loan Policy
Financial institutions need to ensure that their loans meet the standards needed by the
institutions. The most efficient way to ensure this is to establish a written loan policy. A loan
policy refers to a document that gives loan officers and management specific guidelines used
in making individual loan decisions and in shaping overall loan portfolio. It is a document
which outlines various laws which guides the lending process. The lenders’ loan portfolio must
be in accordance with the institution’s loan policy. Most often, loan policies are always
contained in a handbook given to customers or borrowers either for free or for a menial amount.
Some borrowers default in loan payment because they are ignorant about many things about
loan types, the pros and cons of the various loan types. Sometimes, this can be blamed on bank
officials’ lack of advice to customers. In this case, the loan policy comes in to fill this gap.
Loan policies inform employees in a financial institution on the procedure of loan procurement.
It equally helps the lender to move towards a loan portfolio that can successfully blend multiple
objectives like promoting profitability, satisfying regulatory requirements and control risk
exposure. Loan policies should be flexible to changes in the economic environment. However,
violation of loan policies should not be frequent.
The following elements should be contained in a loan policy;
- It should contain the guidelines for taking, evaluating and perfecting collaterals
- A loan policy should contain procedures for setting loan rates and fees as well as the
terms of repayments of loans.
24
 - It should contain the operating procedures for soliciting, evaluating and making
decisions on customer loan applications
- It should show the preferred upper limits for the total loans outstanding (maximum ratio
of total loans to total assets allowed).
- It should contain a description of the institution’s principal trade area for which most
loans should come.
- It should show the line of authority, revealing who is responsible for maintaining and
reviewing the credit file.
- It should show the lines of responsibilities in making assignments and reporting
information.
- It should have a procedure for detecting and working out problem loan situations
- It should indicate the required documents that will accompany each loan application
and what must be kept in the lender’s file
- It should contain a specification of the lending authority given to each loan officer, loan
committee, BOD…there should be a measure of the maximum amount and the type of
loan that can be approved by a loan officer, loan committee and what signature of
approval is required.
- It should specify what loans the lender is likely not to make. E.g. birthday loans,
marriages, feasts, dead celebrations, wars etc. these loans are not productive loans
- It should contain a goal statement for the whole loan portfolio. Meaning that, it should
contain a statement showing the characteristics of a good loan portfolio. i.e. the types
of loans, maturity dates, sizes and the loan quality.
Loan Types and Loan Amortization
A loan is a contractual agreement between the borrower and the lender on the amount of money
loaned, at a specific interest rate and for a given period of time. The way loans are granted and
the way they are repaid are very different. Most lending decisions rotate round three key issues
;
- The credit worthiness of the borrower
- How well the loan can be structured to protect the bank and public funds
- If the claim against a borrower’s assets can be perfected in case of loan default
Loans can be classified based on two main categories ie Methods of Repayment and Purpose
of the Loan.
I. Classification based on the purpose of the loan
It is essential to know the different types of loans that one can obtain from a bank and their
competitors. Banks make a wide variety of loans to customers for different reasons. The loans
are subdivided into:
Agricultural Loan: Loans granted to farmers to assist in planting and harvesting crops as well
as supporting some in the feeding and caring for life stock.

25
Personal Loans: Loans granted to individuals to finance the purchase of automobile, modernise
homes, medical, educational and other personal expenses.
Real Estate Loans: These are loans secured by real property such as land, buildings and other
structures and these include short term loans for construction and land development, long term
loans to finance purchase of farmland, homes, commercial structures and foreign property.
Lease Finance Loans: these are loans used by lenders to buy equipment or vehicles and lease
them to customers. Rents on these assets is paid to the bank and it is known as operating
leasing: At some occasions, the bank uses these to buy assets for the customers and the assets
are used as securities for the loans, this is called finance leasing which is a form of mortgage.
Miscellaneous Loans: These include some the loans not listed above like school fee loans
among others.
II. Classification based on the Method of Payment
In this category, there are three sub classes: interest only loans, pure discount loans and
amortised loans. There are explained as follows ;
i. Pure Discount Loans
These are the simplest form of loans in which the borrower receives money today and repays
a single lump sum including the interest at some time in the future. For instance, Mr Ayuk is
granted 70,000 FRS today to repay in one year at an interest rate of 10%. What amount will he
repay at the end of the year?
Solution
Loan amount = 70000
Interest rate = 10% (0.1)
T= 12months
= 70000(1.1)
= 77,000 FRS i.e. 1,100 FRS for every thousand borrowed today.
ii. Compounding and Discounting Loans
Compounding is the process of accumulating interest in an investment over time to earn more
interest.it is also known as capitalization. In other words, it means earning interest on interest
and principal hence is called compound interest. It is interest earned on both the initial principal
and the interest reinvested from prior investments. The principal refers to the amount of money
on which interest is received. Simple interest is interest earned only on the original amount
(Principal) invested. Compounding is the process by which, the present value (PV) is converted
to the future value (FV) i.e. FV=PV (1+r) n. The reverse is true for discounting i.e. PV=FV/
(1+r) n. Compound interest = FV-PV. Banks and other financial institutions may give out loans
to be paid annually, semi-annually, quarterly, every three months and monthly.
e.g.
A customer saved an amount of money into his account that pays interest at the rate of 12%
p.a. He received 5,000,000 FRS at the end of the 5th year. What was the initial amount he
saved?
26
Solution
PV= FV (1+r) n
PV= 5,000,000 (1.2)5
=2,837,135FRS
iii. Interest Only Loans
The borrower here is required to pay interest each period and the principal at some time in the
future. An interest-only loan and a pure discount loan are the same when there is only one
repayment period.
Example
How much will the borrower pay for 12% interest-only loan of 150,000FRS which runs for
five years?
Solution
150,000+90,000= 240,000FRS
This implies the borrower will pay 18000Frs. every year and for five years, he will pay 240,000
FRS (150,000+90,000).
iv. Loan Amortization
This is a method frequently used by banks and other financial institutions. All the principal is
repaid at once in the case of a pure discount or interest-only loan. Practically, this may be heavy
on the customer and may result to loan default. It is often necessary for a bank to prepare a
schedule that will show how the loan will be repaid by the customers in which case the lender
requires the borrower to repay parts of the loan over time. This process of paying off a loan by
making regular principal deductions is called Loan Amortization. It is simply the process by
which a debt is reduced by paying small regular amounts. A very simple way of amortizing a
loan is to have the borrower pay the interest each period plus some fixed amount from the
principal (called annuity) so that at the end of the loan period, the loan will be fully paid. This
approach is common with medium-term business loans, car loans and mortgages.
Here, we are more interested in calculating total annual payments (annuity) and the principal
paid each time (amortised amount). It will be observed that the total payment each year will
decline, reason being that the loan balance goes down resulting in lower interest charge each
year. The formula for the constant amount to be paid each year is as follows;
Loan (PV) = a [1-(1+r)-n / r]. This implies a = Loan/ [1-(1+r)-n /r] where ‘a’ is the annual
repayment (annuity), n = the number of periods and r = the interest rate.
Example
UBC Bank grants a loan of 5,000,000 Frs to a customer at 9% p.a. to be paid in five years. How
much will he pay each year to amortize the loan? Draw a schedule to show the movement of
the loan for the five years.
Solution
Annual repayment (a) = 5000000/ [1-(1.09)-5/ 0.09]
= 1,285,462.18 FRS
27
Continues on the board in class
 The lending process
 Securities used
 Credit recovery strategies to be done in class

28
CHAPTER SIX: THE FINANCIAL MARKET
Financial markets are structures through which funds flow. It is structured as follows;
- Debt and equity market
- Exchanges and OTC markets
- Primary and secondary market
- Money and capital market
The last two classifications of a financial market are explained as follows
1. Primary Markets versus Secondary Markets
Primary Markets.
Primary markets are markets in which users of funds (e.g., corporations) raise funds through
new issues of financial instruments, such as stocks and bonds. The fund users have new projects
or expanded production needs, but do not have sufficient internally generated funds (such as
retained earnings) to support these needs. Thus, the fund users issue securities in the external
primary markets to raise additional funds. New issues of financial instruments are sold to the
initial suppliers of funds (e.g., households) in exchange for funds (money) that the issuer or
user of funds needs. Most primary market transactions in the United States and other developed
countries are arranged through financial institutions called investment banks.
For these public offerings, the investment bank provides the securities issuer (the funds user)
with advice on the securities issue (such as the offer price and number of securities to issue)
and attracts the initial public purchasers of the securities for the funds user. By issuing primary
market securities with the help of an investment bank, the funds user saves the risk and cost of
creating a market for its securities on its own.
Primary market financial instruments include issues of equity by firms initially going public
(e.g., allowing their equity shares to be publicly traded on stock markets for the first time).
These first-time issues are usually referred to as initial public offerings (IPOs).
Secondary Market.
Once financial instruments such as stocks are issued in primary markets, they are then traded
i.e., re-bought and resold in secondary markets. This implies that a secondary market is a
market that trades financial instruments once they are issued. Buyers of secondary market
securities are economic agents (consumers, businesses, and governments) with excess funds.
Sellers of secondary market financial instruments are economic agents in need of funds.
Secondary markets provide a centralized marketplace where economic agents know they can
transact quickly and efficiently. These markets therefore save economic agents the search and
other costs of seeking buyers or sellers on their own. When an economic agent buys a financial
instrument in a secondary market, funds are exchanged, usually with the help of a securities
broker such as Schwab acting as an intermediary between the buyer and the seller of the
instrument. The New York Stock Exchange (NYSE) and the National Association of Security
Dealers Automated Quotation (NASDAQ) system are two well-known examples of secondary
markets for trading stocks.
29
In addition to stocks and bonds, secondary markets also exist for financial instruments
backed by mortgages and other assets, foreign exchange and futures and options (i.e.,
derivative securities - financial securities whose payoffs are linked to other, previously issued
primary securities).
Money Markets versus Capital Markets
Money Markets. Money markets are markets that trade debt securities or instruments
with maturities of one year or less. In the money markets, economic agents with short-term
excess supplies of funds can lend funds (i.e., buy money market instruments) to economic
agents who have short-term needs or shortages of funds (i.e., they sell money market
instruments). The short-term nature of these instruments means that fluctuations in their prices
in the secondary markets in which they trade are usually quite small.
Money Market Instruments. A variety of money market securities are issued by corporations
and government units to obtain short-term funds. These securities include Treasury bills,
repurchase agreements, commercial paper, negotiable certificates of
deposit, and banker’s acceptances. They are explained as follows;
Treasury bills: short-term obligations issued by the U.S. government.
Call or notice money: short-term funds transferred between financial institutions usually for
no more than one day.
Repurchase agreements: agreements involving the sale of securities by one party to another
with a promise by the seller to repurchase the same securities from the buyer at a specified date
and price.
Commercial paper: short-term unsecured promissory notes issued by a company to raise
short-term cash.
Negotiable certificate of deposit: bank-issued time deposit that specifies an interest rate and
maturity date and is negotiable, (i.e., can be sold by the holder to another party).
Banker’s acceptance: time draft payable to a seller of goods, with payment guaranteed by a
bank.

Capital Markets
Capital markets are markets that trade equity (stocks) and debt (bonds) instruments with
maturities of more than one year. The major suppliers of capital market securities (or users of
funds) are corporations and governments. Households are the major suppliers of funds for these
securities. Given their longer maturity, these instruments experience wider price fluctuations
in the secondary markets in which they trade than do money market instruments. For example,
all else constant, long term maturity debt instruments experience wider price fluctuations for a
given change in interest rates than short-term maturity debt instruments.
Capital market instruments include:
Corporate stock: the fundamental ownership claim in a public corporation.

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Mortgages: loans to individuals or businesses to purchase a home, land, or other real property.
Corporate bonds: long-term bonds issued by corporations.
Treasury bonds: long-term bonds issued by the government (US) Treasury.
State and local government bonds: long-term bonds issued by state and local governments.
Bank and consumer loans: loans to commercial banks and individuals.

Derivative Security Markets

Derivative security markets are the markets in which derivative securities trade. A derivative
security is a financial security (such as a futures contract, option contract, swap contract, or
mortgage-backed security) whose payoff is linked to another, previously issued
security such as a security traded in the capital or foreign exchange markets. Derivative
securities generally involve an agreement between two parties to exchange a standard
quantity of an asset or cash flow at a predetermined price and at a specified date in the
future. In other words, a derivative security is an agreement between two parties to exchange a
standard quantity of an asset at a predetermined price on a specified date in the future. A the
value of the underlying security to be exchanged changes, the value of the derivative security
changes.
Financial Market Regulation
Financial instruments are subject to regulations imposed by regulatory agencies such as
the Securities and Exchange Commission (SEC). SEC is the main regulator of securities
markets since the passage of the Securities Act of 1934 as well as the exchanges (if any)
on which the instruments are traded.

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