Module Foundation of Banking - Chapter 3

FOUNDATION OF BANKING

MD NAZRI MD NOR
NORZIHAN BINTI MOHAMAD

RATNA HAFIZA REDZUAN

POLITEKNIK UNGKU OMAR

CHAPTER 3

3.0 COMMERCIAL BANKS

3.1 Identify the roles and responsibilities of commercial banks
3.2 Describe the banking services provided by commercial banks

3.2.1 Describe types of deposits
3.2.2 Describe types of money remittances

a. Demand draft
b. Telegraphic transfer
c. Mail transfer
d. Standing instructions
3.2.3 Describe types of advance and loans
a. Overdraft
b. Fixed and term loans
3.2.4 Describe status of the following
a. Credit card
b. Banker’s guarantee
c. Trust receipts
d. Travellers cheques
3.2.5 Describe other services
a. Share trading
b. Insurance
c. Unit trust
3.3 Explain e-marketing for banking
3.3.1 Define e-marketing
3.3.2 Classification of e-marketing for banking services

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INTRODUCTION OF COMMERCIAL BANK

The commercial banks have always played a crucial role in the banking system. They are the
largest and most significant providers of funds in the system. Under the terms of the license
recommended by Bank Negara Malaysia, and granted by the minister, they enjoy the widest
scope of banking activities and businesses.

DEFINITION OF COMMERCIAL BANK

Commercial bank is a banking institution that provides retail banking services, trade financing
facilities, treasury services, payment services and custodial services. The Financial Services Act
(FSA 2013) defines commercial banks’ business to include receiving deposits on current
accounts, deposit accounts, savings accounts or other similar accounts and pays or collects
cheques drawn by or paid in by customers, as well as dealing in the provision of finance and such
other business as BNM with the approval of the Minister may prescribe.

The provision of finance under FSA includes:

a) The lending of money
b) Leasing business
c) Factoring business
d) The purchase of bills of exchange, promissory notes, certificates of deposits, debentures

or other negotiable instruments
e) The acceptance or guarantee of any liability, obligation or duty of any person

Below are the lists of commercial banks that available in Malaysia:

No Name of Bank n ship
L : Locally-owned
1 A i B k Ber F : Foreign-owned
2 Alli ce B k M l y i Ber
3 AmB k M Ber L
4 BNP P ri M l y i Ber L
5 B gk k B k Ber
6 B k Americ M l y i Ber L
7 B k i M l y i Ber
8 IMB B k Ber F
9 i tr cti B k M l y i Ber
10 iti k Ber F
11 e t c e B k M l y i Ber
F

F

L

F

F
F

12 B B k M l y i Ber 46

13 g e g B k Ber F
L
14 I i I ter ti l B k M l y i Ber F
F
15 I tri l mmerci l B k i M l y i Ber F
F
16 J P M rg e B k Ber L
F
17 MU G B k M l y i Ber F
F
18 M l y B ki g Ber L
L
19 Mi B k M l y i Ber F
F
20 N ti l B k A i M l y i Ber F
F
21 B B k M l y i Ber

22 P lic B k Ber

23 R B B k Ber

24 t r rtere B k M l y i Ber

25 mit m Mit i B ki g r r ti M l y i Ber

26 e B k N v c ti Ber

27 U ite ver e B k M l y i B

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ROLES AND RESPONSIBILITIES OF COMMERCIAL BANK

The general role of commercial banks is to provide financial services to general public, business
and companies, ensuring economic and social stability and sustainable growth of the economy.

The roles and responsibilities of commercial bank are:

 To actively promote and inculcate the saving habits, especially among younger
generation to growth of the economy.

 Should make their interest rate reasonable enough for customer.
 Banks should educate customer on services and facilities by giving talks and publishing

pamplets and brochure, that clarifying on the procedure and advantages of the various
types of services and facilities available.
 As the financial intermediaries between depositors and borrowers, banks have to ensure
that such funds lent out for productive and economically activities.

Commercial banks play important functions as financial intermediaries. The functions and
business of commercial banks in Malaysia are:

1) Providing facilities for savings through current, savings and fixed deposit accounts and
other financial instruments

2) Providing facilities to effect payments on behalf of its customers
3) Providing loans and credit facilities, both to individual borrowers and corporations
4) Financing the government through the purchase of government securities and treasury

bills
5) Providing a wide variety of other banking services such as remittances, facilitating foreign

exchange transactions and the financing of both domestic and international trade

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BANKING SERVICES OFFERED BY COMMERCIAL BANK

DEPOSITS ACCOUNT

Deposits are the main source of funds for commercial banks. It is bank’s responsibilities to
attract public to deposit their money into the banks. There are several types of deposits
accounts. The main types of deposits are current account, savings account and fixed deposit
account.

 Current account
Current account is an account into which a customer can deposit money and effect
payments by the drawing of cheques. Customer can make arrangement with his bank to
allow him to overdraw his current account. This facility is called as overdraft facility.

Types of current account that available in Malaysia are:
1) Individual account
2) Joint account
3) Sole proprietors account
4) Partnership account
5) Companies account
6) Trustee account

 Savings account
A savings account is the most basic type of account at a bank. It allows you to deposit
money, keep the funds safe, and withdraw funds as needed. Savings accounts typically
pay interest on your deposits, which helps you grow your money. However, the rates
offered by the banks are relatively low.

An account holder will be given a
passbook and an ATM card. However,
nowadays the bank will not provide
passbook. Customers can view their
banking transaction via online banking
or ask for a statement from the bank.

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Types of current account that available in Malaysia are:
1) Individual accounts
2) Joint accounts
3) Associations, societies and clubs accounts

 Fixed account deposit
Fixed deposit, or commonly referred to as “FD” in Malaysia, is a type of bank savings or
investment account that promises the investor a fixed rate of interest. In return, the
investor agrees not to withdraw or access his / her funds for a fixed period of time.

Fixed deposit is the form of investment or deposit account where certain sum money is

placed with a bank for a fixed period of time to earn interest. The rates for fixed deposits

for periods exceeding 12 months are negotiable. Banks are not required to display,

publish or announce the interest rates on deposits for more than 12

months.

As compared to a savings
account, generally the
interest rate payable
on a fixed deposit
account is higher.
Some of the
examples of fixed
deposits are Affin

Bank Fixed Deposit,
Public Bank PB Golden
50 PLUS FD Account,
AmBank Conventional Fixed
Deposit, BSN Term Deposit,
Maybank Fixed Deposit, RHB
Ordinary Fixed Deposit and many more fixed deposit that available in the market.

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MONEY REMITTANCES

A remittance is the funds an expatriate sends to his or her country of origin via wire, mail, or
online transfer. These peer-to-peer transfers of funds across borders are economically significant
for many of the countries that receive them.

 Demand draft

A Demand Draft or bank draft is a cheque drawn by a bank on its Head Office, on a

branch or on another bank for payment outside the local area, either domestically or

abroad. A

demand draft

is a method

used by an

individual for

making a

transfer

payment from

one bank

account to

another.

 Telegraphic transfer
If a person needs to transfer funds to a beneficiary who is located in another town in the
country or overseas urgently, he can instruct the bank to remit the funds by telegraphic
transfer. Telegraphic Transfer is the fastest mode of money transfer and is used for
payments, in or out of Malaysia. It transfers the funds by telegraph, telex, cable, or
SWIFT from a bank to its branch
or another
bank
authorizing
the payment
of funds to a
specified
account.

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 Mail transfer
A mail transfer is similar to Telegraphic Transfer. However, instead of transmitting the
message electronically through telex, fax or SWIFT, the message is sent through the mail.
Nowadays, this mode of transfers is
seldom used.

Mail is a method of sending money
from one place to another place by using

the letter (mail). The mail transfer (MT)
is possible only when the sender
(remitter) and the receiver
(remittee) both are having bank
accounts in the same bank, but at

different branches. Generally, no
charges are charged by bank for mail

transfer. In this the remitter has to
inform his bank to transfer a certain
amount from his account to another person's account in other branch of the same bank.
The details of the remittee (receiver) such as his name, account number, the branch
where he has account, etc. must be provided to the
bank.

 Standing instructions
A standing instruction is an instruction by account
holder ("the payer") gives to his or her bank to pay a set
amount at regular intervals to another's ("the payee's")
account. The instruction is sometimes known as a
banker's order.
Standing instructions is a way of making an automatic
payment of a fixed amount to a loan, bill, or credit card at
the same time every week or month. It can be made

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from your savings or checking account and is most commonly used to make payments to a
mortgage, car loan, insurance premium, or to pay bills. But, this service is not suitable for a

variable payment such as utility bills because the amount to be paid is not fixed.

ADVANCES AND LOANS
Money is an essential element for any business, because it fulfills the short term and long term
requirement of funds. It is not possible for the owner to bring all the money himself, so he/she
take recourse to loans and advances. Loans refer to a debt provided by a financial institution for
a particular period while Advances are the funds provided by the banks to the business to fulfill
working capital requirement which are to be payable within one year.

 Overdraft
Overdraft is one of the examples of advance provided by the bank. A bank overdraft is a
line of credit that covers your
transactions if your bank account
balance drops below zero. This is
an advance or facility granted
under a current account whereby
the customer is authorized to
draw on the account up to an
approved limit. Interest is
charged only on the utilized
portion of overdraft limit.

 Fixed and term loans
A term loan is a loan from a bank for a specific amount that has a specified repayment
schedule and a fixed or floating interest rate. For example, many banks have term-loan
programs that can offer small
businesses the cash they need to
operate from month to month.
Often, a small business uses the
cash from a term loan to purchase
fixed assets such as equipment for
its production process.
With a term loan, you must repay the loan either by instalments over the loan period, or
in full at the end of the loan period, depending on the terms agreed with your lender.

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OTHER BANKING FACILITIES

 Credit card
A credit card is a card
issued by a financial
company to a user that
enables the cardholder to
borrow funds to pay for
goods and services on the
condition that the
cardholder will pay back
the original amount plus
agreed-upon additional
charges.

The credit company or bank also grants a line of credit to the cardholder from which the
cardholder can borrow money in the form as a cash advance. A credit card’s borrowing
limits are usually pre-set according to the individual's credit rating.

A credit card holder can make minimum amount of payment each month on what he
owes if he chooses not to make full payment. A late payment charges is also a cost to a
card holder if he pays after the due date stated in the bill.

 Banker’s guarantee
A bank guarantee is a guarantee from a lending institution ensuring the liabilities of a
debtor will be met. In other words, if
the debtor fails to settle a debt, the
bank covers it. A bank guarantee
enables the customer, or debtor, to
acquire goods, buy equipment or draw
down loans, and thereby expand
business activity.

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 Trust receipts
A trust receipt (TR) is a notice of the release of merchandise to a buyer from a bank, with
the bank retaining the ownership title of the released assets. In an arrangement involving
a trust receipt, the bank remains the owner of the merchandise, but the buyer is allowed
to hold the merchandise in trust for the bank, for manufacturing or sales purposes.

TR is a short term trade financing facility offered to customers to finance the
purchase/import of
goods. TR is signed by
the customer
(borrower) on the
strength of which the
Bank releases shipping
documents to the customer, who will hold and sell the goods as a trustee for the Bank. It
is to be repaid with interest by the customer on the maturity date, or when the goods
have been sold, (whichever is earlier).

 Travellers cheques
Travellers cheque are issues for the convenience of travellers. They are issued in various
denominations and currencies. They are drawn on the bank’s head office and counter
signed by the customer to whom they are issued at the time of issue. This is an
alternative way to carry money abroad for leisure or business. It is issued in various
currencies. It is also easy, convenient and safe to carry around the world.

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OTHER BANKING SERVICES

 Share trading
Shares trading are the buying and selling of company stock – or derivative products based
on company stock – in the hope of making
a profit. Shares represent a portion of the
ownership of a public company, and make
up its worth. The trading of shares is one of
the most popular and best-known markets
in investing, alongside forex and
commodities.
Share trading is an online trading service which allows you to trade and manage your share
portfolio in real-time from anywhere around the world. It provides instant access to Bursa
Malaysia Securities Berhad and Bursa Malaysia Derivatives Berhad live prices. It also
provides access to major foreign stock exchanges across the globe.

 Insurance

Insurance is a means of protection from
financial loss. It is a form of risk management,
primarily used to hedge against the risk of a
contingent or uncertain loss. Insurance
companies accept premiums that have been
determined under the contract.

 Unit trust
A Unit Trust Fund consists of a pool of funds collected
from a group of investors with similar objectives. This
collective investment fund is managed full time by
professional fund managers. An investment portfolio
typically includes equities, bonds and assets.

A unit trust is a three-way relationship among the manager, the trustee and the unit
holder. The manager manages and operates the unit trust fund, the trustee holds all the
assets and the unit holder is the investor.

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EXPLAIN E-MARKETING FOR BANKING
a) Define e-marketing
E-marketing is referred to those strategies and techniques which utilized online ways to reach target
customers. There are millions of internet users that daily access different websites using a variety of tools
like computers, laptops, tablet and smart or android phone devices, and the number of internet users are
increasing very rapidly. E-marketing also known as online or internet advertising which uses the internet
technology to promote online message to customer. E-marketing examples are email or social media
advertising, web banners and mobile advertising.

b) Classification of e-marketing for banking services
Marketing of bank products refers the various ways in which a bank can help a customer, such as
operating accounts, making transfers, paying standing orders and selling foreign currency. Banking is the
business activity of banks and similar institutions. Promotion and marketing in general is a big part of any
bank or financial institution. They rely on their promotional material in order to sustain their reputation.
Electronic banking can be defined as the use of electronic delivery channels for banking products and
services. The most important electronic delivery channels are the Internet, wireless communication
networks, automatic teller machines (ATMs), and telephone banking. Internet banking is a subset of e-
banking that is primarily carried out by means of the Internet. E-banking includes the systems that enable
financial institution customers, individuals or businesses, to access accounts, transact business, or obtain
information on financial products and services through a public or private network, including the Internet.

E-banking provides many advantages for banks and customer's. It provides banking throughout the year
24/7 days from any place have internet access. The usage of e banking by the enterprises came into
existence in mid 90’s. E-banking came into existence in greater numbers because of low operating costs.
First it is in the form of ATM’s and phone transactions. Recently it transformed to internet a new channel
between customers and banks which benefits both.

The main aim of e- banking services is to provide the customers a much faster services with low cost.
From the last twenty years, banking sector has chosen a new method of banking based on the progress
of information technology. In addition to these customers, transaction and communication abilities are
fastened based on information technology. The progress of electronic banking started with use of
automatic teller machines (ATM) and afterwards it developed to online banking. Anyway online banking
continues to be the best for financial transactions.

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Importance of E-Banking:
E banking provides many advantages for banks and customers. E-banking has made life much easier and
banking much faster for both customers and banks.

Main advantages are as follows.
 It saves time spent in banks
 It provides ways for international banking.
 It provides banking throughout the year 24/7 days from any place have internet access.
 It provides well-organized cash management for internet optimization
 It provides convenience in terms of capital, labour, time all the resources needed to make a
transaction.
 Taking advantage of integrated banking services, banks may compete in new markets, can get
new customers and grow their market share.
 It provides some security and privacy to customers, by using state-of-the-art encryption and
security technologies.

Electronic Funds Transfer (EFT) means computer systems are used to perform financial transactions
electronically. The EFT is used for electronic payments and customer initiated transactions where the
cardholder pays using credit or debit card. The transaction types are withdrawal, deposit, inter account
transfer, inquiry, administrative transactions that covers non-financial transactions including PIN change.
Electronic Fund Transfer transactions needs authorisation and a means to match the card and card
holder. EFT transactions require the cardholder’s PIN to send online in encrypted form for validation by
the issuer of the card. Other information may include the card holders’ address or the CVV (Card
Verification Value) security value printed on the card.

Electronic funds transfer transactions are activated during e-banking procedures. The different methods
of e-banking are:

 “Online banking
 Short message service banking
 Telephone banking
 Mobile banking

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Online banking
Online banking also called as internet banking, allows the customers to use all the banking services from
a computer which has internet access. The customer can perform financial transactions on a secure
website operated by the bank. Online banking offers features such as bank statements, loan applications,
funds transfer, e-bill payments and account aggregation allows customers to monitor all their accounts
in one place.

Telephone Banking
Telephone banking is a service provided by the banks which provides customers to perform transactions
on phone. All the telephone banking systems uses automated answering system with keypad response
or voice recognition capability. To prove their identity customers must provide a numeric or verbal
password or answering the questions asked by the call centre representative. In telephone banking
customer can’t withdraws and deposits cash but can do all the other transactions. Mostly there will be a
customer care representative to which the customers speak, although this feature is not guaranteed. The
customer care representatives are trained to do what are available at the branch like cheque book orders,
address change, debit card replacements.

SMS Banking
SMS banking is a service permitting banks to do selected banking services from the users mobile by the
sms messaging. SMS banking services have push and pull messages. Push messages are sent by the banks
for alerting customer about new offers, marketing messages, alerts to events happening in costumers
account such as large amount of withdrawals from ATM or credit card etc. Pull messages are those that
are sent by the customer to bank for having some information or to perform a transaction in their
account. Examples include account balance enquiry, requesting for current exchange rates and for new
offers that are launched. The customer has a choice to select the list of services he need to be informed.
This can be done by integrating to internet banking or speaking to the customer care representative of
the bank call centre.

Mobile Banking
Mobile banking can be described as the facility provided by the banks to its clients, in which they can
access their bank accounts and undertake monetary transactions remotely using mobile
telecommunication devices like smartphones, tablet or cellular device. It can take place through short
message service (SMS), mobile web or application. The customer can avail this service anytime and
anywhere.

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CHAPTER 3 EXERCISES
1. Identify THREE (3) roles and responsibilities of commercial banks. 106

(3 marks)

2. Elaborate TWO (2) types banking services provided by commercial banks. (6 marks)

3. Identify THREE (3) functions and business of commercial banks in Malaysia.
(3 marks)

EXERCISES

4. There are 3 types of deposit under commercial bank services. Explain these types 107

of deposits. (12 marks)

5. Explain the roles and responsibilities of commercial bank. (10 marks)