Banks and their services: WASSCE Commerce

A trader in Makeni who keeps the week's takings under the mattress risks theft and fire, earns nothing on the money and cannot easily pay a supplier in Freetown. A bank solves all three problems: it keeps money safe, pays interest and moves money where it is needed. Banks are the aid to trade that removes the hindrance of finance.

Learning objectives

By the end of this lesson you should be able to:

define a bank and describe the banking system
explain the functions of the central bank
explain the services of commercial banks
describe the types of bank account and how to open one
distinguish a loan from an overdraft and calculate simple interest
describe other financial institutions: community banks, microfinance and mobile money

The banking system

Definition

A bank is a financial institution that accepts deposits from the public, lends money and provides other financial services such as payments and safekeeping.

The banking system: the Bank of Sierra Leone regulates and supervises commercial banks, community banks, development and specialised banks, and microfinance and mobile money providers, which take deposits from and lend to households, businesses and government

Figure 1. The banking system in Sierra Leone. WASSCE Tutor diagram.

Type	Main role
Central bank	Controls the money and banking system (Bank of Sierra Leone)
Commercial banks	Take deposits and lend to the public and businesses
Development banks	Long-term loans for agriculture, industry and infrastructure
Merchant banks	Serve large firms: raising capital, accepting bills, advising on mergers
Mortgage banks	Long-term loans for buying or building houses
Community (rural) banks	Banking services in rural communities
Microfinance institutions	Small loans and savings for small traders and the poor, often in groups
Mobile money providers	Payments, transfers and savings by mobile phone

The central bank

The Bank of Sierra Leone was set up in 1964, when it began to issue the leone.

Functions of the central bank:

Issues currency: the sole issuer of notes and coins.
Banker to the government: keeps government accounts, makes payments and lends to the government.
Bankers' bank: commercial banks keep accounts with it, and it settles cheque clearing between them.
Lender of last resort: lends to commercial banks in difficulty.
Controls credit and money supply (monetary policy) through the policy interest rate, reserve requirements and open market operations (buying and selling government securities).
Regulates and supervises banks and other financial institutions, including mobile money.
Manages foreign reserves and the exchange rate.
Manages the national debt and issues treasury bills.
Advises the government on economic and financial matters.

Services of commercial banks

Accepting deposits into current, savings and fixed deposit accounts.
Lending: loans and overdrafts to customers and businesses.
Means of payment: cheques, bank drafts, transfers, standing orders, cards and mobile banking.
Safekeeping of valuables and documents in strongrooms and safe deposit boxes.
Foreign exchange: buying and selling foreign currency; letters of credit for importers.
Financial advice to customers on investment and business.
Agency services: paying bills, buying shares, acting as executors and trustees.
Discounting bills of exchange.
Status enquiries: references on a customer's creditworthiness (with consent).
Electronic banking: ATMs, POS terminals, internet and mobile banking, SMS alerts.

Examples of commercial banks in Sierra Leone include the Sierra Leone Commercial Bank, Rokel Commercial Bank, Ecobank, UBA and Union Trust Bank.

Types of bank account

	Current account	Savings account	Fixed (time) deposit account
Purpose	Day-to-day business payments	Saving	Saving a sum for a fixed period
Cheque book	Yes	Usually no	No
Interest	Usually none	Paid	Highest rate
Withdrawals	Any time, by cheque, card or transfer	Any time, with limits	Only at the end of the period (or notice and penalty)
Overdraft	Allowed by arrangement	No	No
Charges	Bank charges (commission on turnover)	Few or none	None
Suits	Traders and businesses	Individuals and students	People with spare money to invest

Opening a current account usually requires:

a completed application form
identification (national ID card, passport or voter card)
passport photographs
proof of address
a reference or introducer acceptable to the bank
a specimen signature
an initial deposit
for a company: its certificate of incorporation, memorandum and articles, and a board resolution

Loans and overdrafts

Loan	Overdraft
A fixed sum given at once, credited to a loan account	Permission to withdraw more than is in the current account, up to a limit
Interest on the whole amount borrowed	Interest only on the amount actually overdrawn, day by day
Repaid in instalments over an agreed period (often long or medium term)	Short term; repayable on demand
Used for buying assets: machines, vehicles, buildings	Used for working capital and short-term needs
Usually needs collateral	May need collateral

Worked example

Loan or overdraft? A trader needs up to NLe 20,000 for 3 months to buy stock, but expects to use only NLe 8,000 on average.

\text{simple interest} = \dfrac{P \times R \times T}{100}

\begin{aligned}&\text{simple interest} \\ &= \dfrac{P \times R \times T}{100}\end{aligned}

Loan of NLe 20,000 at 18% a year for 3 months:

I = \dfrac{20000 \times 18 \times 3}{100 \times 12} = \text{NLe } 900

\begin{aligned}I &= \dfrac{20000 \times 18 \times 3}{100 \times 12} \\ &= \text{NLe } 900\end{aligned}

Overdraft limit NLe 20,000 at 24% a year, average NLe 8,000 used for 3 months:

I = \dfrac{8000 \times 24 \times 3}{100 \times 12} = \text{NLe } 480

\begin{aligned}I &= \dfrac{8000 \times 24 \times 3}{100 \times 12} \\ &= \text{NLe } 480\end{aligned}

The overdraft has the higher rate but costs less, because interest is charged only on what is used. For a large purchase that needs the whole sum at once, the loan would be cheaper.

Security (collateral) for loans:

title deeds of land or a house
share certificates
life assurance policies
warehouse warrants
fixed deposits
a guarantor

Other financial institutions

Community banks bring savings and credit to rural towns. They are supported by Apex Bank, which also oversees financial services associations (FSAs).
Microfinance institutions lend small sums, often to groups of market traders who guarantee each other.
Mobile money (for example Orange Money and Afrimoney) lets people send, receive and save money by phone, pay bills and buy airtime. It is regulated by the Bank of Sierra Leone.
Thrift and savings groups (osusu) let members contribute regularly and take the pot in turns.

In Sierra Leone

Many Sierra Leonean traders belong to an osusu group: each member pays an agreed sum every week, and one member collects the whole amount in turn. It works like an interest-free savings and loan scheme based on trust. Banks and microfinance institutions now offer group loans built on the same idea.

Common mistake

The central bank does not do ordinary banking with the public. It does not open accounts for traders or lend to individuals. It is the bank of the government and of the banks.

Key points

Banks accept deposits, lend and make payments; they remove the hindrance of finance.
The central bank (Bank of Sierra Leone) issues currency, is banker to the government and the banks, is lender of last resort, controls credit and supervises banks.
Current accounts suit business payments (cheques, overdrafts); savings and fixed deposit accounts earn interest.
An overdraft charges interest only on the amount used; a loan charges interest on the whole sum.

WASSCE examination focus

WAEC tests this

WASSCE regularly asks for the functions of the central bank and the services of commercial banks, to distinguish current, savings and fixed deposit accounts, and to distinguish a loan from an overdraft. Simple interest calculations may appear. Do not mix up central and commercial bank functions.

Quick check

Give three functions of the central bank.
Which type of account gives the customer a cheque book?
Find the simple interest on NLe 12,000 at 15% a year for 8 months.
Give two differences between a loan and an overdraft.

Answers: 1. Any three: issues currency, banker to the government, bankers' bank, lender of last resort, controls credit, supervises banks, manages foreign reserves, manages national debt, advises government. 2. A current account. 3. $\dfrac{12000 \times 15 \times 8}{100 \times 12} =$ NLe 1,200. 4. Any two: a loan is a fixed sum given at once, an overdraft is permission to overdraw up to a limit; loan interest is on the whole sum, overdraft interest only on the amount used; loans are repaid in instalments, overdrafts are repayable on demand; loans are often medium or long term, overdrafts short term.

Banks and their services