27-Jan-23

COMMERCE – GRADE 12 (Notes)

Mbewe D.
Grandview Academy 2023

BANKING
A bank is a financial institution which collects surplus funds
from the general public, safeguards them and lends them
out at an interest to people who are in immediate need for
them so that they can eventually be returned to their true
owners when they need them. Those that borrow the money
must be able to provide security for those funds.
Types of Banks
The types of banks include the following:
 Central Bank
 Commercial Banks
 Building Societies
 Credit unions

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 Microfinance institutions
 Foreign Exchange bureaus (Bureau de Change)
 Pension Funds institutions
The above mentioned are banking institutions. Non-Banking
Financial institutions will be looked at later in this topic.
A. COMMERCIAL BANKS
These are the most common type of bank and the ones with
which most people are familiar. Commercial banks accept
deposits from customers, make loans, and provide a wide
range of other financial services, such as checking and
savings accounts, debit and credit cards, and online
banking. Examples of commercial banks include ZANACO,
ABSA, FNB, Atlas Mara, Stanbic Bank etc.

Customers of Commercial banks include, individuals, government

and non-governmental organisations, churches, schools,
universities etc.
Main Services of Commercial Banks
The main services offered by commercial banks include:
 They safeguard money collected from those who have surplus
funds in vaults, safe deposits such as current, savings and
deposit accounts.
 They finance traders by means of loans and overdrafts
 They give advice to customers on investments
 They provide safe and convenient means of making and
receiving payments through various accounts.
 They give trading information to customers on local and
international markets.
 They provide customers with night safe facilities.

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 They provide foreign exchange to members of the public

 They may act a executors and trustees for customers
 They issue customers with credit and debit cards
 They receive payments on behalf of customers
 They provide customers with safe custody of wills and other
important documents.
 They provide customers with Electronic Funds Transfer at
the Point of Sale (EFT POS)
 They provide customers with Automated Teller Machines
(ATMs) which are conveniently located at strategic places
and available 24/7 to enable customers to access their
bank account at any time and in a convenient place, eg.
Shopping malls, filling stations, etc.

Points to Note when doing ATM Transactions

 Customers must not allow anyone near them during ATM
transactions
 Customers must not allow any random person to touch their
ATM card or insert the card on their behalf.
 Bank customers must not show their ATM Card PIN to any other
person
 Customers must only call bank staff to assist them if need be

Further Explanation on Banks Making & Receiving Payments.

Commercial Banks can make or receive payments on behalf of
customers through the following:

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a) Standing Order
This is an instruction to the bank by its customer to pay fixed sums
of money at regular intervals to a specified person or
organization. It is convenient when the amounts of money are
fixed and are paid repeatedly over a period of time. The bank
will continue to pay until the customer gives the instruction to
stop the payment. Therefore, a Standing Oder is convenient
when:
• Paying Hire purchase installments
• Paying for insurance premiums
• Paying for mortgages, etc.
The main advantages are:
 The customer doesn’t need to remember the dates on which to
make payments
 It is a safer and cheaper payment method than sending cash or
cheque by post.

 Payments are made promptly, thus enabling the person

receiving payment to plan well financially
 Time is saved on sending reminders to debtors to pay up.
 No time is wasted on counting money during depositing or
withdrawing cash as it is electronically transferred.

b) Credit Transfer
This is used when making a single payment or multiple once off
payments to people with different accounts either in the same
bank or at different banks or branches.
Multiple payment transfers are done when one is paying for
things such as salaries where it may be inconvenient to write
an individual cheque for every account receiving payment.

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How Payment Is Made By Credit Transfer

 A person making payment prepares a list of people to be
paid with their bank addresses including amounts each
individual is to be paid indicated against their names.
 The person then prepares a cheque or enough cash to
meet the payment, once the cheque or cash is deposited
into the bank, the bank would transfer respective amounts
to the credit side of each person’s bank account.
 The person receiving payment must have an account but
the person paying may not have one.

Advantages of credit transfer to bank customer making

payment
 Funds are transferred directly into the bank accounts of
people to be paid using only one cheque.
 Paper or clerical work is greatly minimised.
 It saves time when paying several people.
 It is safer and more secure method of making payments.
 No money is wanted for postage of cash or cheques.

Advantages of credit transfer to customer receiving payment

 The customer is able to receive payment promptly.
 Time is not wasted in counting money.

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Direct Debiting
DIRECT DEBITING: - Is used for making payments that vary in amounts
such as payments for subscriptions to professional bodies and clubs.
How Direct Debiting Operates
 In agreement with the buyer the seller is authorized to ask for
payment on dates he or she wants from the buyer’s bank.
 The seller takes the initiative to inform the buyer’s bank of the
amount owed which is then transferred to the seller’s bank account.
 Amounts may vary and paid to the seller on varying dates fixed by
the seller.
Advantages of direct debit to the bank customer making payment:
 Enables payments that vary in amounts to be paid from time to
time.
 Reduces clerical work as there is no need to change or alter records
whenever there is an increase or decrease in amount s to be paid.

 The customer does not need to remember the dates on which to

make payments.
 Payments are made promptly.
 Cheques do not have to be written.
Advantages of direct debit to the bank customer receiving
payment
 Payments are received on dates wanted by the creditor.
 Direct debit avoids outstanding debts and bad debts.
 Payments are received promptly.
 Direct debit is safer and more secure method of payment.
 Time is not wasted in counting cash notes or in depositing money
at bank.
 The creditor can ask for payment from the debtor’s bank at any
time payment is due.

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Banker’s draft
 A bank draft is an equivalent of the banker’s own cheque.
 It is drawn by the bank on itself.
 It may be used as a means of payment when the person
offering payment is not known personally to his/her
creditors, particularly when large sums of money are
involved.
 It can be used when the bank’s guarantee of payment is
needed.

TYPES OF ACCOUNTS OFFERED BY COMMERCIAL BANKS

Current Account
 A current account is used by individuals and organizations that
wish to safe keep money but would also like to withdraw some of
the money at any time.
 It uses cheques for withdrawing cash from the bank and also
making payment hence calling it a cheque account.
 There is no minimum amount required to maintain a current
account.
 It is the only bank account that allows overdraft.
 No interest is paid on deposits because money is withdrawn at
any time and therefore the bank does not make use of the
money. The customer pays ledger fee instead.
 Cheque books are issued to current account holders.
 Bank statements are periodically issued to customers.

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When a customer overdraws his/her account the overdraft may be

indicated by the letters DR or the overdraft figure printed in red
hence the saying “the customer is in red “.
Opening a Current Account
 An application form for opening a current account is first
completed.
 The bank might be interested in knowing whether the prospective
customer is honest or not and therefore would ask the applicant
for referees.
 The bank would also ask the prospective customer to sign a
specimen signature card. This helps the bank to recognize
signatures of its customers and thus avoid forgery on cheques.
 Once the bank satisfied with the details given by the applicant, it
would allow for the current account to be opened. A cheque
book would be issued to the new customer.

Advantages of Holding a Current Account to a Bank Customer

 The customer is able to make payment s by cheque and keeps
used cheques as receipts of payments.
 Money can be withdrawn at any time.
 A customer is allowed overdrafts when faced with temporary
financial problems.
 The customer is able to receive financial advice on business
investment.
 The customer is able to get loans.
 No minimum balance required to maintain the account.
 The customer can obtain foreign exchange.
 Safe keeps customers money.

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Savings Account
 A savings account is used by people who would wish to
save fairly small amounts of money.
 A minimum balance is required to maintain the account.
 Interest is paid on savings
Advantages of Holding a Savings Account
 Interest is paid on savings account deposits.
 Safe keeps the customers money.
 Able to obtain foreign exchange
 Able to receive financial advice on investments.

Fixed Deposit account

 A deposit account is used by bank customers who wish to safe
keep large sums of money not needed for immediate use.
 Money can only be withdrawn from a deposit account after an
agreed fixed period. Early withdraws are not allowed as the
customer is charged interest if money is withdrawn before the
agreed period.
 Capital and interest is repaid in full on maturity.
 There is a minimum investment capital required for one to open
a fixed deposit account.
 Overdrafts facilities are not allowed on fixed deposit accounts.

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Advantages of Holding a Fixed Deposit Account

 A higher rate of interest is paid on deposits.
 Safe keeps customers money.
 Can receive financial advice on investment.
 No fees charged for operating a deposit account.
 Capital and interest is repaid in full on maturity.

Save As You Earn

 A Save as You Earn (SAYE) plan enables eligible employees of a
company to be granted options to acquire shares in the
company. Under this plan, an employee enters into a saving
contract with the company which may take 3 to 5 years.
 A SAYE contract form is provided by the commercial bank or
building society selected by the company. At the maturity of
the savings contract, the employee will have the option of
using the savings to acquire shares in the company.
 However, if the market value of shares has fallen, the employee
will opt to be repaid his/her money plus the tax free bonus
accrued.

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Investment Account
This is a type of an account held at a financial institution for the
purpose of a long term investment for capital preservation and
growth for fixed income. Investment accounts are those which
earn higher rate of return than normal bank accounts.
Building Societies
This financial institution provides loans for the purchase or building
of houses. It also offers savings and fixed deposit accounts similar
to those offered by commercial banks. Its main services are:
 Provide the public with access to finance (mortgage lending)
to build or buy houses.
 Offers savings and fixed deposit accounts to the general public.

Types Of Documents Used In Banking

Bank Statement
 A bank statement is a record of all the transactions that have gone
through an account. It is issued to the customer periodically e.g.
monthly or on request so that he/she can check it against his/her
own record.
 Customers having ATM cards can also obtain mini-statements from
ATM.
 Pay-in-slip/Deposit slip
 This is a form available in banks and is used to deposit money into a
bank account.
 Each deposit slip has a duplicate which is returned to the depositor
duly sealed and signed by the bank official.
 It gives details regarding date, account number, amount deposited
and name of the account holder.

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Withdrawal slip

 This document is a document that is used to withdraw

money from a savings/deposit account. The account older
has to indicate the account name, account number,
branch of bank, date, amount to be withdrawn in both
figures and words.
 The documents should be duly signed by the account
holder.

Cheque
 A cheque is a written order by a current accountholder to a bank to pay
a specified amount of money to the person named on the cheque.
 There are three parties to a cheque, namely Payee, Drawee and
Drawer.
 There are two types of cheques namely “order cheque and bearer
cheque”
 A cheque can either be open cheque or crossed cheque.
Open Cheque
An open cheque is a cheque that is not crossed on the left corner and
payable at the counter of the drawee [bank] on presentation of the
cheque.
Crossed cheque
This is a cheque which has two parallel lines drawn across the face of the
cheque.

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Example of a Cheque

00-00-78
2135052
KAFUE BRANCH
Date: /_____/_________

Pay Or Order

The Sum of
K
For and on behalf of
A/C No.: 118749681574271 Account Holder Name

(Zambia National Commercial Bank PLC)

Authorised Signatory

00 0 6 0 0065 4679546183 66 91

Types of crossing
General crossing
A generally crossed cheque is a cheque which:
 Has two parallel lines drawn across its face with or without
words in between the crossings.
 Does not have a name of the bank between the
crossings.
 Can be deposited at any bank where the payee happens
to have a bank account.
 Can be endorsed and passed on to another person in
settlement of debts.

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Meanings
Account payee Only
Adding a crossing to a cheque increases its security in that it cannot
be cashed at a bank counter but must be paid into an account in
exactly the same name as that which appears on the ‘payee’ line
of the cheque (i.e. the person who has received the cheque, who is
legally the “payee” and “holder” of the cheque).
Not negotiable
The words 'not negotiable' can be added to a crossing.
The effect of such a crossing is that it removes the most important
characteristic of a negotiable instrument: the transferee of such a
crossed cheque cannot get a better title than that of the transferor
(cannot become a holder in due course) and cannot convey a
better title to his own transferee, but the instrument remains
transferable.

Special crossings
 Has two parallel lines drawn across its face with the name of the
bank written in between the crossings.
 Must be paid into a bank account at a branch of the bank
named between the crossings.
 Cannot be deposited at any bank where the payee happens to
have a bank account but only at a bank named between the
crossings.
 Cannot be endorsed and passed on to another person in
settlement of debts.

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Specific bank
A crossing may have the name of a specific banker added
between the lines. A cheque with such a crossing can only be
paid into an account at that bank.
The beneficiary bank can add an additional crossing to allow
another bank, who is acting as their agent in collecting payment
on cheques, to be paid the cheque on their behalf.
Elements of a valid cheque
A valid cheque must have;
 a date,
 must not be stale,
 should have the drawer’s signature,
 the amount in words and figures must be the same,
 it should have the name of the payee.

Dishonoured Cheque
It is a cheque that has been refused payment by the
bank. When it is refused payment it is returned to the
payee with the letters (R/D meaning referee to drawer)
written on it.
It is the duty of the payee to find out from the drawer the
reasons for dishonouring the cheque.
Reasons for dishonouring a cheque
A cheque may be dishonoured when:
 There are insufficient funds in the drawers account to
honour the cheque.
 The drawer’s signature differs from the specimen
signature.

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 The bank learns of the death of the account holder.

 The drawer does not sign the alteration on the cheque.
 The cheque is stale i.e. it is more than six months old.
 The cheque is stopped by the drawer. A cheque is
stopped when the drawer instructs the bank to
dishonour the cheque. This may happen when the
cheque is stolen or lost.
 The cheque is post-dated. A post-dated cheque is a
cheque that is dated ahead of the date it is being
written. For example a cheque written on 24th
September 2017 but dated 2nd January 2018 is a post-
dated cheque.

The Central Bank (Bank of Zambia)

The Central Bank is the bank that controls all financial activities in
the country
Functions of the Central Bank
 Supervising the financial institutions
 Printing and minting of money
 Government banker
 Lender of the last resort.
 Bankers bank
 Servicing the national debt.
 Protection against counterfeit money
 To ensure appropriate monetary policy formulation and
implementation

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 To act as the fiscal agent of the Government

 To license, regulate and supervise banks and financial service
institutions registered under the Act to ensure a safe and sound
financial system
 To manage the banking, currency and payment systems
operations of the Bank of Zambia to ensure the provision of efficient
and effective service to commercial banks, Government and other
users.
THE ELECTRONIC CHEQUE CLEARING SYSTEM
 The clearing of cheque is a process by which various banks come
together and settle the amounts they owe each other as a result of
their customer’s business transactions.
 Each bank collects all cheques presented by its customers and
sends the images to its clearing department usually at the head
office.

 The cheques are sorted and put according to banks they

belong. The values of all the cheques from each bank are
totalled.
 Any indebtedness would be settled by the central bank by
moving the difference from one bank’s account to the other.
This is possible since all commercial banks maintain their
accounts with the central bank as a rule.
 Cheque images are then sent back to the clearing
department at the headquarters of a bank on which it was
drawn. The images are then sent back to the drawer’s branch.
 At the drawer’s branch the cheque is checked for all details
once they are correct and there is enough balance in the
drawers account, it is debited with the amount on the cheque.
The cheque is then cleared.

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