TOPIC 14: FINANCIAL INSTITUTION ~ ECONOMICS FORM 6

TOPIC 14: FINANCIAL INSTITUTION ~ ECONOMICS FORM 6

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These are institution which stands between surplus spending unit and deficit spending units.

These are institution which acts as a goal between transferring funds from those who have surplus to those who are spending.

THEY PLAY THE FOLLOWING ROLES

They transfer funds from those with surplus to those who are in need

They facilitate the pooling of risks.

They provide the public with more liquid and less risks on assets

They help to increase efficiency by applying special technology and other assistance in investment

They increase the liquidity of financial institution by giving loans.

FINANCIAL INTERMEDIARIES ARE CATEGORIZED INTO TWO

Banks

These are financial institution which provide short term loan, accept and maintain deposit, undertake less risk investment, create credit and their aimed at making profit.

Non banking financial institution (NBFIs)

These are institutions that carry out financial activities by their resources and are not directly from the savers as debt instead they mobilize the public saving for providing financial services.

Are institutions that provide banking services without meeting definition of bank for example development bank, life insurance Company, PPF, NSSF, Building society, post offices, saving banks etc.

DIFFERENCE BETWEEN BANKS AND NON BANKS.

Banks	Non Banks
i)They operate different account for their customer example saving, fixed and current account ii)Bank use saving to advance loans iii)They make profit from loan inform of interest iv)Banks are aimed at making profit	-They do not operate account for their customers – They do not use saving to advance loan -They depend on revenue obtained from investment. – They are not aimed at profit making.

Banks can be categorized into

Commercial Banks

Central Banks

Saving Banks

Specialized Banks

Merchant Banks

COMMERCIAL BANK

Is a profit making financial institution, it obtains its profit from charging high interest on loan, charging a commission on service rendered and investing in short term and medium investment.

FUNCTION OF COMMERCIAL BANK

Accepting and keeping deposits

Maintaining different accounts, these are saving current and fixed deposit a/c

They keep valuable articles and documents in self custody

They give loans and overdraft to customers.

They exchange currency

They facilitate quick and payment through cheque, standing orders

Banks manager deceased customer property and distribute it according to the will

They give advice to customers on investment

They assist the government in receiving money from tax payer

They create credit

They help central bank to implement monetary policy

They acts as referees to credit worth customers

NATIONAL BANK OF COMMERCE (NBC)

It was established in 1967 after the Arusha Declaration following the nationalization of private foreign bank. NB was aimed at solving the following problems:

The problem of low finance to domestic sector

There was too much domestic credit to foreigners

There was low savings mobilization to citizens

There was high level of dependency on foreign managerial skills

There was lack of support to the government during deficit budget

FUNCTIONS OF NBC BY THEN.

To provide loans to investors

To mobilize savings

To transfer funds/money from one area to another

To provide technical advice to the investors

Custodian of valuable commodities

It provides other commercial bank services.

After privatization in 1997 NBC was divided into two

National bank of commerce limited ( NBC 1997 ltd)

National micro finance bank (NMB)

NBC was to provide services to big businessmen while NMB was to provide services to low income earners and small businessmen

COOPERATIVE AND RURAL DEVELOPMENT BANK (CRDB)

It was established in 1947 for provision of local development loan fund which was to assist food production and for African productivity loan fund in assisting European farmers.

FUNCTIONS OF CRDB OF 1947.

To promote rural development

To monitor projects

To easy the purchase of crops in the rural areas

To provide technical advice to farmers

To provide loans to cooperative unions.

2) SPECIALIZED BANKS

Are banks that deal with specific function or specific sectors.

They include:-

i) T.I.B – Tanzania Investment Bank, the bank was established in 1971 to bring all means of production to the public. It other functions were as follows;

a) To finance large scale agriculture

b) To provide advice on industrial development

ii) T.H.B – Tanzania Housing Bank: The bank was established 1973 in order to receive deposit and provide account services to provide all banking services and provide credit for residential and commercial premises.

CREDIT CREATION

This is a process through which commercial banks use cheque to expand the volume of money lent.

NB: The expanded credit is only in the form of book entry.

Example:-

Assuming the cash ratio/ reserve ratio is 20% and initial deposit is 1000. When people get loan they deposit cheque in their a/c in the same bank. If there are 4 people who are able and willing to borrow money the credit creation process will be follows.

Person	New deposits	Reserve current ratio	New loan
A	1000	200	800
B	800	160	640
C	640	128	512
D	512	102.4	409.6

Total credit is equal

The number of times the money increase is called the credit multiplier

LIMITATION OF CREDIT CREATION

PROBLEM FACING COMMERCIAL BANKS.

3. CENTRAL BANK.

Is a financial institution which controls all other financial institution and implements monetary policies. The central bank of Tanzania (BOT) was established 1965 replacing the existing East Africa currency board. The Bank of Tanzania BOT started issuing currency in 1966.

FUNCTIONS OF B.O.T

1. Banking function, the BOT does the following

2. Development function the central bank stabilize the economic by

3. Domestic monetary management functions

-BOT acts as adviser on all financial institutions

-It is responsible for financing the government in case of deficit budget

-It manages all government debts

4. External monetary management function

Difference between central bank and commercial bank

Commercial bank	Central bank
They aimed at making profit	They aimed at serving the public
They provide safety custody for valuable goods	Does not provide safe custody for valuable goods
They create credit	They do not create credit
They do not control financial institution	They control other financial institution
They accept deposit from public	They accept deposit from government institution and banks
Take care of property of the deceased	They so not take care of the property of deceased
They do not print money	They print and organize printing
They are owed by individuals and government	Owned by the government

Qn. 1. Discuss the objectives of monetary policy

2. What are the problems of implementing monetary policy in LDC’S.

NONE BANKS FINANCIAL INSTITUTIONS.

Non banking institutions perform the following roles

NATIONAL INSURANCE COMPANY (N.I.C)

It was established in 1967 after Arusha declaration which speculates nationalization policies.

The main objectives of NIC where

Qn. Discuss the roles of PPF?

Privatization of financial institutions.

To reduce the government burden

To increase the amount of profit

To eliminate beau racy

To make the institution more efficient in their operation

To increase capital hence expand their institution

To allow the use of advance technology

To enable the consumer to make choice.

To reduce embezzlement of fund.

To reduce political interference brought about the existence of public institutions.

To allow technical assistance in the management from abroad