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TOPIC 1: BANKING ENVIRONMENT 1

Study unit 1: Purpose and functions of banks and reasons for regulating them 2
1.1 WHAT IS A BANK? 3
1.2 PURPOSE OF BANKS 3
1.3 FUNCTIONS OF BANKS 5
1.4 REGULATING BANKS 7

Study unit 2: Banking structures 9

2.1 BANKING STRUCTURES 10
2.2 UNIT BANKING STRUCTURE 10
2.3 BRANCH BANKING STRUCTURE 11
2.4 VIRTUAL BANKING STRUCTURE 14

Study unit 3: The competitive environment in which banks operate 17

3.1 THE COMPETITIVE ENVIRONMENT IN WHICH BANKS OPERATE 18
3.2 THE DRIVING FORCES OF COMPETITION IN THE BANKING SECTOR 19

TOPIC 2: BANKING PRODUCTS AND SERVICES 27

Study unit 4: Differentiating between bank products and services 28

4.1 DIFFERENT PRODUCTS AND SERVICES OFFERED BY BANKS 29
4.2 CLASSIFICATION OF BANKING PRODUCTS AND SERVICES 29
4.2.1 Retail banking 30
4.2.1.1 Deposit products 30
4.2.1.2 Credit products 31
4.2.1.3 Investment products 31
4.2.2 Corporate finance 32
4.3 THE MAIN AIM OF BANKS IN OFFERING PRODUCTS AND SERVICES TO CLIENTS 34
4.4 APPROACHES TO AND METHODS OF IDENTIFYING DIFFERENT PRODUCTS AND
SERVICES 35
4.5 PROCEDURES AND CHANNELS FOLLOWED TO SATISFY CLIENTS’ NEEDS 36

TOPIC 3: INVESTMENTS AND DEPOSITS 39

Study unit 5: Savings accounts 40

5.1 SAVINGS ACCOUNTS 41
5.2 FEATURES OF A SAVINGS ACCOUNT 42
5.3 OPENING A SAVINGS ACCOUNT 42

Study unit 6: Call deposit accounts notice deposit accounts, fixed deposit
accounts, unit trusts and stokvels 45
6.1 CALL DEPOSIT ACCOUNTS 46
6.2 NOTICE DEPOSIT ACCOUNTS 47
6.3 FIXED DEPOSIT ACCOUNTS 47
6.4 UNIT TRUSTS 48
6.5 STOKVELS 49

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TOPIC 4: CREDIT FACILITIES 51

Study unit 7: Credit evaluation 52

7.1 THE PROCESS OF LENDING TO THE RIGHT CLIENT 53
7.2 CRITERIA FOR EVALUATING A LOAN APPLICATION 54
7.3 RISKS BANKS FACE WITH LENDING ACTIVITIES 57

Study unit 8: Different types of credit facilities 59

8.1 OVERDRAFT FACILITIES 60
8.2 REVOLVING CREDIT ACCOUNTS 61
8.3 TERM LOANS 61
8.4 HOME LOANS OR MORTGAGE LOANS 61
8.5 CREDIT CARDS 62
8.6 INSTALMENT LOANS 62
8.7 LEASES 62
8.8 FACTORING 62
8.9 GUARANTEES 63
8.10 BANKER’S ACCEPTANCES 64
8.11 LETTERS OF CREDIT 66
8.12 BILLS DISCOUNTING 66

Study unit 9: Income derived from lending 69

9.1 INCOME DERIVED FROM LENDING 70
9.2 FACTORS THAT AFFECT THE INTEREST RATE 70

TOPIC 5: BANKING PRODUCTS AND SERVICES – SECURITY 73

Study unit 10: Security, the role of security and good security 74
10.1 WHAT IS SECURITY? 75
10.2 THE ROLE OF SECURITY 75
10.3 THE CHARACTERISTICS OF GOOD SECURITY 75
10.4 EXAMPLES OF SECURITY 76

Study unit 11: Types of security 78

11.1 GUARANTEE 79
11.2 INDEMNITY 79
11.3 CESSION 80
11.4 PLEDGE AND HYPOTHECATION 80
11.5 LIEN 81
11.6 NOTARIAL CERTIFICATE 81
11.7 MORTGAGE BOND 81
11.8 GUIDELINES FOR COMPLETING SECURITY DOCUMENTS 82

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TOPIC 6: BANKING PRODUCTS AND SERVICES – SERVICES 85

Study unit 12: Types of service 86

12.1 STOP ORDERS 87
12.2 DEBIT ORDERS 87
12.3 BANK CODES AND REPORTS 87
12.4 SAFE CUSTODY 90
12.5 ESTATE PLANNING 91

Study unit 13: Insurance and assurance 92

13.1 INSURANCE 93
13.2 ASSURANCE 94

TOPIC 7: ELECTRONIC BANKING PRODUCTS 99

Study unit 14: Electronic systems 100

14.1 ELECTRONIC SYSTEMS 101
14.2 ADVANTAGES OF ELECTRONIC SYSTEMS 101
14.3 DISADVANTAGES OF ELECTRONIC SYSTEMS 101
14.4 THE SECURITY OF ELECTRONIC SYSTEMS 102

Study unit 15: Different types of electronic banking 104

15.1 AUTOMATED TELLER MACHINES (ATMs) 105
15.2 INTERNET BANKING 106
15.3 TELEPHONE BANKING 108
15.4 ELECTRONIC PRODUCTS 108

TOPIC 8: D
 IFFERENT TYPES OF CLIENTS AND THE OPENING AND CLOSING OF
BANK ACCOUNTS 111

Study unit 16: Different types of clients 112

16.1 MARRIED PERSONS 113
16.2 MINORS 114
16.3 DIVORCED PERSONS 114
16.4 PRODIGALS 114
16.5 MENTALLY INCOMPETENT PERSONS 115
16.6 PERSONS UNDER THE INFLUENCE OF ALCOHOL AND ALCOHOLICS 115
16.7 SOLE PROPRIETORS 115
16.8 INFORMAL BODIES 115
16.9 PARTNERSHIPS 116
16.10 CLOSE CORPORATIONS 116
16.11 COMPANIES 116
16.12 TRUSTS 117
16.13 DECEASED ESTATES 118
16.14 INSOLVENT ESTATE 118
16.15 LOCAL GOVERNMENT 118
16.16 PENSION FUNDS 119

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Study unit 17: Opening and closing bank accounts 121
17.1 OPENING A BANK ACCOUNT 122
17.2 OPERATING BANK ACCOUNTS 123
17.2.1 Bank statement 123
17.2.2 Over-crediting an account 123
17.2.3 Incorrectly debiting an account 124
17.2.4 Stopping an account 124
17.2.5 Freezing an account 124
17.2.6 Dormant account 124
17.3 CLOSING BANK ACCOUNTS 124

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TOPIC 1
Banking environment

AIM
At the end of this topic you should be able to explain the role of banks and the environment
1

in which they operate.

Learning outcomes

On completion of this topic, you should be able to do the following:

• Discuss the purpose of banks, their functions and the reasons why banks are regulated.
• Analyse different bank structures and reasons for the evolution of Banks.
• Evaluate the environment in which banks compete.

TOPIC CONTENT
236 Study unit 1: Purpose and functions of banks and reasons for regulating them

337 Study unit 2: Organisational structure of a bank

438 Study unit 3: The competitive environment in which banks operate

OVERVIEW
A bank is an important financial intermediary that accepts deposits, offers withdrawal
5

facilities and grants loans. Banks have a unique and important role in the overall financial
system. The topic starts by discussing the purpose and functions of a bank, and then
address the reasons for regulating banks.

1
Study unit 1
Purpose and functions of banks and reasons for
regulating them

CONTENTS
6Aim
7Key concepts
8Learning outcomes
9Overview
10 Learning material
11 1.1 What is a bank?
12 1.2 Purpose of banks
13 1.3 Functions of a bank
14 1.4 Regulating banks
15 Assessment
16 Summary

17 AIM

At the end of this study unit you should be able to explain the purpose and functions of
18

banks in the economy, and why it is important to regulate the financial sector.

Key concepts

y commercial banks
y purpose
y functions
y regulating

Learning outcomes

At the end of this study unit you should be able to do the following:
• Discuss the important roles that banks play in the overall financial system.
• Analyse the different categories of functions of a bank.
• Evaluate the functions of banks and their role as financial intermediary in the economy.
• Evaluate the need for regulating banks.

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OVERVIEW
19Banks fulfil a particular function in the financial system, but they also have an important

responsibility towards their shareholders. Banks perform the widest range of financial
20

functions of any business in the economy and for this reason they need to be regulated.

LEARNING MATERIAL
This study unit is based on different books and sources – see the list of references on the
21

last page of the study unit.

1.1 WHAT IS A BANK?

Vocabulary.com [sa] defines a bank as “a financial institution that accepts deposits and
22

channels the money into lending activities”. A bank is a financial institution that does
banking. That implies that banking comprises the activities that are carried out by the
bank. A bank plays the role of a financial intermediary, whose primary function is to collect
deposits and use the collected money to provide loans to borrowers (Casu, Girardone
& Molyneux 2015). In other words, banks act as intermediaries between the savers and
borrowers, as depicted in the figure 1.1:

23

Figure 1.1: The intermediary function (Casu et al 2015)

1.2 PURPOSE OF BANKS

The main purpose of banks involves borrowing and lending money. Banks accept client
24

deposits in return for paying interest to those clients. The bank then uses the majority of
these deposits for a variety of loans to lend to other clients. Economics Help [sa] explains
that the difference between the interest rate paid to the clients and the interest earned
from lending to other clients is banks’ profit margin. Banks play an important role in the
economy for offering a service to people who wish to save. Banks also play an important
role in offering finance to businesses that want to invest and expand. These loans and
business investments are important as they make economic growth possible.

The role of banks in the economy is important because, through money creation, banks
25

directly influence the growth of the money supply (the amount of money available in

3
the economy). They also play a critical role in ensuring the security and stability of the
financial system.

Banks also play an economic role as they contribute to economic growth. Economic
26

growth can be described as an increase in the gross domestic product (GDP) of a nation.
The GDP is the total value, in monetary terms, of the goods and services provided by
an economy over a specific period. Banks act as intermediaries between lenders and
borrowers. Institutions and individuals with surplus (extra) funds place the funds on
deposit with banks, and banks then lend the funds out to institutions and individuals
with deficits or a need for funds. In this way banks channel surplus funds to investment
opportunities, which facilitates economic growth.

Banks are the major channels used by central banks for implementing monetary policy.
27

A central bank is a national bank that provides financial and banking services to its
country’s government and commercial banking system, and it also issues currency. The
central bank of South Africa is the South African Reserve Bank. Banks are required to keep
a certain amount of cash reserves with the central bank. However, banks may borrow
from the central bank on a daily basis. The central bank charges an interest rate on such
loans. Banks then charge their clients this interest rate plus a margin of profit on the loans
supplied to clients.

In this way, banks are directly involved in the process of implementing monetary policy.
28

Banks also play a micro role as they are the primary source of credit for most businesses
and individuals.

The economic role of banks has changed little over time, but the nature of banking
29

changes constantly, mainly as a result of technological developments, regulatory changes

and changing competitive circumstances.

A bank fulfils a particular function in the financial system, but it also has an important
30

responsibility towards its shareholders. This means that the bank has to give its shareholders
a satisfactory return on their investment. However, a bank can maximise the return on its
shareholders’ investment only if it fulfils its function effectively.

Activity 1.1

Read the articles available on the following websites and then answer the questions below:

31http://aidc.org.za/the-responsibility-of-the-sa-reserve-bank/
32 https://www.bis.org/review/r000321a.pdf
33 https://www.rba.gov.au/publications/annual-reports/rba/2013/functions.html
34 https://tigersonagoldenleash.co.za/2019/11/28/role-of-the-south-african-reserve-bank/
https://world101.cfr.org/global-era-issues/monetary-policy-and-currencies/
35

what-central-bank-and-what-does-it-do-you
36 https://www.differencebetween.com/difference-between-bank-and-vs-banking

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Questions
(1) What is the role of the South African Reserve Bank (SARB) in the South Africa economy?
(2) Are banks supported by the SARB? Give reasons for your answer.
(3) Discuss the difference between a bank and banking.

Hint: “While the evolving world of technology creates untold possibilities in the banking
industry, much more is involved in keeping up with the dizzying pace of change” (BBC [sa]).

1Feedback:

“Knowledge is power” – Francis Bacon, in Meditationes Sacrae (1597).

Keep reading to empower yourself.

1.3 FUNCTIONS OF BANKS

37 Categories of functions

Financial institutions offer the widest range of financial services, especially credit, savings
38

and payment services, which are discussed in detail in the coming study units.

The functions of banks are essentially based on the principles of accepting deposits
39

from clients and using the deposits to extend loans to borrowers. Such functions can be
classified into two categories: primary functions and secondary functions.

40 1. P
 rimary function. All banks have to perform two primary functions, which are usually
referred to as the monetary functions of bank, namely:

41 1.1 Accepting deposits. A basic function, yet the most important one fulfilled by
banks, is to mobilise deposits from the client, providing safe custody of savings
and interest on the savings to depositors. The deposits are in the form of savings,
fixed deposits, current deposits and recurring deposits.

42 1.2 G
 ranting loans and advances. The surplus deposits collected from the clients
are used to give advances and loans to individuals and businesses. These loans
and advances are given in the form of overdrafts, cash credit, loans or discounted
bills. Banks charge a higher rate of interest on loans and advances than they pay
on deposits. The difference between the lending interest rate and interest rate for
deposits is bank profit.

43 2. Secondary function. The same as the primary functions, banks perform two secondary
functions, otherwise referred as non-banking functions, namely:

44 2.1 Agency functions. Agency functions are the non-banking services that banks
provide to their clients and for which they earn commission. The agency functions
of a commercial bank include the collection of funds, portfolio management and
the safekeeping of clients’ valuables.

5
 2.2 Utility functions. To improve their relationship with clients, banks go the extra
45

mile by providing functions that are generally useful to clients (Choudhary 2021).
These include safe deposit vaults, underwriting and acting as a leader in foreign
exchange. Figure 1.2 below summarises the functions of banks:

46

Figure 1.2: The functions of banks

(Source: https://kalyan-city.blogspot.com/2011/04/functions-of-banks-important-banking.html)

47 The functions of banks are discussed in more detail in the module BAN1502.

Activity 1.2

Visit the website below and then do the exercise that follows:
48 https://bank.caknowledge.com/general-functions-bank /

Exercise
(1) Analyse the differences between the agency and utility functions of banks.
(2) Explain the primary functions of banks.

Hint: Practise to provide answers with less and less direct reading from the content of
the study unit. This will teach you to respond to questions in your own words to prove
that you understand the work.

2Feedback:

Banking transforms at a very high speed. It is advisable to read other sources of information
to ensure that you keep up with these transformations.

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ADDITIONAL READING
1. https://kalyan-city.blogspot.com/2011/04/functions-of-banks-important-banking.
html
2. https://byjus.com/govt-exams/functions-of-bank/
3. https://www.frbsf.org/education/publications/doctor-econ/2001/july/
bank-economic-function/

1.4 REGULATING BANKS

It is important to understand why the financial sector needs to be regulated. Historically
49

speaking, the banking industry has been one of the most strictly regulated industries; if
there is no confidence in the financial system it will have negative effects on the entire
economy of a country.

Regulation and supervision have three logical objectives, namely: ensuring systemic
50

stability; enhancing efficiency; and protecting investors and depositors. As these objectives
are all related, the same authority normally performs both regulation and supervision.

Owing to banks’ role in the monetary system and the risk of systemic failure, bank
51

regulation and supervision are often performed by the central bank of a country.

52 Banks are regulated for the following valid reasons:

• to ensure the stability of the financial system

• to uphold domestic and international confidence in the country’s financial system
• to ensure monetary stability by controlling the growth of the money supply, among
other things
• to protect clients from malpractice in financial institutions

We must emphasise that regulation and supervision are merely a guideline for correct
53

practices in financial institutions; they cannot prevent banks from going bankrupt.
Regulation and supervision also cannot eliminate the risks inherent in (natural to) banking

activities, but should rather be regarded as a preventive measure against excessive

54

exposure to risks. Lastly, regulation and supervision do not always guarantee sound
management decisions or ethical practices.

Assessment
3

(1) Explain the unique and important role that banks play in the overall financial system.
(2) Name and define the different categories of functions of a bank.
(3) Why should financial institutions be regulated?
55

7
 4Summary

Banks play an important role in the financial system of any country, and they have a major
responsibility to ensure the safety and stability of the financial system. Banks take in funds
and pay interest to the depositors, lend the deposited money to those who need fund-
ing and charge interest. The difference between the interest received and charged is the
banks’ profit. To protect confidence in the banking system, banks are highly regulated.

REFERENCES AND ADDITIONAL READING MATERIAL:

1. BBC. [Sa]. How banking is changing at lightning speed. Available at: http://www.bbc.com/
storyworks/banking-on-innovation/innovation (accessed on 22 September 2021).
2. Casu, B, Girardone, C & Molyneux, P. 2015. Introduction to banking. 2nd edition. To-
ronto: Pearson.
3. Choudhary, R. 2021. General utility functions of bank, general functions of bank.
Available at: https://bank.caknowledge.com/general-functions-bank (accessed on
22 September 2021).
4. Dilley, DK. 2008. Essentials of banking. Hoboken, NJ: John Wiley & Sons.
5. Economics Help. [Sa]. Purpose of banks. Available at: economicshelp.org/blog/glos-
sary/banks (accessed on 22 September 2021).
6. Kalyan City Life. [Sa]. Functions of banks: important banking functions and services.
Available at: https://kalyan-city.blogspot.com/2011/04/functions-of-banks-important-
banking.html (accessed on 22 September 2021).
7. Lumen Learning. [Sa]. The commercial banking system. Available at: https://courses.
lumenlearning.com/macroeconomics/chapter/the-role-of-banks (accessed on 22
September 2021).
8. Vocabulary.com. [Sa]. Bank. Available at: https://www.vocabulary.com/dictionary/
bank (accessed on 22 September 2021).
56

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Study unit 2
Banking structures

CONTENTS
57 Aim
58 Key concept
59 Learning outcomes
60 Overview
61Learning material
62 2.1 Banking structures
63 2.2 Unit banking structure
64 2.3 Branch banking structure
65 2.4 Virtual banking structure
66 Assessment
67 Summary

68 AIM

In this study unit we explore the different structures of banks, and the advantages and
69

disadvantages of each one of them.

Key concepts

y unit banking structure

y branch banking structure
y virtual banking structure

Learning outcomes

At the end of this study unit you should be able to do the following:
• Analyse different banking structures.
• Discuss the reasons for evolution in the banking sector.

9
 OVERVIEW
In study unit 1 you were introduced to the purpose and functions of banks, and the
70

reasons why they must be regulated. In study unit 2 we look at the different structures
of banks. At the end of this study unit, you should be able to explain why banks evolve
from one structure to another.

LEARNING MATERIAL
This study unit is based on different books and sources – see the list of references on
71

the last page of the study unit.

2.1 BANKING STRUCTURES

The type of banking structure that banks form depends largely on the response to the ever-
72

evolving forces of economic factors, legal factors and technology. The economic factors are
driven by the demand for financial services and the number of banks that provide these
services to consumers. The legal factors entail mainly the legal framework of commercial
banks and the entry of new institutions into the banking industry. Technology is needed
to advance the quality of products and services. These banking structures are the unit
banking structure, the branch banking structure and the virtual banking structure.

The unit banking structure is found mainly in the USA and is characterised by many banks
73

with their own management. The branch banking structure is found in various countries
throughout the world, including South Africa. The branch banking structure consists of
different banks, each represented by various offices (branches). In other words, each bank
operates in more than one place. The various branches are controlled from one central
head office and they all follow the same policies. This means that all the branches of one
particular bank are controlled by a single board of directors and owned by the same
shareholders. Recent developments in the banking sector have seen the branch banking
structure gradually evolving to incorporate the virtual banking structures.

2.2 UNIT BANKING STRUCTURE

A bank has a unit banking structure if that bank has only one branch. This structure has
74

led to a proliferation in the number of individual banks (Chaudhuri 2014). Each bank has
its own board of directors, management and identity. It is a more expensive structure
than the branch banking structure. There are also more risks in this structure than in the
branch banking structure because the assets and liability portfolios of unit banks are
not always sufficiently diversified (spread across a variety of risks). The risk of a “run” on
a bank, causing a bank to fail, is greater in the case of unit banking.

An important feature of a unit banking structure is the correspondent arrangement

75

between larger and smaller banks. This is a cooperation mechanism that has arisen
because not all banks in the USA are members of the US Federal Reserve Structure. The
smaller banks have arranged with larger banks in terms of which the larger banks act as

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correspondents for the smaller banks, thereby giving them access to the Federal Reserve
Structure. This means that the smaller banks make deposits with the larger banks (the
correspondents) in exchange for various services that the larger banks can provide. These
include payment clearance, asset management services and the provision of foreign
exchange and reserve facilities. The correspondents also provide the smaller banks with
advice on various matters.

The smaller banks can remunerate (pay) the correspondents for their services in two
76

ways: Firstly, the correspondents are remunerated implicitly in that the smaller banks
have deposit balances with the larger banks. This helps to increase the correspondents’
deposit base, which enables them to grant more credit. Secondly, the larger banks are
remunerated explicitly by receiving fees for their services.

A unit bank may outgrow itself and decide at some point to establish a branch banking
77

structure.

Activity 2.1

Log on to the myUnisa platform and discuss the following questions with your fellow
students:
(1) During previous discussions with your colleagues, you decided to explore the possibil-
ity of opening the first Black-owned bank in South Africa. The unit banking structure
is appealing to all of you because the barrier to entry is low. However, you are not
sure if such a banking structure is allowed in South Africa. Find out if South African
banking regulations make provision for the establishment of a bank with a unit bank-
ing structure and discuss how the unit banking structure could benefit South Africa’s
previously disadvantaged communities.
(2) Assume that provision is made for the unit banking structure in South Africa. What
would be the disadvantages of establishing a bank with a unit banking structure in
South Africa?

Hint: The banking industry in South Africa (and elsewhere) is highly regulated. It is always
advisable to ensure compliance with the law when establishing and/or operating a bank.

5Feedback:

More banking structures are discussed in this module. Keep track of the transformation of
banking structures and the causes of this transformation as we progress.

2.3 BRANCH BANKING STRUCTURE

Branch banking refers to a bank that is connected to one or more other banks in an
78

area or outside of it; this bank provides all the usual financial services but is backed and
ultimately controlled by a larger financial institution.

11
The branch banking structure consists of different banks, each represented by various
79

offices (branches). In other words, each bank operates in more than one place. The
various branches are controlled from one central head office and they all follow the
same policies. This means that all the branches of one particular bank are controlled by
a single board of directors and owned by the same shareholders. All the branches use
the same trademark, corporate image, colours and marketing approach. Although the
basic services are the same at all the different branches of a bank, certain services may
vary from one branch to another, depending on the needs of the specific environment
in which the branch operates.
It is widely agreed that branch banking has advantages over the unit banking structure.
80

Many scholars agree with Carlson and Mitchener (2005) that branch banking “leads to
more stable banking structures by enabling banks to better diversify their assets and
widen their depositor base”.
81 The following are the main advantages of a branch banking structure:

a) It can reduce the number of competitors in the total banking industry.

b) Expenditure can be reduced.
c) It is possible to ensure greater diversification of assets than in the case of a unit
banking structure.
d) Each bank’s deposit base is expanded.
e) There is less chance of a “run” on a bank’s deposits (i.e. a high demand for withdrawals).
f) There is less chance that a bank will fail.
g) It offers good training facilities for employees and branch banks usually have suf-
ficient resources to employ experts.
h) There are sufficient opportunities to specialise.
i) There are economies of scale. This means that when output increases, the average
cost of production and therefore the unit costs decrease.

82 The following are the main disadvantages of branch banking:

a) The structure can be inflexible.

b) Personal contact with clients may be lost.
c) It is sometimes difficult to manage a large bank efficiently.

Branch banks are likely to be organised differently in the future. This likelihood is supported
83

by the changes that have taken place over time in the provision of banking services. Mas
(2009) define how branch banking has turned into branchless banking in four ways:

• Non-bank retail outlets are used as client touchpoints, at least for cashing in or out
of accounts.
• Technology, such as payment cards or mobile phones, is used to identify clients and
authorise transactions electronically and, in some cases, to allow clients to initiate
transactions on their own.
• Transactions can be processed against an electronic store of value (although cash-
based services for non-clients may also be offered).
• Accounts are issued by institutions recognised and explicitly or implicitly authorised
by the banking regulator, although they may not be formally licenced and regulated.

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The South African banking industry is characterised by an oligopolistic market structure,

84

which means that the market is dominated by a few large banking institutions. The
market leaders are ABSA, Standard Bank, Nedbank and FNB. Capitec has recently joined
and established itself as a formidable competitor. Competition between the different
banking institutions is characterised particularly by non-price competition, which is based
on for example service charges, other fees, quality of service and the variety of financial
services offered.

The concentration phenomenon is also an important feature of the South African banking
85

industry: more than 80% of the total bank assets in South Africa are in the hands of
just five banks. Banks are competing for market share, while offering their services at a
reduced cost to clients.

Home banking through the internet and telebanking were developments seen in banking,
86

and recently virtual banking has been introduced. It is therefore likely that in future the
physical branch structure will be largely phased out and home banking, telebanking and
virtual banking (which we discuss later) will expand. Banks have already begun reducing
their branches as part of a strategy to reduce costs and improve their cost-to-income ratio.

Activity 2.2

(1) Berger and Hannan (1998) state that “banks not exposed to competition are able to
exercise monopoly power and tend to be less efficient than banks subject to more com-
petition. When laws restricting competition are relaxed, bank profits generally decline”.
Can you see that this statement seems to be paradoxical (i.e. self-contradictory)?
(2) Investigate the branch structure to improve your knowledge of this type of banking
structure. Do you think the above statement by Berger and Hannan (1998) is well
founded or not? Explain your answer.

Hint: Remember that knowledge is power. Make sure that you read additional material,
but also try to provide answers with less and less direct reading from the content of the
study unit. This will teach you to respond to questions in your own words to prove that
you understand the work.

6Feedback:

Continue reading some more sources on the transformation of banking structures.

ADDITIONAL READING
1. h t t p s : // w w w. d i f f e n . c o m /d i f f e r e n c e / B r a n c h _ B a n k i n g _v s _ U n i t _
Banking#:~:text=Branch%20banking%20refers%20to%20a,by%20a%20larger%20
financial%20institution
2. https://www.scribd.com/doc/52574489/Disadvantages-of-Branch-Banking
3. https://www.gktoday.in/gk/what-is-virtual-banking/

13
 2.4 VIRTUAL BANKING STRUCTURE
As competition in the banking industry increases, banks have been striving to differentiate
87

themselves by reinforcing the relationship with their clients. At the same time technology
has rapidly been changing the way personal finance services are designed and delivered
(Liao, Shao, Wang & Chen 1999). On the one hand, clients are gradually moving away
from traditional branch banking and embracing the ease offered by electronic banking
services. In 2020, the world was affected by the coronavirus pandemic (COVID-19). Social
distancing became one of the major tenets or protocols that were adopted to avoid
being infected by the virus. As a result, the need for virtual banking to become the “new
normal” increased.

Virtual banking is a new way of transacting and depositing money without ever visiting
88

the bank. This banking structure take the form of ATMs, phone banking and internet
banking. Kamel (2010) states that technology is increasingly becoming an invaluable
and powerful tool driving development, supporting growth, promoting innovation and
enhancing competitiveness.

In South Africa there is only one bank that only exists on the World Wide Web. This bank
89

is Tymebank. It earns an income from fees charged for collecting and dispensing client
funds electronically. All Tymebank ATMs are located in Pick n Pay stores in South Africa.

Services commonly offered via the internet are: making payments; checking account
90

balances; moving funds between accounts; getting access to loan application forms;
and so forth. Most banks use the internet for advertising rather than for service delivery.
The number of clients using home computers and the internet has grown exponentially
over the years.

The following are some of the reasons why clients are drifting away from traditional
91

branch banking and embracing the ease of electronic banking services:

• Convenience. You do not need to go to the bank for any transactions. If you have an
internet connection, you can access your bank any time of the day or night.
• Lower interest rates. In the absence of bricks and mortar and overhead costs, banks
can lower their interest rates.
• On-time service. You do not have to queue to be served. Transactions are processed
immediately.
• Account management. Personal and business accounts can be managed online with
ease. Clients can view their financial statements, receive current information about
their business, quickly transfer money between accounts, and access all the informa-
tion they need to make informed decisions.

The virtual banking structure has made banking more convenient and accessible, but it
92

also has some disadvantages:

• Cybercrime. Criminals sometimes get illegal access to their victims’ bank accounts,
and therefore their money, via virtual banking. Some criminals use computers to infect
other computers, including banks’ computer systems, with computer viruses.

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• Lack of personal relationships. Clients are just numbers. Unlike branch banking,
virtual banking generally does not make provision for clients to contact a real person
in times of need.
• Limitation on deposits. Virtual banking limits the amount of money a client can
deposit at any given time. Companies that want to deposit large amounts of money
are therefore also restricted to a specific limit.

Activity 2.3

(1) You are a farmer. There is only one traditional bank in your area; the next nearest
bank is more than 10 kilometres away. If your nearest bank is temporarily closed due
to COVID-19, how would you take care of your immediate banking needs?

Refer to:
https://www.ukessays.com/essays/information-technology/pros-and-cons-of-internet-
93

banking-information-technology-essay.php

7Feedback:

Your lecturers and/or e-tutors will post feedback on this activity and information about ad-
ditional sources of information on the module site. It is therefore extremely important that
you visit the module site regularly to ensure that you get all the necessary information.

8Assessment

(1) Discuss the main reasons why the branch banking structure is transforming into a
virtual banking structure.
(1) Define virtual banking. What are the differences between virtual banking and branch
banking?
(1) Discuss the features of unit banking.
(1) Which banking structure characterises the South African banking industry? Explain
your answer.

9Summary

In this study unit you learned how expensive and risky the unit banking structure is com-
pared to the branch banking structure. We also discussed that banks have to respond to the
ever-evolving forces of economic factors, legal factors and technology while maintaining
their market share in the economy. Depending on the circumstances, banks can evolve
from one structure to the other. You also learned that the branch banking structure now
incorporates virtual banking to render better services to clients.

15
 REFERENCES AND ADDITIONAL READING MATERIAL:
1. Berger, AN & Hannan, TH. 1998. The efficiency cost of market power in the banking
industry: a test of the “quiet life” and related hypotheses. The Review of Economics
and Statistics 80(3): pp.454–465.
2. Business Jargons. [Sa]. Virtual banking. Available at: https://businessjargons.com/
virtual-banking.html (accessed on 22 September 2021).
3. Carlson, M & Mitchener, KJ. 2010. Branch banking, bank competition, and financial
stability. Available at: https://www.nber.org/system/files/working_papers/w11291/
w11291.pdf (accessed on 22 September 2021).
4. Chaudhuri, RR. (2014). The changing face of American banking deregulation, reregula-
tion, and the global financial system. New York: Palgrave MacMillan.
5. Diffen. [Sa.] Branch banking vs unit banking. Available at: https://www.diffen.com/
difference/Branch_Banking_vs_Unit_Banking#:~:text=Branch%20banking%20
refers%20to%20a,by%20a%20larger%20financial%20institution (accessed on 22
September 2021).
6. Kamel, S. 2005. The use of information technology to transform the banking sector
in developing nations. Routledge Taylor and Francis Group
7. Liao, S, Shao, YP, Wang, H & Chen, A. 1999. The adoption of virtual banking: an em-
pirical study. International Journal of Information Management 19:63–74. Available
at: https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.495.9482&rep=rep1
&type=pdf (accessed on 22 September 2021).
8. Lopol. [Sa]. The concept and basic functions of branch banking. Available at: https://
www.lopol.org/article/the-concept-and-basic-functions-of-branch-banking (accessed
on 22 September 2021).
9. Mas, I. 2009. The economics of branchless banking. MIT Press Direct, Vol 4(2), pp. 57-75.
10. MercBankMI. 2018. What is a virtual banking machine? Available at: https://www.
youtube.com/watch?v=Uw-SNR2njmM (accessed on 22 September 2021).
11. Rose, P & Hudgins, S. (1998). Bank management and financial services. New York:
McGraw Hill.
12. TechFunnel. [Sa]. Virtual banking: all you need to know. Available at: https://www.
techfunnel.com/fintech/virtual-banking (accessed on 22 September 2021).
13. Your Article Library. [Sa]. Virtual banking system in India. Available at: https://www.
yourarticlelibrary.com/essay/virtual-banking-structure-in-india/26337 (accessed on
22 September 2021).
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Study unit 3
The competitive environment in which banks operate

CONTENTS
95 Aim
96 Key concepts
97 Learning outcomes
98 Overview
99 Learning material
100 3.1 The competitive environment in which banks operate
101 3.2 The driving forces of competition in the banking sector
102 Assessment
103 Summary

AIM
The aim of this study unit is to provide a clear explanation of the competitive environment
104

in which banks operate, the dynamics involved in driving competition in the banking
sector and the regulatory framework that governs banks.

Key concepts

y competitive environment
y financial innovation
y economic factors
y globalisation
y volatility
y changes in consumer preference
y non-bank financial institutions (NBFIs)

Learning outcomes

At the end of this study unit you should be able to do the following:
• Analyse the competitive environment in which banks operate.
• Describe how the COVID-19 pandemic contributes to competition in the banking
sector.

17
 OVERVIEW
In study unit 1 we explored the banking environment. We introduced you to the bank as
105

an institution and banking as activities performed by banks; the purpose of banks; and
some regulations that govern banks. In study unit 2 we discussed the different banking
systems to explain the evolution of the banking industry in South Africa and internationally.
This study unit focuses on the competitive environment in which banks operate and the
reasons for increasing competition in the financial services industry. We also introduce
non-financial institutions that compete with commercial banks in South Africa.

LEARNING MATERIAL
This study unit is based on various books and sources – see the list of references on the
106

last page of the study unit.

3.1 THE COMPETITIVE ENVIRONMENT IN WHICH BANKS

OPERATE
The financial sector is the bedrock of any economy that functions effectively in the current
107

era. According to Simbanegavi (2015), a competitive banking sector is important for the
effective functioning of the economy. Rafay and Farid (2018) concur that a competitive
financial sector is essential for a stable and efficient economic structure. Deloitte Access
Economics (2014) also adds that the economy of Australia prospered in the last quarter
of a century due to its robust and competitive financial system.

As intermediaries between savers and borrowers, banks collect deposits from savers
108

and advance loans to borrowers. A lack of competition in the banking sector can reduce
efficiency, quality and innovation, and other non-competitive behaviour (Munacinga 2015).
Such an outcome may have crippling effects on other sectors and create considerable
costs for an economy (Rafay & Farid 2018). We have seen the collapse of banks, such as
VBS Mutual Bank in South Africa (which had an adverse impact on municipalities that
invested with the bank) and Lehman Brothers in the USA. The collapse of Lehman Brothers
in 2008 exposed a series of weaknesses that had an impact on the real economy around
the world and led to a global financial crisis.

South Africa did not escape the effects of the global financial crisis in 2008. It resulted
109

in the loss of nearly a million jobs in the country and the economy went into recession
for the first time in 17 years (Steytler & Powell 2010). The impact of competition in the
banking sector became an important concern for policymakers. As a result, more stringent
regulations were announced in an attempt to mitigate risks and competition was regulated
more rigorously.

110

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Activity 3.1

The road to economic recovery has been a difficult one for many economies. Evaluate
the status of the South African economy since the 2008/2009 recession. How has the
COVID-19 pandemic contributed to the current economic condition?

Hint: Conduct a search and ask for the opinions of your family members, friends, etc. Many
good sources of information that can assist you in answering this question are available
online and in print media. Try to summarise what you have learned in your own words
instead of copying and pasting from your sources and remember to acknowledge ALL
the sources you have consulted.

10Feedback:

Your answer can include (but is not limited to) some of the following:
y Banks are highly capitalised.
y Less money is flowing around globally.
In addition to regulations, the competitive environment in the banking sector includes the
following driving forces:
y financial innovation
y economic factors
y globalisation
y demographic factors
y changes in consumer preferences

3.2 THE DRIVING FORCES OF COMPETITION IN THE BANKING

SECTOR
Winning clients and becoming the primary bank of choice have never been more
111

challenging than now (CGI PayPartner360 [sa Innovation has become a driving force
in the banking industry and habits have changed. Clients are exploring not only new
banking methods, but also new banking providers. This creates a more competitive
environment in the banking sector and the continued transition of clients to digital
channels (PricewaterhouseCoopers 2019).

19
112

Figure 3.1: The driving forces of banking

Figure 3.1 shows the factors that have a direct impact on competition in the banking
113

sector. They are discussed below.

114 (a) Financial innovation. Porter (2021) calls this factor “the threat of substitute products”.
It is characterised by the widespread use of new financial engineering and risk
management tools, which brings about changes in financial instruments, markets
and operating procedures. This means that clients have new financial services that
keep changing and are continuously upgraded. Examples are:

i. Automated teller machines (ATMs) are electronic banking outlets that allow
clients to complete basic transactions without visiting the bank or getting help
from a branch representative or teller.
ii. Prepaid services on your app make it is easy, safe and convenient to purchase
airtime, data and electricity or to pay a third party.
iii. A virtual card is a digital bank that you can create to shop online. To do this,
you load your card details onto your mobile banking app. Then you can use your
virtual card to make secure payments and purchases online without having to
use your credit or debit card.
iii. Loyalty programmes are tried and true marketing tactics that offer rewards
and incentives to clients (CGI PayPartner360 [sa]). Client loyalty programmes are
not a new phenomenon, but many of the tactics used in loyalty programmes
today are very different from those used ten years ago. Today’s clients are digi-
tally literate and they can easily compare loyalty programmes. In fact, 81% of
modern bank clients expect incentives in the form of loyalty programmes or
signup bonuses (CGI PayPartner360 [sa]).

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Activity 3.2

Now that you have learned about a variety of financial services, can you think of any other
financial services that banks have recently introduced? Describe these services.

Hint: Conduct a search and ask for the opinions of your family members, friends, etc. Many
good sources of information that can assist you in answering this question are available
online and in print media. Try to summarise what you have learned in your own words
instead of copying and pasting from your sources and remember to acknowledge ALL
the sources you have consulted.

11Feedback:

Did you manage to answer the question on your own without copying and pasting from
sources? Your answer could have included (but is not limited to) some of the following financial
services that have recently been introduce:
y Lotto
y virtual cards
y loyalty products (UCount Rewards, eBucks – add more products that drive client behaviour)
y forex trading
Can you think of more recent financial services to add?
If you had trouble with this exercise, return to section 3.2(a) above and reread it carefully. Then
try to complete activity 3.2 again.

The underlying motivation for financial innovation is usually to improve banks’ competitive
115

positions. Technology and other changes increasingly allow parties to complete financial
transactions electronically and, in many cases, without banks. For example, consumers
can pay bills and transfer funds over the internet and by telephone without banks.
Many non-bank financial service providers have lower overhead costs and are subject to
fewer regulatory constraints. If consumers do not use banks to complete their financial
transactions, banks could potentially lose fee income, deposits and income generated
from those deposits, and even their clients.

116 (b) E
 conomic factors, such as inflation and the volatility (instability) of interest rates,
also have a direct impact on the competition (or rivalry) among commercial banks
(Porter 2021). Inflation has made depositors more aware of the interest they receive
on their deposits. As a result, deposit funds have become increasingly mobile, which
has serious liquidity implications for banks. Clients deposit their money in institutions
that will give them the highest interest on their funds. Apart from an increase in the
mobility of funds, inflation has a definite influence on the level of interest rates: it
results in higher interest rates. If banks pay lower interest on deposits than is the norm
in the market, disintermediation occurs (i.e. financial intermediaries such as banks are
removed from transactions) because clients withdraw their deposited funds from the
banks and invest them in securities with a higher rate of return.

21
The economic impact of the coronavirus (COVID-19) pandemic on the banking sector
117

cannot be ignored. COVID-19 is driving the global economy into recession. Central banks
around the world have proactively intervened to calm the market storm. The US Federal
Reserve cut the federal funds rate (repo rate) by 50 basis points; the Bank of Japan injected
liquidity into the market; while the People’s Bank of China pumped more than $240 billion
of liquidity into the financial system (Baret, Celner, O’Reilly & Shilling [sa]). According to
Trading Economics [sa], the South African Reserve Bank has cut the repo rate by 275 basis
points to 3,5% since 2020.

Governments across the world imposed lockdown to prevent the spread of COVID-19.
118

This measure has stopped economic activities across many sectors, which had serious
repercussions for businesses and households. Businesses that were relying of client contact
(e.g. businesses in the hospitality Industry) were the most affected.

Since March 2020, many businesses have closed and people working in these businesses
119

have lost their employment income. Businesses that have lost revenues might default
on their loans. Similarly, households whose members have lost their jobs, might not be
able to repay their loans. These losses owing to COVID-19 have therefore been affecting
the bottom line of the banking sector adversely.

120 (c) Globalisation can be described as the growing interdependence of the world’s
economies, cultures and populations that is brought about by cross-border trade in
goods and services, technology, and flows of investment, people and information
(PIIE 2020). Globalisation has caused competition in financial markets to intensify
across borders. Financial instruments and markets are less bound by geographical
borders than before; in other words, financial transactions are no longer limited by
geographical borders. This has serious implications for banks. Financial institutions
must be fully aware that international financial affairs have a direct influence on
domestic markets. Therefore, when developing strategies, banks must consider the
influence of foreign competition and opportunities on their operations.

Activity 3.3

(1) Define globalisation in your own words.

(2) Which critical term(s) and examples in the discussion above helped you to formulate
your definition of globalisation?

Hint: Practise to provide answers with less and less direct reading from the content of
the study unit. This will teach you to respond to questions in your own words to prove
that you understand the work.

12Feedback:

If you had trouble with this exercise, return to section 3.2(b) above and reread it carefully.
Then try to complete activity 3.3 again. As the module progresses, you will learn more about
globalisation and its impact on competition in the banking sector.

22
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121 (d) C
 hanges in consumer preferences. According to Accenture (2020) it is obvious
that COVID-19 has changed consumers’ banking behaviour but is not known which
new behaviours are permanent and which will change back when normality returns.
However, there is no doubt that banks that want to remain relevant need to understand
and embrace how clients are feeling and acting.

122 (e) Non-banking financial institutions. The sources of competition among banks
include non-bank financial institutions (NBFI). An NBFI is a financial institution that
does not have a full banking license and cannot accept deposits from the public.
However, NBFIs can offer alternative financial services, such as investment opportunities
(both collective and individual), risk pooling, financial consulting, brokering, money
transmission and cheque cashing. NBFIs are a source of consumer credit (along with
licensed banks). Examples of NBFIs include insurance firms, venture capitalists, currency
exchanges, some microlenders and pawnshops. They provide services that are not
necessarily suited to banks, serve as competition to banks and specialise in specific
sectors or groups.

123

Figure 3.2

Notable non-bank institutions that compete with banks in South Africa are Pick n Pay
124

(Go Banking), MTN, Virgin Money, South African Airways and Kulula, Edcon, Woolworths,
Clicks, Shoprite/Checkers, Discovery and Vodacom. Most of these firms are in the retail
and telecommunications industry, but like banks they are now offering credit cards,
credit solutions and other payment solutions. They have also diversified by offering and
retailing various insurance products. Some have been given financial services licenses
by the National Credit Regulator although their core business is not financial services.

125 (f) F
 inancial inclusion is described by National Treasury (2009) as “a continuous process
of expanding access and usage of financial services and products to previously
excluded population segments”. In South Africa the issue of financial inclusion is
gaining momentum across the board. Even the South African government has joined
the chorus saying that although South Africa has a well-developed financial sector,
poverty, unemployment and inequality in the country lead to widespread financial
exclusion.

23
 Activity 3.4

About a week ago you were approached by representatives of a stokvel called “Rise and
Shine”. They have heard that you are studying a Unisa module on banking. They request
you to come and share information with them and their constituents about the variety
of factors that have a direct impact on competition in the banking sector.

Draft the speech that you will give to the Stokvel group. Remember to include some
authentic and practical examples (local and global) throughout your presentation.

Hint: You should be guided by the content of section 3.2 above, but it is important to
use your own words and examples when you write your speech. Do not copy and paste
from the content of section 3.2. Practise to summarise what you have learned and to use
your own words. You may also refer to additional sources. Remember to acknowledge
ALL the sources you have consulted.

Feedback:
13

Your lecturers and/or e-tutors will post feedback on this activity and information about ad-
ditional sources of information on the module site. It is therefore extremely important that
you visit the module site regularly to ensure that you get all the necessary information.

Activity 3.5

Read the article entitled “Banking consumer study: making digital more human”, which
is available under Additional Resources on the module site and also at https://www.
accenture.com/us-en/insights/banking/consumer-study-making-digital-banking-more-
human. Now do activity 3.5.

As a student of the module BAN1501, you attended a webinar with the topic “Banking
126

consumer study: making digital more human”. During this webinar, the guest speaker
said the following:

It is obvious that COVID-19 has changed consumers’ banking behaviour but is not known
127

which new behaviours are permanent and which will change back when normality returns.
However, there is no doubt that banks that want to remain relevant need to understand
and embrace how clients are feeling and acting.

1. Do you agree or disagree with the guest speaker’s statement?

2. Explain why competition is important in the banking sector.
3. Why must governments have stringent regulations for the banking sector?
4. Discuss the driving forces of competition in the banking sector.
5. Briefly discuss how coronavirus (COVID-19) is affecting the banking sector.
6. Describe in detail how consumer behaviour and preference have been affected by
the COVID-19 pandemic.
7. How can banks best serve their clients during the COVID-19 pandemic?
8. Critically evaluate the validity of this article based on the current reality.

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Share your contribution with your fellow students via the Discussions tool on the module
128

site. Limit your posting to 200 words. You also need to respond to at least two of your
fellow students’ postings.

14 Summary

Competition in the banking sector is very important. Simatele (2015) states that a lack
of competition in the banking industry (as in most other industries) can reduce efficiency,
quality and innovation. Secondly, and more specific to the financial sector, it can lead
to under-provision and other non-competitive behaviours such as setting high transac-
tion fees. The forces of competition include (but are not limited to) financial innovation,
economic factors, globalisation, changes in consumer preferences and competition from
NBFIs. The COVID-19 pandemic has forced countries to impose lockdowns, resulting in
businesses closing and people losing their jobs and employment income. It therefore
also has an adverse effect on financial sector revenues and profits.

REFERENCES AND ADDITIONAL READING MATERIAL:

Accenture. 2020. How will covid-19 change the consumer. Available at: https://www.
129

accenture.com/_acnmedia/PDF-131/Accenture-COVID-19-Pulse-Survey-Wave7.pdf.
(accessed on 22 September 2021).
Baret, S, Celner, A, O’Reilly, M & Shilling, M. [Sa]. COVID-19 potential implications for
130

the banking and capital markets sector. Deloitte Insights. Available at: https://www2.
deloitte.com/content/dam/insights/us/articles/6693_covid-19-banking/DI_COVID-19-
banking.pdf (accessed on 22 September 2021).
Barua, B & Barua, S. 2020. COVID19 implications for banks: evidence from an emerging
131

economy. SN Business & Economics (1)19. Available at: https://doi.org/10.1007/s43546-020-

00013-w (accessed on 22 September 2021).
BusinessTech. 2018. A warning to South Africa’s big four bank: competition is coming.
132

Available at: https://businesstech.co.za/news/banking/270411/a-warning-to-south-africas-

big-four-banks-competition-is-coming/ (accessed on 22 September 2021).
CGI. [Sa]. CGI PayPartner360: winning the wallet war. Available at: https://www.cgi.com/sites/
133

default/files/2019-12/cgi-paypartner360-retail-banking.pdf (accessed on 22 September

2021).
Deloitte Access Economics. 2014. Competition in banking. Available at: https://
134

www2.deloitte.com/content/dam/Deloitte/au/Documents/Economics/deloitte-au-
economics-competition-in-banking-010712.pdf. (Accessed on 22 September 2021).
Economics Observatory. 2020. How is coronavirus affecting the banking sector? Available
135

at: https://www.economicsobservatory.com/how-coronavirus-affecting-banking-sector
(accessed on 22 September 2021).
Lund, S, Mehta, A, Manyika, J & Goldshtein, D. 2018. A decade after the global financial
136

crisis: what has (and hasn’t) changed? Available at: https://www.mckinsey.com/industries/

financial-services/our-insights/a-decade-after-the-global-financial-crisis-what-has-and-
hasnt-changed (accessed on 22 September 2021).

25
Matsebula, V & Yu, D. [Sa]. South African Banks need to do more to ensure financial
137

inclusion. The Conversation. Available at: https://theconversation.com/south-african-banks-

need-to-do-more-to-ensure-financial-inclusion-141139 (accessed on 22 September 2021).
Munacinga S. 2015. Market structure and competition in the South African banking sector.
138

Procedia Economics and Finance, Vol. 30 pp. 825 – 835

National Treasury. 2009. The vision for financial inclusion. Available at: https://cenfri.org/
139

wp-content/uploads/2017/11/Treasury-financial-inclusion-framework_March-2009.pdf
(accessed on 22 September 2021).
Peterson Institute for International Economics (PIEE). 2018. What is globalization? And how
140

has the global economy shaped the United States? Available at: https://www.piie.com/
microsites/globalization/what-is-globalization (accessed on 22 September 2021).
PricewaterhouseCoopers 2019. South Africa – major banks analysis. Available at: https://
141

www.pwc.co.za/en/press-room/major-banks-analysis---september-2019.html. (accessed
on 22 September 2021).
Porter, ME. 2021. Porter’s five forces analysis: threat of substitutes. Available at: https://www.
142

smartinsights.com/online-brand-strategy/brand-development/how-to-use-porters-5-
forces-model/ (accessed on 22 September 2021).
Rafay, A. & Farid, S. 2018. Competitive Environment in Banking Industry: Evidence from
143

an Emerging Economy. Business & Economic Review, Vol. 10 (3), pp. 65-84
Simatele, M. 2015. Market structure and competition in the South African banking sector.
144

Proceedings of the Fourth Economics and Finance Conference, 25–28 August, International
Institute of Social and Economic Sciences, London. Available at: https://ideas.repec.org/p/
sek/iefpro/2204816.html (accessed on 22 September 2021).
Simbanegavi W. 2015. Testing for competition in the South African banking sector. Journal
145

of African Economies, 2015, Vol. 24 (3), pp. 303–324

Steytler N & Powell D. 2010. The impact of the global financial crisis on decentralized
146

government in South Africa. Available at: https://www.cairn.info/revue-l-europe-en-

formation-2010-4-page-149.htm. (accessed on 22 September 2021).
Trading Economics. [Sa]. South Africa interest rate. Available at: https://tradingeconomics.com/
147

south-africa/interest-rate (accessed on 22 September 2021).

West, E. 2020. Covid-19 impact sends Banks into tailspin with huge drop in profits. Available
148

at: https://www.iol.co.za/business-report/economy/covid-19-impact-sends-banks-into-
tailspin-with-huge-drop-in-profits-0ff1fd09-327b-4721-85d7-8bc06388901f (accessed
on 22 September 2021).
Whitehouse, D. 2020. Coronavirus: Ecobank CEO says COVID-19 can boost digital
149

financial services. The Africa Report. Available at: https://www.theafricareport.com/27482/

coronavirus-ecobank-ceo-says-covid-19-can-boost-digital-financial-services/ (accessed
on 22 September 2021).
150

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TOPIC 2
Banking products and services

AIM
At the end of this topic you should understand the products and services provided by banks,
151

and why banks offer different services.

Learning outcomes

On completion of this topic you should be able to do the following:

• Differentiate between the various products and services that banks offer to their
clients.
• Distinguish between the products and services offered by banks.
• Explain why banks offer different products and services to their clients.

TOPIC CONTENT
152 Study unit 4: Differentiating between bank products and services

OVERVIEW
This topic considers banks as financial services firms, which act as intermediaries by
153

borrowing and lending the public’s funds in the economy. They identify the financial
services that the public demands, provide those services efficiently and sell them at
a competitive price. The topic also explains the cheque as a banking product.

154

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Study unit 4
Differentiating between bank products and services

CONTENTS
155 Aim
156 Key concepts
157 Learning outcomes
158 Overview
159 4.1 Different products and services offered by banks
160 4.2 Classification of banking products and services
161 4.3 The main aim of banks in offering products and services to clients
162 4.4 Approaches to and methods of identifying different products and services
163 4.5 Procedures and channels followed to satisfy clients’ needs
164 Assessment
165 Summary

AIM
At the end of this study unit you should have a clear understanding of the different
166

products and services that are offered by banks.

Key concepts

y products
y services
y marketing
y strategies
y weakness

Learning outcomes

At the end of this study unit you should be able to do the following:
• Differentiate between products.
• Differentiate between services.
• Explain why banks offer different products and services.

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OVERVIEW
This study unit deals with the different products and services that banks offer. It also
167

explains why banks offer different products and services.

4.1 DIFFERENT PRODUCTS AND SERVICES OFFERED BY

BANKS
To understand the products and services provided by banks, it is necessary to understand
168

the categories of products and services in banking. What do we mean by products and
services? Products are items produced or provided by banks, such as the different types
of accounts offered by banks. Services are devices for handling information located in
banks; individuals or clients use these devices to get access to their funds and to the
possible credit at their disposal.

In South Africa, the different products offered by banks can be broadly classified into:
169

retail banking; corporate finance; and treasury operations. Retail banking is the visible
face of banking that deals directly with the general public, with bank branches located
in cities and towns. The corporate finance operations of banks are defined as activities
and transactions related to a company’s (borrower’s) strategic decisions that have a
financial and monetary impact, and to raise capital from the bank for the establishment,
expansion or acquisition of a business. Treasury operations are the departments in banks
responsible for managing the best possible use of surplus funds, maintaining liquidity,
reducing the overall costs of funds, mitigating operational and financial risk, and liaising
with regulatory bodies.

4.2 CLASSIFICATION OF BANKING PRODUCTS AND SERVICES

Banks provide their clients with products and services that can improve their lives. As
170

technology and competition increase, banks are offering more and improved products
and services to remain current and attract more clients. Figure 4.1 shows some of the
current products and services provided by banks in South Africa:

171

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172

Figure 4.1: Classification of banking products and services

4.2.1 Retail banking

Retail banking is the division of a bank that deals with retail clients. It includes a wide
173

variety of banking services that belong to similar categories, such as savings accounts,
credit accounts, mortgages, investment and insurance.

4.2.1.1 Deposit products

• A savings account is a demand deposit account that is used when the client has no
immediate need for their money but wants quick access to it in case of emergencies
or unforeseen expenses. It is an interest-bearing account, though the account rates
are lower than the inflation rate. However, your risk of loss is virtually zero because
your savings are insured.
• A current account is a deposit account that allows you to deposit and withdraw money
for your everyday needs quickly and easily. A current account bears no interest rate,
unless banks want to attract more clients. However, banks charge monthly service
fees and clients must keep a minimum balance in their accounts.

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This current account allows the client to arrange or apply for an overdraft. This means
that the bank will allow you to withdraw an agreed amount beyond your current bank
balance. Of course an overdraft comes with a higher interest rate.
• A long-term deposit is a basic deposit account into which clients can deposit their
extra income for a specific period and earn a higher interest rate than in a savings
account. Long-term deposits have terms between 12 months and 60 months.

4.2.1.2 Credit products

• Credit and debit cards might resemble each other, but they are very different. A
credit card allows you to borrow money from the bank up to an agreed limit to buy
things or to withdraw cash from automated teller machines (ATMs). Clients must apply
to get a credit card and applications are approved or rejected based on clients’ credit-
worthiness. On the other hand, a debit card only allows you to spend or draw money
that you have previously deposited with the bank. It is linked to either your current
or your savings account. The bank issues a debit card when the account is opened.
• Consumer finance has to do with the process of lending between the bank and the
client. Consumer finance is divided into two parts, namely when the client wants to
buy a more expensive product than usual, or when the client wants to consolidate
their debt. The second amounts to a personal loan in the form of a line of credit. It is
similar to a credit card, but the difference is that a line of credit requires more formal
application and approval processes.
• A mortgage is a loan used to purchase real estate that is taken against a property
owned by the client. The property could be a house, land or even a shop. Banks
face competition as non-banking financial institutions also offer mortgage loans. The
loans are payable with a monthly instalment. The property serves as security or col-
lateral and stays in the possession of the bank until the loan has been paid in full. This
means that the bank has a legal claim over the property for the duration of the loan,
and if you default on the mortgage (i.e. if you do not pay the monthly instalments),
the bank has the right to repossess the property and auction it off.

4.2.1.3 Investment products

• Wealth management is one of the services that banks provide under investment
products. Investopedia (2020) defines wealth management as an investment advisory
service that combines other financial services to address the needs of affluent clients.
In other words, the private banker works closely with the portfolio manager to invest
in different products, depending on their client’s risk appetite and financial aspirations.
• Insurance is a service that banks offer to their clients. Banks act as agents for insur-
ance companies and receive commission from the insurance companies concerned.
Banks use their big client databases to offer insurance cover to clients.
• Advisory services include a range of services offered by banks, such as investment
advice, the preparation of tax returns and help with record-keeping. Business clients
are often assisted by a bank in checking the credit standing of their prospective clients
and in evaluating marketing opportunities abroad.

31
• Safe custody means that banks accept valuables (e.g. jewellery, insurance policies and
wills) from their clients for safekeeping. Banks may know what is kept in a safety box
(an “open” safety box) or they may have no knowledge of the contents of a safety box
(a “closed” safety box).

4.2.2 Corporate finance

Every decision made in a business has financial implications, and a decision that involves
174

the use of money is a corporate finance decision. In short, corporate finance is based
on how to maximise the value of the company through its financing and investment
decisions (i.e. how best to raise the money needed and use that money effectively).
Corporate finance activities range from starting a new venture and expanding an existing
business to merging with or acquiring another business. In South Africa, Black Economic
Empowerment is also a corporate finance activity.

• Mergers and acquisitions are terms that are often used interchangeably, but they
have different meanings. A merger is the combination of two companies to form a
new legal entity under one corporate name. According to Investopedia (2020), an
acquisition, on the other hand, is an outright purchase of the other company.
An upsurge in globalisation has contributed to increased competition and facilitated
a global spurt in cross-border mergers and acquisitions (Bhalla 2014). Companies
looking to restructure, diversify or even consolidate their operations have awakened
to the possibility of engaging in mergers and acquisitions, and are asking banks for
advice on potential targets and/or buyers. Banks normally have a deep understanding
of the market and the full complexity of their clients as they have footprints in many
countries.
• Capital investment refers to money used by companies to purchase fixed assets. It
is therefore money invested in and used by a business to buy fixed assets and not
to cover operational expenses. The bank offers businesses the finance they need to
achieve the following:
• to diversify the business by either adding value, developing new products or in-
creasing production
• to replace existing assets that have reached the end of their lives.
• to introduce new technology to gain a competitive edge in their market
Banks may assist businesses in acquiring capital investment, for example in the form
equity capital (the portion of business capital that is raised in exchange for ownership
of the business); debt finance (a bank loan that a business acquires and pays back with
interest for a stipulated period of time); or venture capital (funds that are invested by
institutional investors or wealthy individuals in a promising venture with high growth
potential).
• Black Economic Empowerment (BEE) transactions are aimed at redressing the wrongs
of the apartheid system, which excluded black people from participating meaning-
fully in the South African economy. BEE has been legislated by the South African
government to redress the injustices of the past. It was first introduced in the 1990s,
when Sanlam and Anglo American launched an initiative to empower certain black
business people. Other BEE transactions followed, including transactions involving

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SAB Zenzele Kabili, Vodacom’s YebuYethu BEE scheme and Exxaro’s empowerment
restructure. These BEE transactions were complex and empowered communities that
did not have equity to purchase stakes in companies that issued shares. Banks played
and still continue to play a crucial role in providing the right expertise to structure BEE
agreements for both parties and financing the transactions.

4.2.3 Treasury operations include various services that are offered by banks. Banks’
175

treasury departments are their most important but often least understood departments.
Let’s explore some of the treasury operations that are the responsibility of banks’ treasury
departments:

• Assets and liability management is a primary function of the treasury department.

To perform this function, the treasury department matches assets and liabilities stra-
tegically, improves the bank’s efficiency and profitability, and reduces risk. According
to the Management Study Guide (2015), it is the job of the treasury department to pre-
pare various financial models to forecast the amount of the interest income that the
bank stands to earn in different economic scenarios. It is also the job of the treasury
department to predict exactly how sensitive this interest income will be to external
shocks like changes in the interest rates.
• Disaster management is another responsibility of the treasury departments of banks
and it involves mitigating the effects of unforeseen circumstances. The department
employs various tools to protect the bank against exposure to different kinds of risk.
Disasters can interfere significantly with critical business operations for weeks and
even months at a time when banking services are in great demand. Sophisticated
and interconnected ATM networks, internet banking solutions and telebanking are
some of technologies currently deployed by banks to keep businesses running dur-
ing disaster periods.
• Liaison with regulatory bodies is the responsibility of banks’ treasury departments.
The treasury departments of banks are highly regulated. According to the Manage-
ment Study Guide (2015), treasury departments must maintain banks’ capital adequacy
ratios and reserve ratios, and they must liaise with regulatory agencies on these and
similar matters. The government usually invites treasury department executives when
decisions about the banking industry need to be made. These executives also lobby
on behalf of the banking industry if adverse regulations are put in place.

Activity 4.1

According to the previous study unit, insurance companies are in competition with banks.
According to this study unit, banks act as agents for insurance companies (see section
4.2.1.3 above). Are banks and insurance companies competitors or allies? Substantiate
your answer.

Hint: The question requires you to decide whether banks and insurance companies are
allies or competitors. Then you must argue or defend your answer.

33
 15 Feedback:

While you were thinking about the above activity, you probably realised that banks have
bigger database than insurance companies and that they use these databases to earn com-
mission from insurance companies. Banks and insurance companies can therefore be seen
as allies rather than competitors.

Activity 4.2

In this study unit we do not discuss all the products and services offered by banks. Identify
and name more products and services that are offered by banks in South Africa.

Hint: Find out about products and services that are offered by banks in South Africa in
addition to those discussed in this study unit. Some of the products and services you
identify will be discussed in detail as your studies in banking progress.

16 Feedback:

Banks give their products and services unique names to gain a competitive advantage over
other banks. If you have made a table to compare banks’ product and service offerings, you
have probably realised that all major banks offer products and services that are quite similar
despite their different names.

4.3 THE MAIN AIM OF BANKS IN OFFERING PRODUCTS AND

SERVICES TO CLIENTS
176 An individual client is a person who opens a bank account in his or her own capacity.

A corporate client is a business organisation that is treated as a legal entity. This business
177

may have a bank account in its own name that is separate from the personal bank accounts
of the directors. Banks compete and specialise in meeting the needs of particular groups
of clients, such as individuals or small savers and business or corporate clients. Banks
satisfy clients’ liquidity needs. Liquidity is the ability to meet your current obligations by
quickly and readily converting an asset into cash without significant loss. Banks offer high
liquidity in the deposits they receive and in the loans they provide. They give borrowers
access to liquid funds to spend precisely when those funds are needed.

Client satisfaction has become the centre of attention of many banks as it represents an
178

important marketing variable. Different researchers agree that experience has shown
that banks find it challenging to achieve a reasonable rate of client satisfaction. Trying
to meet this challenge is a permanent process with varied results. A satisfied client is of
great importance to the bank. Keeping a current client happy requires less effort, time and
money than getting a new one (Titko & Lace 2010; Korauš 2011; Chochoľáková, Gabčová,
Belás & Sipko 2015). Bilan (2013) warns that clients do not want to play games – if they
feel their needs are not satisfied, they choose another bank.

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4.4 APPROACHES TO AND METHODS OF IDENTIFYING DIF-

FERENT PRODUCTS AND SERVICES
179 Approaches
Banks are similar to insurance companies and other institutions that offer financial services
180

as they use marketing as a tool to identify the needs and wants of the target market to
which a product is sold. Banks compete with other banks and financial intermediaries to
obtain savings from depositors.

Banks require a management process that is capable of identifying, anticipating and

181

satisfying client requirements profitably. All large retail banks have a marketing department
that takes overall control of this function.

182 Methods of identifying different products and services

A bank conducts business with various members of the public. To function effectively,
183

a bank must be able to distinguish between the different types of client and deal with
them on their own particular merits. To obtain this goal, marketing is used as a tool to
make sure that the needs of target clients are optimally satisfied.

184 Marketing, when applied to banking, can be defined as:

i. dentifying present and future markets for services

ii. setting long- and short-term goals for the progress of existing and new services
iii. selecting which markets to serve and identifying client needs in those markets
iv. managing the services to persuade clients to use them at a profit, and in so doing
controlling the bank’s success

185 Banks have singled out four important issues for successful marketing:

186 (a) Strategy

An individual retail bank needs an overall strategy to create a unique personality for
187

itself that is consistent with the bank’s public image. The strategy needs to take into
account the strengths and weaknesses of competitors – both banks and other financial
institutions – and the strengths and weaknesses of the bank implementing the strategy.
Figure 4.2 below can be used as a strategy for selling the image of this bank and
showing its commitment to its clients.

188

Figure 4.2: Metrobank marketing slogan

189

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190 (b) Services: price and productivity
Banks expect their services to be profitable and for this reason they must meet the needs
191

of their clients in a cost-effective and productive manner. To achieve this goal, banks levy
direct charges on any services rendered.

192 (c) The selling role

All staff are trained in the art of selling the bank’s products and services. The emphasis is
193

on the bank’s business as the top priority for its staff. The right environment also has to
be created. The selling role must be balanced against the operational needs of running
the business to provide a high standard of counter service for existing clients. Open-plan
areas are created for staff to discuss services with clients and prospective clients.

Banks regard their services as “products” and talk about “retailing their products” as if
194

they were actual goods on the shelves behind the counter. In its selling role, a bank’s
service can be packaged and sold as a product.

195 (d) Market segmentation

The branch manager and sales team in the branch and sub-branches of a bank are
196

responsible for marketing. The development of market segmentation is of particular

interest. Banks divide their clients into groups according to their needs and affordability
– students, housewives, manual workers, the wealthy, the elderly and business clients –
or simply according to the client’s income group (see study unit 9).

4.5 PROCEDURES AND CHANNELS FOLLOWED TO SATISFY

CLIENTS’ NEEDS
Banks offer a range of services that can be tailored to suit clients’ needs. They have
197

structures and expertise to provide both individual and corporate clients with effective
advice and support. In offering products to their clients, banks follow different procedures.
These are discussed in detail in later study units. Banks take into account their clients’
interest in their financial requirements. Furthermore, they believe that they offer a full
range of solutions, which will help various clients to grow. Most banks offer more than
one of the many alternative banking channels, such as:

• branch banking
• telephone banking
• online/internet-based banking
• cell phone banking via the internet or via secure SMS
• ATM banking for clients to withdraw cash and conduct other financial transactions
• electronic payments and collections banking solutions (virtual banking)

198

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17 Assessment

(1) Distinguish between the different products and services offered by banks.
(2) Explain the difference between the products and services aimed at individuals and
those aimed at corporate clients.
(3) Identify the methods for identifying different products and services.
(4) Evaluate the importance of having a division dealing with disaster management in
a bank.

18 Summary

This study unit gave an overview of some important products and services offered by
banks. These are some of the products and services you may encounter as you pursue
you career in banking.
It is crucial to point out the importance of and roles played by the different departments
in a bank, especially the treasury department, which is considered the most important
and the least understood department. The treasury department is tasked with maintain-
ing the bank’s liquidity, managing risk through disaster management initiatives, keeping
in constant contact with the regulatory bodies, etc.
The main aims of banks in offering products and services to clients were highlighted.
Banks must differentiate themselves in a very competitive market. They offer liquidity
to clients and ensure that their customers are satisfied. The study unit concluded with
how banks go about choosing the best products and services to achieve their objectives.

REFERENCES AND ADDITIONAL READING MATERIAL:

Ashar J. 2019. What is the main activities in corporate finance? Available at: https://www.
199

financialdirector.co.uk/2019/11/08/what-are-the-main-activities-in-corporate-finance/
(accessed on 13 May 2021).
Bhalla, P. 2014. Mergers & acquisitions in India: a sectoral analysis. International Journal of
200

Business and Economic Development 2(2):119.

Bilan, Y. 2013. Sustainable development of a company: building of new level relationship
201

with the consumers of XXI century. Amfiteatru Economic 15:687–701.

Capital One. (2019). A guide to banking products and services. Available at: https://www.
202

capitalone.com/bank/money-management/banking-basics/banking-products-and-
services/ (accessed on 18 September 2021).
Chochoľáková, A, Gabčová, l, Belás, J & Sipko, J. 2015. Bank customers’ satisfaction,
203

customers’ loyalty and additional purchases of banking products and services. A case
study from the Czech Republic. Journal of Economic Literature 8(3):82–94.
Corporate Finance Institute. 2020. Banking products and services. Available at: https://
204

import.cdn.thinkific.com/4670/courses/852131/CoursePresentation-210305-193515.pdf
(accessed on 18 September 2021).

37
Corporate Finance Institute. 2020. Corporate finance overview. Available at: https://
205

corporatefinanceinstitute.com/resources/knowledge/finance/corporate-finance-industry/
(accessed on 18 September 2021).
Corporate Finance Institute. 2016. Introduction to corporate finance. Available at: https://
206

www.youtube.com/watch?v=5eGRi66iUfU (accessed on 18 September 2021).

207 Korauš, A. 2011. Financial marketing. Bratislava: Sprint.
Management study guide. 2015. Available at: https://www.managementstudyguide.com/
208

treasury-operations-of-banks.htm (accessed on 19 September 2021).

Saba, A. 2018. Has BEE been a dismal failure? Available at: https://mg.co.za/article/2018-
209

08-31-00-has-bee-been-a-dismal-failure/ (accessed on 13 May 2021).

Titko, J & Lace, N. 2010. Customer satisfaction and loyalty in Latvian retail banking.
210

Economics and Management:1031–1038.

Ward, S. 2021. What is capital investment? Available at:
211 https://www.thebalancesmb.com/
capital-investment-2948114 (accessed on 13 May 2021).

212

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TOPIC 3
Investments and deposits

AIM
At the end of this topic you should understand investments or deposits by clients as products
213

designed to attract funds from depositors with surplus funds and to advance these funds to
borrowers in need of funds. You should also be able to distinguish between different kinds
of saving and investment accounts.

Learning outcomes

On completion of this topic you should be able to do the following:

• Explain various investment products offered by banks.
• Describe the features of the various types of investment accounts as products avail-
able in the banking industry.
• Explain the procedures for opening an investment account.
• Distinguish between the various investment accounts in a bank.

TOPIC CONTENT
214 Study unit 5: Savings accounts

215 Study unit 6: Call deposit accounts, notice deposit accounts, fixed deposit accounts, unit
trusts and stokvels

OVERVIEW
Banks are moving closer to the concept of universal banking, which means that banking
216

activities converge with investment banking, insurance and other financial services.
Banks offer a variety of services via different delivery channels, which add up to greater
convenience for their clients. They operate as financial department stores, offering different
products and services under one roof. The common services include deposit-taking,
lending, financial leasing, payment services, supplying guarantees and credit commitments,
and trading in money market instruments.

In these study units we focus on deposit-taking services, unit trusts and savings accounts
217

as forms of investment. Investments can be seen as the use of savings by clients with
surplus funds to provide the required finance to clients with a shortage of funds.

39
Study unit 5
Savings accounts

CONTENTS
218 Aim
Key concepts
219

220 Learning outcomes

221 Overview
222 5.1 Savings accounts
223 5.2 Features of a savings account
224 5.3 Opening a savings account
225 Assessment
226 Summary

AIM
At the end of this study unit you should have a clear understanding of all the features of
227

a savings account and the basic procedures that are followed when opening a savings
account.

Key concepts

y savings
y debit card
y FICA verification

Learning outcomes

At the end of this study unit you should be able to do the following:
• Discuss the features of a savings account.
• Explain the procedures that are followed to open a savings account.

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OVERVIEW
The previous study unit introduced savings accounts, which are one of the deposit
228

products offered by banks. In this study unit we focus on the types of savings accounts
offered in South Africa, their features and the procedures that are followed when opening
a savings account.

5.1 SAVINGS ACCOUNTS

One of the earliest sources of funds obtained by banks was savings accounts. A savings
229

account is a deposit account designed to hold money you do not need or plan to spend
immediately. You earn interest on the money you save your initial capital is guaranteed
and you can easily access your money when necessary. All the major South African banks
offer savings accounts under different brand names and with varying interest rates to
attract more clients.

The original idea was that savings accounts should appeal to small savers. Banks handed
230

out savings boxes at schools, companies and so on, and clients put their money in these
boxes. They would then bring the savings boxes to the bank, where it was opened, and the
proceeds credited to the client’s account. However, this system caused chaos, especially
when people arrived with their boxes just as the bank was about to close. In the 1980s,
the system changed, and savings boxes were no longer used.

Nowadays clients want convenient access to their cash, and they want transactions to
231

proceed smoothly and easily. Technology allows banks to meet these needs by issuing
debit cards to savings account holders. A debit card is a payment card that deducts money
directly from your savings account when it is used. Figure 5.1 shows a typical debit card:

232

Figure 5.1: Example of a debit card

Source: https://www.visa.co.za/pay-with-visa/find-a-card/debit-cards.html

41
 5.2 FEATURES OF A SAVINGS ACCOUNT
233 The savings accounts offered by different banks share the following features:

• Clients can make cash withdrawals and deposits at ATMs or branches.

• A savings account is flexible; therefore clients can choose where and when they would
like to do banking.
• Clients can check their account balances by requesting mini-statements from ATMs.
• A personal identification number (PIN) is used as a security measure to protect clients
against fraud.
• Debit orders can be arranged to enable clients to pay their accounts and policies easily.
• Savings accounts result in a relationship between the bank and the client; clients’
record can be tracked via these accounts, especially when they apply for loans.
• New Visa Electron cards allow clients to carry less cash on them.
• Any purchases can be made with a debit card that is linked to the savings account.
• A savings account earns a higher interest rate than a current account.
• Interest rates depend on the minimum balance in the account.

5.3 OPENING A SAVINGS ACCOUNT

The formalities of opening a savings account are simple. The client is required to supply
234

information such as his or her name, address and occupation, a specimen signature and
an initial deposit.

235 Before opening the account, the bank must do the following:

• Establish the identity of the person opening the account.

• All clients must be FICA verified; that is, the client has to provide the bank with an
original document that is no more than three months old as proof of his or her physi-
cal address.
• Determine that the person is authorised to open the account.
• Ensure that the person is employed.

236 The standard formalities for opening accounts are as follows:

• An application form is completed at the new accounts desk.

• The client must submit a certified copy of his or her identity document or passport.
• In the case of a business client, supporting documents must be submitted.
• Specimen signatures of the client or the parties involved must be obtained.
• In the case of a business or more than one partner in a business, a mandate should
be obtained.
• The bank charges, such as service fees, commission charges and tariffs, should be
explained to the client.
• The way the client is expected to manage the account should be explained fully before
he or she opens an account.

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Activity 5.1

Fill in the brand names of savings accounts offered by the biggest banks in South Africa,
the minimum deposit required to open the savings account in each case and the nominal
interest paid by each bank.

Savings account name Minimum deposit Nominal interest rate

ABSA
Capitec
FNB
Nedbank
Standard Bank

Hint: Conduct a search and ask each bank to provide the required information. You will also
find a number of good sources online or in print media that contain the information you need.

19Feedback:

f you have managed to get all the information, you will realised how easy it is to choose the
savings account with the best interest rate to achieve your financial goals.

20 Assessment

(1) Discuss the features of a savings account.

(2) Explain why the procedures that are followed when opening a savings account are
necessary.

21 Summary

Savings accounts are designed to attract funds from clients who wish to set aside money
for future expenditures. Banks offer various savings accounts with different interest rates
and conditions. The features of savings accounts and the procedures that must be fol-
lowed when opening a savings account are similar for all banks.

43
 REFERENCES AND ADDITIONAL READING MATERIAL:
Meistre, AJ. 2013. Money Launder and Terrorist Financing Control Regulations. Available
237

at: http://baywealth.co.za/images/Downloads/BWM%20FICA%20Internal%20Rules.pdf
(accessed on 23 July 2021).
Standard Bank. 2021. The difference between savings and investments. Available at:
238

https://www.standardbank.co.za/southafrica/personal/learn/the-difference-between-
saving-and-investments (accessed on 23 July 2021).
239 Van Wyk, D. 2021. Which savings accounts offer the best interest rates? Available at:
https://www.justmoney.co.za/news/2021/08/03/which-savings-accounts-offer-the-best-
240

interest-rates/ (accessed on 23 July 2021).

Visa. (2021). Visa Classic Card. Available at: https://www.visa.co.za/pay-with-visa/find-a-
241

card/debit-cards.html (accessed on 23 July 2021).

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Study unit 6
Call deposit accounts notice deposit accounts, fixed
deposit accounts, unit trusts and stokvels

CONTENTS
242 Aim
243 Key concepts
244 Learning outcomes
245 Overview
246 6.1 Call deposit accounts
247 6.2 Notice deposit accounts
248 6.3 Fixed deposit account
249 6.4 Unit trusts
250 6.5 Stokvels
251 Assessment
252 Summary

AIM
At the end of this study unit you should be able to explain the different deposit accounts
253

that are available. You should also be able to differentiate between call deposits and
notice, fixed deposit accounts, and unit trusts, as well as stokvels.

Key concepts

y call deposits
y notice deposits
y unit trusts
y stokvels
y higher returns
y interest

254

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 Learning outcomes

At the end of this study unit you should be able to do the following:
• Identify and explain various investment products offered by banks.
• Differentiate between the different investment accounts.
• Describe the features of the different investment accounts.
• Apply procedures for opening an investment account.
• Discuss unit trusts as an investment option.

OVERVIEW
In this study unit we focus on banks’ deposit-taking services. Investments can be seen as
255

the use of savings by clients with surplus funds to provide clients with a shortage of funds
with the required finance. Banks offer clients a number of different investment options.

6.1 CALL DEPOSIT ACCOUNTS

A call deposit account is a bank account for investment funds from which a client may
256

withdraw funds with no advance notice and no fixed deposit period. It provides instant
access to funds and allows unlimited withdrawals and deposits.

257 Features of a call deposit account

Funds placed in a call deposit account can be withdrawn on demand without prior notice
258

of the intended withdrawal. This option is suitable for all types of investors. A minimum
balance should be maintained, for example R1 000, although this amount differs from one
bank to the next. The client can deposit additional funds into the account at any time. If
an emergency arises, the client can withdraw all the excess money, but must leave the
minimum balance in the account unless he or she is closing the account.

Call deposit accounts can be linked to both the client’s current account and his or her
259

savings account. The client can transfer funds to and from these linked accounts using
ATMs, telephone banking or internet banking. Stop order facilities can also be arranged
for transfers to call deposit accounts. In most cases, statements are available on request.

The purpose of call deposits is to earn a higher rate of interest than in the case of a savings
260

account, while still having the funds available within 24 hours. The excess funds can thus
be put to better use and earn a higher return for the depositor.

Interest is calculated daily and paid monthly. Interest rates change from time to time,
261

depending on market conditions. A cash deposit fee is charged whenever cash is paid
into the account.

262 Procedure for opening a call deposit account

The procedure for opening a call account is the same as for a savings account. In addition,
263

the client should have an initial deposit of for instance R1 000 (depending on the bank
concerned). The client might also be required to deposit a minimum of, say, R500 every
month to operate the account.

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6.2 NOTICE DEPOSIT ACCOUNTS

In banking terminology, notice deposit accounts refer to savings accounts that permit
264

withdrawal without penalty; however, the bank must be notified in advance when a client
plans to withdraw money from his or her notice deposit account.

265 Features of a notice deposit account

The notice periods linked to this type of account are normally specified by the client,
266

although banks may also prescribe certain notice periods they. The most popular notice
deposit account in South Africa is the 32 days’ notice account. The funds are available at
the end of the notice period. Many clients open a notice deposit account to earn an even
higher rate of interest than with a call deposit account.

Notice deposit accounts have a minimum opening balance, just like a call deposit account.
267

Deposits and notice withdrawals can be made in amounts of R100 or more. If a client
wishes to give an advance notice instruction, he or she must do so in writing. Multiple
withdrawals may be made, but they are subject to further withdrawal notice periods.
Statements are available on request.

Interest is calculated daily and paid quarterly or monthly, as requested by the client.
268

After the notice period, the money can be reinvested according to the client’s needs.
Transactions on these accounts are mostly conducted free of charge.

269 The following example explains how this type of investment account works:
Thandiwe invests R5 000 on 32 days’ notice at an interest rate of 15% per annum. When
270

she wants to withdraw her money, she must give the bank notice 32 days before she
needs the money. The bank then prepares and makes the money available after 30
days. Thandiwe will receive her R5 000 plus the 15% interest per annum, apportioned
approximately. She will get the money only on the 32nd day after she has given notice.

271 Procedure for opening a notice deposit account

The procedures for opening a notice deposit account are the same as for opening a savings
272

account. A client may deposit a lump sum into the account and demand 32 days’ notice
or more. Alternatively, he or she may have a stop order for a fixed amount deposited into
the account monthly.

6.3 FIXED DEPOSIT ACCOUNTS

Fixed deposit accounts are savings accounts intended for longer-term savings. They
273

are linked to an agreed period of time (12 months, 24 months or 60 months). When the
investment amount has been deposited and the period chosen, the interest rate is specified
and locked in until the end of the chosen investment period. Fixed deposit accounts earn
higher interest than ordinary savings accounts.

274 Features of a fixed deposit account

Fixed deposit accounts are also called time deposits, and they have fixed maturity dates
275

and fixed rates of interest. These accounts carry a minimum maturity date and funds cannot

47
be withdrawn or deposited before that date. A certain amount of money is invested for a
fixed period of time (normally from six to 60 months) at a fixed rate of interest, as agreed
at the time of investment. Fixed deposit accounts normally attract higher interest rates.
Most banks offer senior citizens an additional percentage bonus interest on investments
over 12 months. The money can be reinvested after the maturity period.

276 The following example illustrates how fixed deposit accounts work:
Vusi invests his matured insurance policy money of R20 000 in a fixed deposit account
277

for a period of six months at an interest rate of 15% per annum. He cannot withdraw the
money before the end of six months. At the end of the period he will get R20 000 plus
interest on his investment.

278 Procedure for opening a fixed deposit account

A fixed deposit account may be opened on similar terms as an ordinary savings account.
279

A client deposits a lump sum into the account for a certain agreed-upon period.

6.4 UNIT TRUSTS

A unit trust is an investment that enables clients to pool their money with other investors.
280

This pooling allows clients to benefit from professional fund management and enables
them to invest in markets that they would otherwise find difficult to access. As an investor
in a unit trust, a client is allowed a number of units at the time he or she invests. These
units represent the client’s share of the overall unit trust fund. Unit trusts are sold at the
ruling price of the share market.

281 Look at the following scenario:

Motshabi invests R20 000 in a unit trust. In return, she receives a number of units as
282

determined by the daily price of the fund on the date of investment. If a unit in the fund
is priced at R10 on that day, Motshabi will receive 2 000 units for her R20 000. The price
of a unit increases, and decreases based on the price of investments held by the fund.

For an example, if the unit price increases to R13, the value of the 2 000 units grows by
283

R6 000 to R26 000. If the assets fall in value to R8, the value of 2 000 units decreases to
R16 000.

284 Features of a unit trust account

285 Unit trusts are characterised by the following features:

• Each unit trust scheme has a distinct set of investment objectives.

• They are open-ended schemes of investment.
• The trusts are designed according to the financial limitations of investors.
• Unit trusts are managed by a fund manager who does research to determine which
portfolio would be the best for investors.
• The trusts have a medium-term or long-term investment scope.

286

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287 Procedure for opening a unit trust account

Most people do not have sufficient time, experience or capital to invest directly in stock
288

exchange securities. A unit trust solves this problem by collecting a pool of money
subscribed by a large number of individual savers. The unit trust then buys and sells
securities with this money, using the expertise of professional investment managers. The
prices of units bought (offer price) and sold (bid price) appear in most daily newspapers.

The unit trust saver receives either a certificate or a statement showing that he or she holds
289

a certain number of units in the trust. The income of the trust consists of dividends and
interest on the investments paid by the companies. Management expenses are deducted
before the dividends are shared between the investors on the basis of the number of
units bought by each investor. In South Africa, unit trusts are regulated by the Collective
Investment Schemes Control Act 45 of 2002.

6.5 STOKVELS
According to Matuku and Keseke (2014), stokvels are informal self-help groups of
290

people with a common goal who pool funds together every month to address poverty,
unemployment, a lack of access to funding and income insecurity. For some time stokvels
were part of a hidden sector of the economy. It is estimated that the value of stokvels in
South Africa amount to R49 billion (Bophela & Khumalo 2019). This type of financial scheme
is not unique to South Africa – it is common around the world. For example, the names
for similar schemes are ayuuto in Somalia and chama in Swahili-speaking in East Africa.

Even though stokvels are not recognised in the official economic plans and policies of
291

the government, the value contributed by stokvels has not gone unnoticed by the major
banks in South Africa. Banks now even offer incentives to stokvel members that open
accounts with them. The benefits offered by banks include funeral cover, discount on
school supplies and discounts when shopping at a selected partner stores.

Note that the COVID-19 pandemic has put stokvels at risk and threatens their survival in
292

several ways:

The imposition of social distancing means that close in-person contact with others, which
293

is a core characteristic of stokvels, is prohibited.

Many businesses had to close and many stokvel members lost their jobs. As a result, they
294

can no longer make contributions to a stokvel.

Activity 6.1

The South African Stokvel sector is massive and controls vast financial resources (an
estimated R49 billion). Why are stokvels not officially recognised in the economic plans
and policies of the government?

Hint: This is a very interesting topic. Discuss the question with your fellow classmates
and use available resources to substantiate your answer.

49
 22 Feedback:

I trust that you have found this question interesting and your discussion with fellow students
enlightening. Stokvels have the potential to empower people and contribute significantly to
the economy, but to realise this potential, investors’ attitude towards stokvels must change.

23 Assessment

(1) Explain the differences between unit trusts and stokvels.

(2) Explain the procedures that are followed to open a call deposit account.
(3) Differentiate between a call deposit account and a notice deposit account.
(4) Discuss the features of a fixed deposit account.
(5) Describe the administration and operation of a unit trust. What are the attractions of
this type of investment for small savers?

24Summary

Banks offer various savings and investment accounts to their clients. They encounter com-
petition from a whole range of institutions that offer similar investment products with
different interest rates, benefits and conditions. Investment increases a country’s produc-
tive capacity and raises the standard of living. Stokvels can also contribute significantly
to the economy of the country if the money deposited can be invested in capital assets
instead of consumable goods and services.

REFERENCES AND ADDITIONAL READING MATERIAL:

1life. 2020. How to start a stokvel. Available at: https://www.1life.co.za/blog/how-to-
295

start-a-stokvel (accessed on 20 August 2021).

Bophela, MJK & Khumalo, N. 2019. The role of stokvels in South Africa: a case of economic
296

transformation of a municipality. Business Perspectives 17(4):26–35.

Matuku, S & Kaseke, E. 2014. The role of stokvels in improving people’s lives: the case in
297

Orange Farm, Johannesburg, South Africa. Business Perspectives 7(4):26–37.

The Conversation. 2020. How South African stokvels manage their lending activities outside
298

the courts. Available at: https://theconversation.com/how-south-african-stokvels-manage-

their-lending-activities-outside-the-courts-135449 (accessed on 20 August 2021).

299

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TOPIC 4
300 Credit facilities
AIM
At the end of this topic you should be able to explain the basic principles of lending and
301

the different types of credit facilities available to clients.

Learning outcomes

On completion of this topic you should be able to do the following:

• Explain the criteria used and the process followed when evaluating a loan applica-
tion (credit loan granting cycle).
• Analyse the different types of credit facilities available to clients
• Discuss how banks derive income from lending and explain the factors that affect
the interest rate.

TOPIC CONTENT
302 Study unit 7: Credit evaluation

303 Study unit 8: Different types of credit facilities

304 Study unit 9: Income derived from lending

OVERVIEW
This topic considers credit and explains what credit is. It also looks at different types of
305

credit. In banking the term credit usually relates to loans. In accounting terms it means
an increase in liabilities or income. A credit facility is created when a bank enters into a
formal agreement with a client to extend credit, such as an overdraft, a revolving loan
account or a term loan.

306

51
Study unit 7
Credit evaluation

CONTENTS
307 Aim
308 Key concepts
309 Learning outcomes
310 Overview
311 7.1 The process of lending to the right client
312 7.2 Criteria for evaluating a loan application
313 7.3 Risks banks face with lending activities
314 Assessment
315 Summary

AIM
At the end of this study unit you should have a clear understanding of the process of
316

lending and the criteria that are used to evaluate a loan application.

Key concepts

y loan application
y lending process
y right client
y evaluating
y financial position

Learning outcomes

At the end of this study unit you should be able to do the following:
• Evaluate the process of lending to the right client.
• Discuss the criteria that are used to evaluate a loan application (credit loan granting
cycle).
• Assess the different risks that banks face in their lending activities.

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OVERVIEW
This study unit introduces the process that borrowers are subjected to to determine
317

whether they are eligible for funding by the banks.

7.1 THE PROCESS OF LENDING TO THE RIGHT CLIENT

Every adult natural person and every juristic person or association of persons has the right
318

to apply to a credit provider for credit. A credit provider in turn has the right to refuse to
enter into a credit agreement with any prospective consumer on reasonable commercial
grounds that are consistent with its customary risk management and underwriting
practices. On request from a client, a credit provider must advise that client of the dominant
reason for not granting credit to him or her.

319 The following are the objectives of credit evaluation by a bank:

• to provide the best tailored loan for the client and a quality loan for the bank
• to ensure compliance with regulations and bank policy
• to ensure that the level of risk is acceptable

The following are some of the factors that bank managers must consider when they
320

evaluate an individual or a business that is seeking credit:

• Credit worthiness. The bank manager checks the applicant’s credit history to deter-
mine his or her trustworthiness and ability to repay the loan.
• Loan size. The size of the credit should be such that the borrower is able to repay the
loan in full and on time when it matures.
• Purpose of the loan. The bank manager ensures that the loan sought fits the client’s
purpose for requesting it.
• Duration of the loan. Banks accept additional risk as the time horizon increases. The
length of the loan is one of the determinants that banks take into account to cover
their risk. Interest rates are charged accordingly.

The bank manager must follow the bank’s principles with regard to the client’s own
321

resources. Most banks consider whether the client invests a reasonable amount of his
or her own money in the project; if this is the case, the client has an incentive to see
the project through to a profitable conclusion. This rule does not necessarily apply to
personal borrowing, but some contribution from the client may still be required. When a
personal loan is granted to buy goods, the bank manager must bear in mind any current
government restrictions, which usually take the form of specifying a minimum deposit
and a maximum repayment period.

Like all other businesses, South Africa’s financial institutions are faced with social challenges
322

and responsibilities, such as community development. Institutions try to fulfil their social
responsibilities in different ways and offer different types of credit facilities to meet the
needs of the various types of clients.

53
If a client wants to finance a project, the bank manager must check whether the advance
323

offered to the client will be sufficient.

The lender of money is entitled to know for which purpose the credit facilities are required.
324

The purpose of lending should be within the terms of the bank’s policy. For personal
advances the purpose is usually easy to understand, for example buying a car, paying
tuition fees or buying furniture. However, for business advances the purpose may be
more complex, for example providing a business plan, financing the business or advising
the business on investments.

Banks must also ask for how long the client will need the credit before it is offered to the
325

client. Bank overdrafts and loans are repayable on demand.

Credit facilities offered for capital expenditure, such as buying a car or machinery, usually
326

take the form of a loan or personal loan account. Such advances must be repaid within an
agreed period of time. A bank manager always expects the loan to be repaid well before
the equipment becomes due for disposal.

The final question is: “How is the loan to be repaid?” The repayment of every advance
327

normally comes from the client’s future earnings. If a personal loan is granted to buy a car,
repayment must come from the client’s wages or salary each month. Before granting the
advance, the bank enquires about the client’s earnings and normal expenditure, including
any existing mortgage and hire-purchase agreements. This information is important
because clients often ask for loans without having calculated whether they can make
the repayments. In the case of a business, repayments may be made from future profits.

A bank needs to establish a clear lending policy. It needs to ensure that it has a well-
328

spread loan portfolio:

• Lending officers. Every bank should have system for dealing with loan applications.
• Monitoring of loans. Once a loan is granted, its status needs to be monitored regularly.
• Reserve Bank supervision. The South African Reserve Bank has a supervisory func-
tion over all banks that operate in South Africa.

7.2 CRITERIA FOR EVALUATING A LOAN APPLICATION

A credit provider may determine for itself any scoring or other evaluative mechanism or
329

model to be used in managing, underwriting and appraising credit risk. The mechanism
or model used should not be structured or based on any direct or indirect discrimination
against the consumer.

330 There are certain legal requirements that all registered credit providers must fulfil:

331 Requirements
• A full assessment of the applicant’s credit and debt repayment history must be car-
ried out.
• An affordability assessment must be done to see whether the applicant will be able
to afford the credit requested.

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• The applicant must be supplied with a quotation and a pre-agreement.

• Banks must ensure that the applicants fully understand their rights and obligations
in terms of the credit agreement.

Lending can be profitable to a bank’s operations, but it can also be risky. Banks must
332

avoid poor lending procedures to avoid failure on their side. They must avoid lending
money to clients who will not be able to repay their loans. The following are the most
important criteria that banks use to evaluate a loan application:

333 (a) Character

Clients must have utmost integrity and they must be completely honest. These two
334

characteristics have a direct impact on their willingness to repay a loan. Clients must keep
their word. They must be trustworthy. Note, however, that it is very difficult to assess the
character of a client.

The most important information that a bank can use is the borrower’s financial history
335

and personal references.

336 The loan may not be granted if the following happens:

• The client regularly overdraws or exceeds his or her overdraft limit without prior ar-
rangement with the bank.
• The client makes significant changes to the management structure of his or her busi-
ness by replacing a key person with another person.
• The client’s personal circumstances change, for example his or her marriage ends, or
the client becomes an alcoholic.

337 (b) Capacity

The loan repayment terms must be related to the type and nature of the transaction
338

being financed. An important component of the repayment term is the interest rate that
applies to the loan.

The capacity to borrow has two dimensions, namely the borrower’s capacity to repay the
339

loan and his or her legal capacity to borrow.

340 1. Repayment capacity. The bank must determine whether the client is the right person
to be given credit. Can the client repay the loan? The bank may be able to answer this
question if the applicant is an existing client. Interviewing the client and asking tactful
questions may be necessary. Ideally, a loan should be self-liquidating. In other words,
the borrowed money must be used to generate funds that can then be used to repay
the loan. A professional borrower might earn a high salary that enables them to repay
a loan, while a production worker who earns a lower salary might pose a high risk to
the bank.

341 2. L
 egal capacity. Banks do not usually grant credit to minors, but if it is necessary, the
minor must be assisted by a parent or guardian. If the credit is for a partnership, all
the partners must sign for it.

342

55
343 (c) Capital
Capital refers to the financial strength of a borrower as measured by his or her net worth.
344

The net worth of a client often determines how much a bank is prepared to lend to him
or her. To a certain extent, net worth is also an indication of the borrower’s financial
success in the past.

345 (d) Purpose of the loan

The purpose of a loan should be justified before credit is granted or approved. The
346

purpose of the loan may be stated explicitly in the application, or it may be deduced
from the borrower’s financial statements. For example, if the money requested is used
to buy stock, then the sales of that stock may soon generate cash for the business. In
such circumstances an application for loan intended for productive use would be given
preference.

347 (e) Size of the loan

The size of the loan depends on how the money will be used (its purpose). If a client borrows
348

money for business purposes, some conditions apply. The bank determines how much
to lend to the borrower for his or her business. Many honest borrowers underestimate
their cash needs in the hopes of making the request seem more attractive to the lender.
If a property is bought, the borrower might not disclose some fees such as legal and
professional fees. This may jeopardise the loan application.

349 (f) Collateral

The bank needs additional assurance that it will not sustain a loss by granting the loan;
350

that is, the bank needs collateral or security. Banks should not grant credit to clients
with obvious cash flow problems. The main purpose of security is to reduce the bank’s
exposure to risk and not to improve the repayment capacity of the client.

The security offered by a prospective borrower must be sufficient to cover the amount
351

being lent in full.

352 (g) Credit report

If the client is an existing client of the credit provider, then the credit provider can get
353

an internal report on the client’s financial position. Credit providers may also apply for
external information on a client through a credit bureau. Credit bureaus hold information
on consumers’ credit history, including previous applications for credit and financial
history, past and current income, assets and debts.

354 (h) Credit score factors

A client’s creditworthiness is usually rated by a computer. However, the credit scoring
355

can always be overridden by a manager who takes factors such as the following into
consideration:

• gender
• age
• place of residence and length of time living there

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• if recently moved to that address, the previous address and length of time there
• whether the client has a telephone or not
• whether owner, tenant, living with parents or living in a hostel
• occupation and employer
• salary and other income
• monthly expenditure
• bankers’ and other trade references

7.3 RISKS BANKS FACE WITH LENDING ACTIVITIES

356 Banks face the following risks when they lend money to clients:

357 1. C
 redit risk. This is the risk that the borrower (the client) will not have the means to
repay the loan. This is why it is necessary to evaluate loan applications carefully.

358 2. L
 iquidity risk. Banks normally borrow over short periods while lending over longer
periods. All banks are required to hold a minimum cash reserve. However, there may
be an unexpected demand for cash that creates a liquidity risk.

359 3. C
 urrency or exchange risk. Banks are exposed to this risk when they invest in foreign
currency and when receipts are due to the bank.

360 4. I nterest rate risk: This refers to the risk that interest rates will change. An interest rate
change does not impact equally on all the financial sectors of the bank.

361 5. I nvestment risk: Banks invest money to earn interest, especially if there is an excess
cash. This money is invested in a variety of assets. A change in interest rate has an
effect on the price of these assets.

Activity 7.1

You belong to a stokvel called Umgalelo. Members of the stokvel contribute an agreed
amount every month. At the end of the year, Umgalelo members meet to spend all the
money on groceries and share it among members. After taking this module, you realised
that the Umgalelo concept is like a revolving door. You contribute the whole year only to
spend all the money on groceries and start all over again. In this case, only the retailers
and bank benefit, not the members.
You decide to suggest to all members that Umgalelo should invest the money in egg
farming and expand to other businesses in the future. In this way members will create
jobs for themselves and their children. They will create wealth for themselves instead
of for others because they will get earnings from a business. After you have convinced
members of this, you will need some form of a loan to start the egg farm.
Analyse the process that the bank manager will follow when considering whether to
lend money to Umgalelo. What are the criteria used by the bank to evaluate your loan
application?

Hint: Remember that Umgalelo is not formally constituted. Discuss this with your fellow
students and use what you have learned in previous study units to address the structure
of Umgalelo before you approach the bank.

57
 25 Feedback:

Banks do not give loans to entities that are not legally constituted. Certain legal processes
need to be undertaken by members of Umgalelo before the bank would regard the stokvel
as a legitimate loan recipient.

26 Assessment

(1) Why is it important for the bank manager to consider the four factors mentioned in
section 7.1 above when evaluating an individual or a business that is seeking credit?
(2) Explain the criteria used by bank managers when evaluating a loan application.
(3) Discuss the different risks that banks face when they lend money to individuals and
businesses.

27Summary

Bankers and lending officers offer advances to clients based on lending principles,
procedures and guidelines. In this study unit we discussed the various factors that banks
consider when granting credit or advances to borrowers. Risks feature prominently during
credit evaluation. This topic is discussed detail in the risk management modules that you
will encounter later in your studies. The next study unit deals with the different credit
facilities offered by banks.

REFERENCES AND ADDITIONAL READING MATERIAL:

Corporate Finance Institute. 2020. Credit analysis process. Available at: https://
362

corporatefinanceinstitute.com/resources/knowledge/credit/credit-analysis-process/
(accessed on 6 July 2021).
Inc. 2020. Credit evaluation and approval. Available at: https://www.inc.com/encyclopedia/
363

credit-evaluation-and-approval.html (accessed on 6 July 2021).

364

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Study unit 8
Different types of credit facilities

CONTENTS
365 Aim
366 Key concepts
367 Learning outcomes
368 Overview
369 8.1 Overdraft facilities
370 8.2 Revolving credit accounts
371 8.3 Term loans
372 8.4 Home loans or mortgage loans
373 8.5 Credit cards
374 8.6 Instalment loans
375 8.7 Leases
376 8.8 Factoring
377 8.9 Guarantees
378 8.10 Banker’s acceptances
379 8.11 Letters of credit
380 8.12 Bills discounting
381 Assessment
382 Summary

AIM
At the end of this study unit you should be able to analyse and discuss the different credit
383

facilities that banks offer.

384

59
 Key concepts

y • credit
y • facilities
y • lender
y • borrower
y • overdraft
y • term
y • mortgage

Learning outcomes

At the end of this study unit you should be able to do the following:
• Analyse the different credit facilities.
• Evaluate the elements of a bill of exchange.
• Explain the purpose of different credit facilities.

OVERVIEW
The previous study unit gave an overview of the credit offered by banks. This study unit
385

deals with the different types of credit that banks offer to clients for various purposes.

8.1 OVERDRAFT FACILITIES

When you open a bank account, you are offered a number of financial services. The bank
386

provides you with an ATM cum debit card, mobile banking facilities and even overdraft
facilities, among others. But what are overdraft facilities?

An overdraft facility is a financial instrument that enables you to withdraw money from
387

your bank account (savings or current accounts) even if you do not have sufficient funds
in your account. The bank charges an interest rate like on any other credit facility.

Banks offer overdraft facilities mainly to clients who are in a certain income category. This
388

income should be deposited into the client’s account every month. Overdraft facilities
enable the client to overdraw his or her account by incurring a loan, which may be for a
specified amount, depending on the financial institution.

An overdraft (or advance) is an amount by which the debit side of an account exceeds the
389

balance of the account (normally a current account). In other words, the client withdraws
more money than he or she has in the account.

This service costs nothing unless the account is overdrawn, in which case the bank charges
390

interest on the overdrawn amount. Depending on the bank, repayment may be credited
from the client’s next deposit, or a portion of the amount overdrawn may be deducted
from the account every month. The client should apply for overdraft facilities just as he
or she would for a credit card or a personal loan.

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8.2 REVOLVING CREDIT ACCOUNTS

Revolving credit is an agreement with the bank that permits an account holder to borrow
391

money repeatedly up to a set amount while repaying a portion of the current balance
due in regular payments. Credit cards and lines of credit both work on the principles of
revolving credit.
Banks open revolving credit accounts for certain groups of clients. These accounts depend
392

on the income level of the client and are usually available to higher-income clients.
393 The following example explains how revolving credit works:
Naledi has a total revolving credit limit of R20 000. Every time she pays back 15% of the
394

borrowed money, she can borrow that same amount of money again without having
to reapply. This type of loan offers clients a lifeline and banks offer competitive interest
rates, but revolving credit must be managed carefully.
The way in which banks offer these facilities differs. Some regard a gold current account
395

bearer as the best client for this service. Others regard high-income earners as eligible
for revolving credit accounts.

8.3 TERM LOANS

A term loan is credit that is extended for longer than one year. Term loans are designed to
396

fund longer-term business investments, such as the purchase of equipment or new physical
facilities. Such a loan is often suitable for an established small business on a sound financial
footing.

A term loan is usually repayable in annual or more frequent instalments. It is usually structured
397

in accordance with the borrower’s normal cycle of cash inflows and outflows. The loan is
secured by fixed assets (e.g. plant or equipment) that are owned by the borrower and it
carries either a fixed or a floating interest rate.

8.4 HOME LOANS OR MORTGAGE LOANS

In this study unit the terms home loan and mortgage loan are used interchangeably. Home
398

loans are credit that is extended to an individual or family to buy a residential property. They
are secured loans and the property purchased is held as security by the bank throughout the
term of the loan. As a borrower, you agree to pay monthly instalments towards the mortgage
for a period of 20 or 30 years.

As you continue paying your mortgage and making improvements, the value of the house
399

increases or appreciates in the market. The difference between the market value and what
you owe the bank is your equity, that is, the asset you own. This amount can be used as credit.

For example, Mr. Molebaleng owes Theé Bank R125 000. The estimated value of his house
400

is currently R300 000 because he has made improvements to it. The difference between
R300 000 and R125 000 (which is R175 000) can be granted to him in the form of available
credit. The money can also be granted to him as revolving credit. Such a loan may be made
for home remodeling, repairs, renovations or improvement.

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 8.5 CREDIT CARDS
A credit card is a plastic card that the cardholder (or client) presents in order to borrow money
401

(or cash) from a bank, or to buy goods and services from different suppliers (or shops) on credit.

The bank sets a maximum limit on the cash withdrawal facilities and a minimum monthly
402

repayment on all credit card accounts. The service charges are expressed as either a percentage
of the outstanding balance or a fixed amount, whichever is greater.

A disadvantage of credit cards is that people might be tempted to overspend. However,

403

if a credit card is used sensibly it can be of great benefit to clients. For example, it offers
a flexible way of spreading the cost of a purchase over a period of time (3 months, 6
months, 24 months, or even longer).

8.6 INSTALMENT LOANS

An instalment loan is a type of agreement that involves a loan that has a fixed payment
404

over a set period. The loan has an interest rate, repayment terms and fees that affect the
monthly instalment. Common types of instalment loans include mortgages, car loans
and personal loans.

8.7 LEASES
A lease is a form of business finance under which the ownership of equipment remains
405

with the lessor, but the lessee can use the item, provided that regular leasing payments
are made.

A wide range of assets may be leased (or rented), for example equipment or a vehicle
406

that is worth anything from R10 000 to several hundred times as much. An agreement
establishing the terms of the contract and the amount of rental payable is drawn up
between the leasing company (lessor) and the business (lessee).

A lease period can be for three, four or five years. At the end of the period there is an
407

option to renew the lease for a further period at a reduced rate or an option to purchase
the property.

8.8 FACTORING
Factoring is a type of debtor finance in which a business sells its accounts receivable
408

to a third party (called a factor) at a discount and assumes complete responsibility for
collecting the receivables.

Factoring involves using the shorter-term assets of a business that are expected to roll
409

over (be converted) into cash in the near future, such as accounts receivable and inventory,
in order to raise more working capital.

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Factoring is a service provided by specialist companies against a firm’s debtors. Services

410

include sales ledger accounting, credit insurance and finance.

In factoring, a bank actually purchases selected items from its client. Factoring is not a
411

form of collateral lending but rather an outright purchase of the client’s assets. The bank
notifies the borrower’s debtors to remit (send) all payments directly to the bank and not
to the client.

412 The following example illustrates how factoring works:

The lockdown owing to the COVID-19 pandemic has forced many South African companies
413

to close and many more to retrench their staff. Unemployment rates have skyrocketed.
Because they have very little or no income, many people defaulted on their monthly
instalments to Phamudzi Retailers. Now Phamudzi Retailers is sitting with accounts
receivable (invoices) valued at R7 million on their balance sheet. These accounts receivable
cannot be collected in 30 or 60 days. Phamudzi Retailers needs funds immediately to
pay salaries during lockdown. Management decides to sell their accounts receivable
to a factoring company that will immediately pay about 80% of the invoices to assume
responsibility for collecting the debt owing to Phamudzi Retailers. The remaining 20%,
less the factoring fee, is paid once the clients pay the invoices in full.

Nearly all the major banks offer factoring services, and some have special schemes that
414

are tailored to meet the needs of exporters. Most banks offer a factoring service to their
business clients, usually through a subsidiary company.

Factoring is appropriate for businesses that sell to a wide range of clients at regular
415

intervals, and where the total sales figure is a stipulated value.

8.9 GUARANTEES
A guarantee is a collateral security involving three parties: the borrower, the creditor and
416

the guarantor. The guarantee serves as a risk management tool for the borrower, as the
creditor assumes liability of the contract should the borrower default on their obligation.
Guarantees serve a key purpose for small businesses. A major problem for businesses
during lockdown is that they are not generating income, which means that they have
very little liquidity. A guarantee scheme would give small businesses some cash flow so
that they can start operating again. This would allow them to cover costs such as new
stock, keeping the lights on and paying salaries (Mail and Guardian 2020).

According to the Mail and Guardian (2020), an independent research group suggests that
417

the government of South Africa should extend a helping hand to small, medium and micro
enterprises (SMMEs) by guaranteeing their debt to save jobs and keep the economy alive.

418

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 8.10 BANKER’S ACCEPTANCES
Chen (2021) defines banker’s acceptance as a negotiable piece of document that is
419

guaranteed by the bank, rather than the account holder, to pay at a later date. Banker’s
acceptance (also known as a bill of exchange) are mostly used in international trade to
finance transactions with relatively little risk to the contracting parties. In case the account
holder defaults, the bank will accept the liability to pay the third party.

Banker’s acceptance is a financial instrument that is guaranteed by the bank (instead

420

of the account holder) for the payments at a future date. It simply means that the bank
has accepted the liability to pay the third party in case the account holder defaults. It
is commonly used in cross-border trade for assuring exporters against counterparty
default risk (https://www.wallstreetmojo.com/bankers-acceptance/).

421 Look at the following example of a bill of exchange:

422

Figure 8.1: Example of a bill of exchange

Source: https://www.google.com/search?q=bill+of+exchange&rlz=1C1CHBD_enZA793ZA793&sxsrf=AO
aemvKdbMuuIP6kwIJ_XaVMU0wh1ryHgw:1633280581242&source=lnms&tbm=isch&sa=X&ved
=2ahUKEwiJwvOm3K7zAhUlnVwKHbu1ArUQ_AUoAXoECAEQAw&biw=1242&bih=597&dpr=1.1

Let’s break down the elements of the definition of a bill of exchange to make it easier to
423

understand:

• An unconditional order. There are no conditions stipulated that must be carried out
before payment. The bill simply says “pay”. A conditional order is a document that
orders payment subject to the fulfilment of some condition, for example: “Pay Moeng

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Auto Manufacturers the sum of R35 million on condition that the receipt above is duly
signed and dated.”
• In writing. The bill must be in writing, whether typewritten or in ink, print or pencil.
The writing may be on paper, cardboard or a similar medium.
• Addressed by one person to another. In our example above, the bill of exchange is
addressed by Koloi Auto Manufacturers to Moeng Auto Manufacturers.
• Signed by the person giving it. The bill of exchange in the example is signed by the
directors on behalf of Koloi Auto Manufacturers.
• The bank that accepts a bill of exchange must pay. By accepting the bill of exchange,
the bank guarantees that it would pay should Koloi Auto Manufacturers default on
their payment.
• Must pay on demand or at a specific future time. This bill is payable three months
after the date of issue. It is therefore deemed to be payable on 17 June 2013.
• A specified sum: The amount is clearly stated as R35 000 000.

You will see that our bill of exchange says “To the order of ourselves”. This bill is not a
424

bearer bill, which would say “pay … to the order of bearer”. The “ourselves” here is Koloi
Auto Manufacturers. The words “to the order of ourselves” allow Koloi Auto Manufacturers
to transfer their interest in the bill to another person by endorsement or signature.

The words “value received” are often added to the wording of a bill to establish “valuable
425

consideration”, which is normally one of the essentials of a valid contract.

The above explanation of bills of exchange will help you to understand the link between
426

the credit facilities that we discuss below (letter of credit and

427 bills discounting).

428 (a) Types of bills of exchange on the basis of period

429 There are of two types of bills of exchange on the basis of period:
430 (1) D
 emand bills of exchange. There is no fixed date for the payment of such bills.
They become payable at any time, when they are presented by the holder to the
payee.

431 (2) T
 erm bills of exchange. These bills are payable after a specified period of time.
The period after which these bills become due for payment is called the tenor.

432 (b) Types of bills of exchange on the basis of object

433 On the basis of the purpose of writing the bills, the bills can be classified as:
434 (1) T
 rade bills. These bills are drawn and accepted against the sale and purchase of goods
on credit. They are drawn by the seller (creditor) and accepted by the buyer (debtor).

435 (2) Accommodation bills. Accommodation bills do not involve any sale and purchase
of goods; rather they are drawn without any consideration. The purpose of such bills
is to help one party or both parties financially.

436

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437 (c) Classification of bills of exchange
438 Bills of exchange can be classified as:
439 (1) Inland bills. These bills are drawn in a country upon person living in the same country
or made payable in the same country. Both drawer and the drawee reside in the same
country.

440 (2) Foreign bills. These bills are drawn in one country and accepted and payable in
another country, e.g. a bill drawn in South Africa and accepted and payable in United
States of America.

8.11 LETTERS OF CREDIT

A letter of credit is a legal notice in which a bank or other institution guarantees the credit
441

of one of its clients who is borrowing from another institution.

Normally, the bank client is the importer or the buyer of goods. They work with the bank
442

to issue the letter of credit to the beneficiary. A bank undertakes to pay a certain sum of
money on behalf of its client when the conditions of the letter of credit have been fulfilled.

The letter of credit includes the terms under which the client accepts liability to the bank
443

for the amount in question. The client may pay a fee for the letter of credit, or a bank may
provide the necessary loans to facilitate the issuing of the letter of credit.

8.12 BILLS DISCOUNTING

Bills discounting are the purchase or sale of a bill of exchange or other instrument at less
444

than face value. (The face value is the amount that is printed on the instrument.)

445 The following example explains what bills discounting means:

The bank draws and accepts a banker’s acceptance on itself for the amount of R1 000 000
446

(see the bill of exchange in section 8.1 above).

Once accepted, the banker’s acceptance is usually discounted (i.e. sold for a lesser value
447

than the face value at maturity) on the money market. The discounted value is usually
calculated on the basis of the current interest rate. If R1 000 000 is discounted at 15%,
the amount will be R850 000.

The bank may benefit because it puts funds to good use and obtains a return on these
448

funds. The difference between the maturity value of R1 000 000 and the discounted value
of R850 000, which is R150 000, includes handling charges and fees.

449

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Activity 8.1

(1) You have just set up a chocolate manufacturing business in South Africa and you
want to import cocoa beans from Cote d’Ivoire. You have agreed all the terms of
sales with the exporter.
a) Which credit facility would you use to conclude the payment of a shipment of
cocoa beans to South Africa?
b) Name the parties involved and describe the processes (value chain) that must be
followed to make sure that the transaction is above board and all stakeholders
are satisfied at the end.
Hint: Conduct a search and visit the Discussion Forum to discuss these questions with your
classmates. There are a number of good sources of information online and in print media that you
can consult before you answer the questions. Remember to summarise what you have learned
in your own words. It is not acceptable to copy and paste your answers from other sources. Re-
member always to acknowledge the sources you have consulted.

28Feedback:

Have you managed to answer the question on your own without copying and pasting from other
sources? Your answer could have mentioned the following financial services, among others:
(a) letter of credit
(b) importer
(c) bank
(d) exporter
(e) risk managemen

29Assessment

(1) Explain the elements of a bill of exchange.

(2) Discuss an overdraft as a form of credit.
(3) Analyse the components and use of a banker’s acceptance.

30 Summary

This study unit dealt with credit (loans) and advances (which constitute a substantial por-
tion of a bank’s assets) to clients. Banks offer different types of credit facilities because
credit is needed for different purposes. Owing to the COVID-19 pandemic, businesses,
especially SMMEs, are faced with liquidity challenges.
Governments are urged by different researchers to give guarantees to save jobs and the
economy.

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 REFERENCES AND ADDITIONAL READING LINKS:
Investopedia. 2021. Banker’s acceptance. Available at: https://www.investopedia.com/
450

terms/b/bankersacceptance.asp (accessed on 14 July 2021).

Mail and Guardian. 2020. Should government offer debt guarantees? Available at: https://
451

mg.co.za/article/2020-04-16-government-should-offer-debt-guarantees/ (accessed on 1
July 2021).
McGurran, B. 2019. What is installment credit? Available at: https://www.experian.com/
452

blogs/ask-experian/what-is-installment-credit/ (accessed on 1 July 2021).

Property24. 2020. Mortgage bond vs home loan: two parts of your land asset whole.
453

Available at: https://www.property24.com/articles/mortgage-bond-vs-home-loan-two-

parts-of-your-land-asset-whole/29758 (accessed on 1 July 2021).

454

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Study unit 9
Income derived from lending

CONTENTS
455 Aim
456 Key concepts
457 Overview
458 9.1 Income derived from lending
459 9.2 Factors that affect the interest rate
460 Assessment
461 Summary

AIM
At the end of this study unit you should have a clear understanding of interest rates and
462

the factors that affect interest rates.

Key concepts

y interest
y supply
y combined cost
y repo rate

Learning outcomes

At the end of this study unit you should be able to do the following:
• Discuss how banks derive income from lending.
• Explain the factors that affect the interest rate.

OVERVIEW
Banks usually lend out surplus funds from deposits they take from savers and investors,
463

money markets or the central bank. The main purpose of granting credit is to derive
income and improve the liquidity of the bank.

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 9.1 INCOME DERIVED FROM LENDING
Interest is the cost of a loan or the amount paid by a borrower to a lender in exchange for
464

the use of the lender’s money for a certain period. Interest is income earned by the bank
and it is paid on loans at regular intervals. It can also be described as a charge levied by
the bank on a cardholder’s account in terms of the cardholder agreement.

Interest can also be an expense to the bank, especially when the bank pays interest to
465

investors or depositors on deposit accounts. This study unit covers only the part of interest
that is regarded as income earned by the bank. All the credit facilities we have mentioned
demand interest (among other charges) from clients.

The COVID-19 pandemic has created both heath and economic crises in South Africa and
466

elsewhere. People lost their jobs, and many missed payments on their personal loans
and mortgages, which affected the interest income of the banking industry. The South
African Reserve Bank decided to cut the repo rate (the rate at which banks borrow money
from the South African Reserve Bank) to 3,5% (from 6,5%) during 2020 to make funds
less expensive and to boost economic activities. This means that banks can charge lower
interest rates on loans and therefore earn less interest income. Depositors also receive
less interest income from their deposits.

9.2 FACTORS THAT AFFECT THE INTEREST RATE

The interest rate is affected by various factors, including the following:
467

468 (a) S
 upply and demand. Scarcity is a condition that exists when the demand for a
particular good or service is higher than its supply at current prices. The interest rate
is high when money is expected to be scarce and low when money is expected to
be readily available. The banking industry is willing to advance loans at a particular
interest rate, depending on their cost of funding. Potential borrowers refrain from
borrowing when interest rates are high.

469 (b) I nflation. During periods of high inflation (i.e. rising prices of goods and services)
borrowers tend to buy more goods before a rise in prices. Lenders then tend to lose
out since the real value of the money advanced to the borrower keeps declining.
Lenders are not always compensated for this loss by the interest rate because the
value derived from interest repayments also declines in real terms.

470 (c) R
 isk and duration of the loan. Credit risk and liquidity are important issues when
making a loan. Banks tend to offer loans to individuals and banks at a higher interest rate
than government, as credit risk or non-payment risk is higher in the case of companies
or individuals. Liquidity means that an asset can quickly and readily be converted
into cash without significant loss. Short-term loans have a lower interest rate than
longer-term loans because of their differences in liquidity. A loan becomes an asset in
the books of the creditors, but it only becomes money after the expiry of the agreed
period (i.e. three months, six months, a year, etc.). The shorter the term of the loan,
the sooner it can be converted into cash, which means there is more liquidity.

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471 (d) Combined cost of funding. Banks obtain their funds from three main sources:

472 (1) Savings and investments. Banks obtain their funds from investors before they
lend them to borrowers. As a result, borrowers tend to obtain these funds at a
higher interest rate than the banks pay to their investors. Banks then make a profit
because there is a difference between the lower interest paid to investors and the
higher interest that borrowers are charged.

473 (2) The money markets. Banks do not always manage to lend to borrowers from
the funds they receive from investors. To cover the shortage, banks approach the
money market for short-term funds. They offer a securities paper (i.e. a written
document that is given to ensure the fulfilment of an obligation) to obtain more
money.

474 (3) T
 he South African Reserve Bank. Banks obtain funds from the South African
Reserve Bank (SARB), as a lender of last resort. The funds are lent to banks at an
interest rate known as the repo rate (the rate at which the SARB lends money to
banks). Banks then lend this money to borrowers at an interest rate based on the
repo rate.

Activity 9.1

In this study unit we discussed factors that affect the interest rate. Can you think of any
other factors that affect the interest rate but have not been discussed here?

Hint: There is a lot of information online and in print media about additional factors
that affect the interest rate. Remember, you must summary what you have learned in
your own words. It is not enough just to copy and paste the information in your sources.
Remember always to acknowledge all the sources you have consulted.

31Feedback:

I am sure you came across many factors that affect the interest rate while you were doing
research about this question. Some of these factors will be discussed later in your studies.

32 Assessment

(1) Discuss the factors that affect the interest rate.

(2) Explain the main sources of funds for banks.

33 Summary

This study unit dealt with several factors that affect interest rates. It is important to re-
member that interest rates could be either income or expenditure for banks. The next
topic deals with security.

71
 REFERENCES AND ADDITIONAL READING LINKS:
Freund, LB. 2019. Banks do not create money out of thin air. Available at: https://
475

economictimes.indiatimes.com/wealth/save/smart-things-to-know-about-sources-of-
income-for-a-bank/articleshow/54377370.cms?from=mdr (accessed on 3 July 2021).
Lumen. 2018. How banks create money. Available at: https://courses.lumenlearning.com/
476

wm-macroeconomics/chapter/how-banks-create-money/ (accessed on 3 July 2021).

477

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TOPIC 5
478 Banking products and services – security
AIM
At the end of this topic you should have the knowledge and skills to apply the basic
479

principles of security and explain why security is important in the banking industry.

Learning outcomes

On completion of this topic you should be able to do the following:

• Discuss security as one of the products and services available banks’ clients.
• Discuss the characteristics of good security.
• Evaluate different types of security and their importance.
• Discuss the basic principles of security.

TOPIC CONTENT
480 Study unit 10: Security, the role of security and good security

481 Study unit 11: Types of security

OVERVIEW
This topic deals with basic principles of security and explains why security is important
482

in the banking industry. The topic also discusses the types of security that are considered
to be good security.

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Study unit 10
Security, the role of security and good security

CONTENTS
483 Aim
484 Key concepts
485 Learning outcomes
486 Overview
487 Learning material
488 10.1 What is security?
489 10.2 The role of security
490 10.3 The characteristics of good security
491 10.4 Examples of security
492 Assessment
493 Summary

AIM
At the end of this study unit you should have a clear understanding of security and its
494

role in a banking environment.

Key concepts

y security
y value
y debentures
y marketability

Learning outcomes

At the end of this study unit you should be able to do the following:
• Define security.
• Explain the nature of good security,
• Explain the role of security in the banking sector.

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OVERVIEW
In the previous study unit you learned about the income that banks derive from lending
495

and factors that affect the interest rate. This study unit deals with the role of security in
the banking sector and explains what good security is.

LEARNING MATERIAL
This study unit is based on different books and sources – see the references on the last
496

page.

10.1 WHAT IS SECURITY?

A security is a written document showing ownership of equity, shares or debentures in
497

a corporation. It is an interest in property or a property right given to a bank to convert

into cash in case the client fails to repay the amount advanced with interest. This last
definition is the focus of this study unit.

Security may be either direct or collateral. It is direct when it is deposited by the client
498

to secure his or her own account. Collateral security is deposited by a person to secure
another person’s (the client’s) account.

10.2 THE ROLE OF SECURITY

Security protects the lender (bank) in case things go wrong. If a client cannot repay
499

the money that he or she has borrowed, the bank will claim the asset that was given as
security. Bank securities are designed to ensure that they cannot be challenged and that
they are protected from problems that may occur while they are being held.

10.3 THE CHARACTERISTICS OF GOOD SECURITY

Bankers must be able to tell when a particular security that is offered is good security for
500

an advance. When the borrower fails to pay the banker or fails to fulfil his or her part of
the contract, the bank must be able to recover its funds. The following are characteristics
of good security:

• The bank must be able to sell the asset used as security easily (i.e. marketability).
• It should be easy to obtain a value for the assets (i.e. valuation).
• It should be easy to determine who the legal owner of the security is and thus who
the person is who must execute the mortgage.
• It should be easy to transfer the title to the bank so that the asset can be sold, if required.
• The security should increase in value as time goes by, provided that premiums (in the
case of life assurance) continue to be paid.

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 10.4 EXAMPLES OF SECURITY
Land with value (including buildings) is a common security. A bank may sell the borrower’s
501

house (or first his or her belongings) to recover the money owed by the borrower. Stocks
and shares are also used as security. Most lenders prefer shares that are listed on the
Johannesburg Stock Exchange (JSE) to the shares of only one company. These shares
must be quite easy to sell. If necessary, the seller may have to drop the price to find a
ready buyer. If the shares are not listed on the JSE, an independent accountant may be
called in to give a valuation based on the latest audited balance sheet.

A life assurance policy is also an example of security as it is an asset and it provides a

502

surrender value. Life policies can also be sold on small markets for second-hand policies.
The sale of life policies is often more beneficial than their surrender. Before the sale, the
premiums must have been paid up to date.

Activity 10.1

As a lending banker who has the choice of taking either shares or real estate as security,
which one would you prefer? Give reasons for your answer.

Hint: Banks accept both shares and real estate as security, but one of them is preferred
over the other.

34 Feedback:

Your analysis of real estate and shares depends a lot on timing and the following factors,
which are evaluated to make an informed decision:
y management cost
y time and effort
y liquidity
y diversification
y access

Assessment
35

(1) Define the term security.

(2) Explain the important role of security.
(3) Describe good security.

36 Summary

In this study unit we discussed the role played by security when banks grant advances.
We explained the requirements for good security, especially with regard to the quality and
marketability of the goods. The next study unit explains the different types of security.

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REFERENCES AND EXTRA READING MATERIAL:

Bankingallinfo. 2018. Security – concept & types – characteristics of good security – proper
503

valuation of security. Available at: https://bankingallinfo.com/security-concept-types-

characteristics-of-good-security-proper-valuation-of-security/ (accessed on 9 July 2021).
Kennon, J. 2021. Investing in real estate vs. stocks: what’s the difference? Available at:
504

https://www.thebalance.com/real-estate-vs-stocks-which-is-the-better-investment-357992
(accessed on 9 July 2021).
505

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Study unit 11
Types of security

CONTENTS
506 Aim
507 Key concepts
508 Learning outcomes
509 Overview
510 Learning material
511 11.1 Guarantee
512 11.2 Indemnity
513 11.3 Cession
514 11.4 Pledge and hypothecation
515 11.5 Lien
516 11.6 Notarial certificate
517 11.7 Mortgage bond
518 11.8 Guidelines for completing security documents
519 Assessment
520 Summary

AIM
At the end of this study unit you should have a clear understanding of different types of
521

security. You should also be able to complete security documents.

Key concepts

y security
y lien
y indemnity
y pledge
y value
522

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Learning outcomes

At the end of this study unit you should be able to do the following:
• Describe different types of security.
• Identify important facts to consider about cessions.
• Discuss guidelines for completing security documents.

OVERVIEW
The concept of bank security was introduced in the previous study unit. In this study
523

unit we look more closely at the different types of security that are available to cover a
bank loan or advance. You must be able to define the different types of security once
you have completed this study unit.

LEARNING MATERIAL
This study unit is based on different books and sources – see the references on the last
524

page.

11.1 GUARANTEE
A guarantee is a collateral security involving three parties: the borrower, the creditor and
525

the guarantor. If the borrower cannot pay the creditor, the guarantor agrees to be liable
for the borrower.

Suppose Mr. Dlamini needs to borrow R10 000 from the bank and Ms. Tsotetsi agrees to
526

be the guarantor. If Mr. Dlamini cannot repay this R10 000, the bank will be able to claim
the money from Ms. Tsotetsi.

Anyone can be a guarantor. For example, members of a club can guarantee advances
527

to the club. Friends or relatives can guarantee a personal account. A guarantor is legally
bound by the terms of the guarantee. This means that it is an obligation of one party
that assures the other party that the guarantor will perform the promise if the creditor
defaults. He or she is entitled to a copy of the guarantee and the regulated agreement
that the guarantee secures. The bank notifies the guarantor at regular intervals, possibly
every five years, to remind him or her of the liability. Besides his or her signature on the
bank’s form, the bank could also ask the guarantor to deposit security such as a share
certificate as support for the guarantee.

11.2 INDEMNITY
Indemnity is a contractual agreement between two parties, the indemnifier and the
528

indemnity holder. In this case, the indemnifier promises to make whole (compensate)
the indemnity holder for the loss suffered due to the act of the other party.

79
For example, when Gugulethu took a home loan with the bank, she also bought a home
529

insurance policy on her home in KwaZulu-Natal. The bank insurance agreed to indemnify
Gugulethu against damages to her home and personal property as a result of fire and
burglary, and against liability if someone gets hurt on Gugulethu’s property. One day
Gugulethu came home to a flooded house. The geyser had burst, and the ceiling and
carpets were soaked. Gugulethu’s insurance covered all the expenses to restore the house
to its original state.

Imagine how much money insurance companies had to pay out to businesses that were
530

destroyed in KwaZulu-Natal and Gauteng after the unrest and looting in July 2021.

11.3 CESSION
Cession is the legal act of ceding or giving up rights. A client or borrower can cede rights to
531

the bank. Banks usually accept life policies as security for an advance. A policy is expected
to have a surrender value. A life policy offered as security should be read very carefully.
The following must be considered:

• The assurance company issuing the policy should be reputable.

• The types of policy preferred by banks are endowment or whole-life policies.
• The name of the life assured and the beneficiary should all appear on the policy.
• Clauses should be considered before accepting the policy.
• The age of the insured should be clearly stated for correct premiums.

11.4 PLEDGE AND HYPOTHECATION

A pledge is the delivery of goods or the documents of titles to goods (e.g. shares and
532

stocks) to the bank as security for borrowed money. It is derived from an express agreement
between the borrower and the lender. The lender obtains possession of the security
goods. The lender keeps the pledge until the debt is repaid. The lender has the right to
sell the goods if the debt is not repaid.

Mrs. Mokoena borrows R25 000 from the bank and pledges her investment account. The
533

bank prevents Mrs. Mokoena from accessing this account until she has repaid the debt.
When she pays, the bank releases the funds. However, if she does not repay the loan, the
bank can use the money in the investment account to recover the loan amount.

Hypothecation, on the other hand, is process of agreeing to use an asset as security in

534

exchange for a loan. It is used when the goods have not yet been received by the client,
and it is a legal agreement to give a pledge once the goods (or documents) are available.
A letter of hypothecation, also known as a trust letter, is taken when a pledger of goods
seeks the release of the goods so that they may be sold, and the loan repaid. The bank
gives authority for the goods to be released if they have been warehoused in the bank’s
name.

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11.5 LIEN
Lien is the right to retain the property of another person until legal demands against the
535

owner (i.e. settlement of debt) have been met.

According to Wiese (2014), virtually every adult encounters the legal phenomenon of a
536

lien in their life. For example, Mahlomola takes his car to a mechanic for repairs. Wiese
(2014) states that the mechanic has the right to retain the car until Mahlomola has paid
him for the repairs. Also, if you take your clothes to a dry-cleaner, you cannot demand
your clothes back unless you pay for the service.

Items held in safe custody are not covered by a bank’s lien as they are considered to have
537

been deposited by the client for a specific purpose. A bank’s lien has a right of sale. A letter
of set-off may also be acceptable to a bank granting an advance. This letter formalises
the bank’s right to set off (settle) a credit balance on one account with a debit balance
on another account of the same client. Look at this example: James Brown has borrowed
money from the bank. In other words, he has an account with a credit balance. He also
has a cheque account with the same bank. His cheque account has a debit balance, which
means that there is money in the account. A letter of set-off states that if James cannot
repay the loan, the bank can use the money in the cheque account to repay it.

A negotiable instrument is a document showing a contractual obligation to pay money

538

or deliver a security or goods or services for money.

11.6 NOTARIAL CERTIFICATE

A notarial certificate is a written statement, signed and sealed by the notary public (a
539

practising and admitted attorney that has passed an additional practical examination
in respect of the practice, functions and duties of a notary). A notary public is an official
with the authority to perform certain kinds of legal transactions, especially to record that
he or she has witnessed the signing of a legal document.

He or she can take affidavits and protests of negotiable instruments such as bills of
540

exchange and certificates of deposits. A notary public issues notarial certificates to

acknowledge the instrument. The notarial certificate will include the fact and date of
acknowledgement, with the notary public’s signature, seal of office and date of expiry
of commission to serve as notary public.

11.7 MORTGAGE BOND

A mortgage bond is the transfer of an interest in land or property to a lender as security
541

for a debt. A mortgageable property allows the client to apply for a home loan by using
the property he or she buys as security for obtaining the home loan. In other words, if
you stop paying your instalments, the bank will take your property to recover its losses.
Home loans are usually repayable over 20 to 30 years.

81
When a bank takes legal mortgage of property, it has ownership of the property and
542

can sell it or do anything it likes with it. On repayment of the advance, the mortgage is
reconvened, and ownership of the property or land reverts to the true owner. A mortgage
can be legal or equitable. Under an equitable mortgage the bank does not have such
powers and the mortgage deed merely establishes a claim on the land or other assets. It
could happen that others might have similar equitable claims on the property.

11.8 GUIDELINES FOR COMPLETING SECURITY DOCUMENTS

Security in the form of land, stocks and shares or life policies must be taken correctly so
543

that it can be used if a borrower fails to repay the advance. The following guidelines must
be followed when the documentation is completed:

544 (a) Deposit

• Are these the original deeds or certificates, or duplicates?
• Has the receipt been given?
• Are the deeds or certificates complete (i.e. are previous mortgages, now repaid,
attached)?

545 (b) Inspect

• Who owns the security?
• How many shares are there?
• Are there any prior charges?
• What searches need to be made?
• Does an updated valuation need to be made for the providers?

546 (c) Value

• How much is the security worth?
• How often does an updated valuation need to be made?

(d) Authorise
547

• Who must execute the security?

• Is a company seal needed?
• How many signatures are needed?
• Has independent legal advice been offered?

548 (e) Notify

• Where should the charge be registered to protect it?
• What searches are needed in six months’ time to ensure that the bank’s charge is
registered?

549

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Activity 11.1

You have just completed an honours degree, you have a secured job and you were mar-
ried last summer. You and your spouse want to buy a house. You know that banks want
security to secure their loan in case you default on your monthly instalments. You have
not worked long enough to buy assets. Explain whether you would be able to buy a
house without any security at this point.

Hint: Try to think about the different types of security and answer the above question
returning to the information in the study unit.

37Feedback:

It very important that you learn how to answer questions without looking at the material
again. This will help you to focus on understanding the material while you are studying and
to formulate answers in your own words.

38 Assessment

(1) Explain the important facts that are considered when accepting a cession as security.
(2) Explain the difference between a pledge and hypothecation.
(3) Explain the terms lien and pledge.
(4) Analyse the guidelines for completing security documents.

39 Summary

This study unit deals with various types of security, such as a guarantee, pledge and lien.
If a borrower defaults on a loan, the bank can take possession of the asset used as security
(collateral) and sell it to recover some of the outstanding amount or the entire amount.
A loan with security is a secured loan, which means that the bank is taking a lower risk
because it can collect the security if you stop paying.
We also gave guidelines for completing security documentation. The next topic is a
discussion of different services.

83
 REFERENCES AND ADDITIONAL READING MATERIAL:
Malaba, MS. 2020. Why banks demand collateral on loans and advances. Available at: http://www.baz.
550

org.zw/consumer-centre/education-centre/why-banks-demand-collateral-loans-and-advances
(accessed on 10 July 2021).
Notary Public Underwriter. 2019. What is a notary certificate? Available at: https://
551

notarypublicunderwriters.com/national-notary-blog/1061-what-is-a-notarial-certificate
(accessed on 10 July 2021).
Surbhi, S. 2018. Difference between pledge and hypothecation. Available at: https://
552

keydifferences.com/difference-between-pledge-and-hypothecation.html (accessed on
10 July 2021).
Wiese, M. 2014. A critical evaluation of the nature and operation of liens in South African
553

law in comparison with the Dutch law. Juta Law Publishing 26(2):487.

554

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TOPIC 6
Banking products and services – services

AIM
At the end of this topic you should have the knowledge and skills needed to differentiate
555

between the various services that banks offer to clients.

Learning outcomes

On completion of this topic you should be able to do the following:

• Analyse the various services offered by banks.
• Explain the different types of service offered by banks.
• Explain why banks offer services to clients.
• Explain the features of the services that are available in the banking industry.

TOPIC CONTENT
556 Study unit 12: Types of service

557 Study unit 13: Insurance and assurance

OVERVIEW
This topic deals with the different services provided by banks. These services have to be
558

profitable and must therefore meet the needs of clients in a cost-effective and productive
manner. Services include safe custody, estate planning and debit orders. We discuss all
these services, as well as insurance and assurance, in detail in this topic.

559

85
Study unit 12
Types of service

CONTENTS
560 Aim
561 Key concepts
562 Learning outcomes
563 Overview
564 12.1 Stop orders
565 12.2 Debit orders
566 12.3 Bank codes and reports
567 12.4 Safe custody
568 12.5 Estate planning
569 Assessment
570 Summary

AIM
At the end of this unit you should have a clear understanding of the different types of
571

service that banks offer and the reasons why banks offer these services.

Key concepts

y safe custody
y estate
y clearance
y bank report
y beneficiary

Learning outcomes

At the end of this study unit you should be able to do the following:
• Differentiate between different services.
• Explain estate planning.
• Discuss special clearance.

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OVERVIEW
In study unit 11, we introduced and explained the different types of security, and we gave
572

guidelines for completing security documents. In this study unit we deal with the different
services provided. Bank services have to be profitable and must therefore meet the needs
of clients in a cost-effective and productive manner. Services include safe custody, estate
planning and debit orders. We discuss all these services in detail below.

12.1 STOP ORDERS

A stop order is an instruction from a client to his or her bank to make a series of payments
573

on a specific date to a nominated beneficiary.

The client’s account (current, transmission or savings account) will be debited with the
574

specific amount at either the same bank or another bank. The client decides how long
the stop order must continue. When he or she no longer wants it to continue, he or she
will instruct the bank to cancel the payment by completing the necessary form.

For example, the client may create a stop order for paying his or her mortgage bond and
575

may instruct the bank to allow the stop order to go through his or her current, transmission
or savings account at the end of every month.

12.2 DEBIT ORDERS

A debit order is an instruction by a client to his or her bank to allow a third party (i.e. the
576

beneficiary to whom payment is to be made) to withdraw regular amounts from the

client’s account.

The beneficiary initiates the transaction. The transactions occur through the use of a
577

magnetic tape. The agreed amount is paid through the system to the intended beneficiary.

Examples of beneficiaries are insurance companies for monthly premiums, municipalities

578

for water and electricity, and different shops such as clothing, furniture and building
materials stores.

12.3 BANK CODES AND REPORTS

A bank report is a document that is issued by the branch where the client has opened his
579

or her account. It contains the client’s financial information and information about his or
her handling of the bank account. A bank report assists business clients in determining
the creditworthiness of another party.

Bank codes and reports are generally requested by businesses or other banks when
580

approached by a client for credit facilities. They are used to decide whether to grant
the credit facility or not and is subject to a duty of secrecy in terms of the bank–client
relationship.

87
This information is supplied either in code or in the form of a typed report. The report
581

includes comments about how the client handles his or her account and his or her ability
to fulfil his or her obligations. Banks can obtain bank reports on foreign companies as
well as individuals and can also provide such reports to overseas parties.

582 Telephonic requests

A telephonic request provides the inquirer with a bank code that assists in determining
583

the creditworthiness of the individual or company in question.

584 Full general report

A detailed report gives the client information on the creditworthiness and trade record
585

of the individual or company in question. This is a service offering that is unique to South
African banks. It is used to establish whether a client is considered to be a risk concerning
a specific credit amount and specific trading terms at a specific point in time. Table 12.1
explains the codes that are included in bank reports:

586

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587 Table 12.1: Bank codes and credit quality

Code Description Meaning

A Undoubted for the A first-class firm of undoubted financial

amount of the equity standing.

B Good for the amount of The firm or person has a good record, meets
enquiry engagements promptly and the amount
is well within the capacity of the ordinary
business commitment.

C Good for the amount The firm or person has a good record, but
quoted, if done strictly the amount may appear high in relation to
in the way of business normal business needs.

D Fair trade risk for the The financial position of the firm or person
amount of the enquiry is modest or unknown, but the account is
satisfactorily conducted, and the firm or
person is considered good for moderate
business commitments.

E Figures considered too The amount of the enquiry is out of

high proportion in relation to the firm’s/person’s
capacity

F Financial position The information available is insufficient to

unknown assess the position of the firm or person in
light of the enquiry. This code is also given
when the conduct of the accounts is such
that an opinion cannot be expressed.

G Occasional dishonours This code is given when, on isolated

occasions, cheques or other instruments
have been returned unpaid for lack of funds
(each unpaid instrument has a lifespan of
one year).

H Frequent dishonours This is given when, at regular intervals,

cheques or other instruments have been
returned unpaid for lack of funds.

Source: https://creditdata.co.za/bank-codes/

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 12.4 SAFE CUSTODY
The provision of safe deposit boxes and the custody of securities are two important ways
588

of safekeeping clients’ valuables.

Safe custody is a service provided by banks in which clients’ valuables, including those
589

too large for safe deposit boxes, are protected in the bank’s vaults for a fee. However, in
South Africa, First National Bank (FNB) has decided to discontinue the provision of safe
custody boxes following a spate of high-profile robberies in December 2016.

Some shops sell small metal boxes with little pressed metal locks and keys. Trusting
590

but unthinking people fill them with valuable papers, family jewellery, mementos and
sometimes with cash. They hide them under their beds. However, these boxes are found
and opened very easily by criminals. The alternative is to use a safe deposit box at a
financial institution.

If your institution offers this type of service, make sure that you know the details of the
591

rental fees involved. The client must know that he or she does not leave the keys of the
box at the bank but takes the keys along with him or her for security purposes. The client
will be issued with a receipt for safekeeping. Figure 12.1 depicts typical bank safe deposit
boxes:

592

Figure 12.1: Example of bank safe deposit box

Source: https://www.bankrate.com/banking/savings/safe-deposit-box-etiquette-what-not-to-put-in-
your-safe-box/

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12.5 ESTATE PLANNING

Estate planning is a service that banks offer to clients who need to measure their
593

estate before they die to determine how it will be distributed. Estate planning includes
determining the after-tax value of an estate. The bank, together with a client’s attorney,
helps to plan how the client’s estate will function in accordance with the client’s wishes
with a minimum of expenses (including taxes).

Activity 12.1
Ms. Deliwe Mhlongo had no living relatives, yet she enjoyed a wonderful life thanks to
the pastor and kind friends at her church. Before her death, she verbally told her pastor
that she would donate her whole estate to the church. Unfortunately she did not have
a written will. Who should inherit Ms. Mhlongo’s estate? Discuss this question with your
fellow students in the Discussion Forum. Remember to refer to South African estate
planning regulations.
Hint: There are numerous sources online that can assist you in answering the question.
Consult some of these sources before you discuss your answer with your classmates.

40 Feedback:

Your answer should be based purely on South African estate planning regulations. I trust that
by now you can answer questions in your own words. Remember, you are not allowed to copy
and paste your answers from the sources you consult.

41Assessment

(1) Explain the importance of bank codes and reports.

(2) Explain safe custody and determine how safe it really is. Keep in mind the decision
taken by FNB following a spate of high-profile robberies.
(3) Explain the difference between stop orders and debit orders.

42 Summary

Banks are always looking for new services that they can introduce to satisfy the changing
needs of clients in a cost-effective manner. As technology advances, banks are offering
different types of service to stay relevant, to attract new clients and to retain the existing
ones. The bank’s service must also be profitable to ensure that the bank can stay in business.

ADDITIONAL READING MATERIAL:

Cred-it-data. [Sa]. Bank codes and reports. Available at: https://creditdata.co.za/bank-
594

codes/ (accessed on 17 July 2021).

FNB staff writer. 2012. Safe custody. Available at: https://businesstech.co.za/news/
595

banking/164019/fnb-ditches-safety-deposit-boxes-after-heists/ (accessed on 17 July 2021).

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Study unit 13
Insurance and assurance

CONTENTS
596 Aim
597 Key concepts
598 Learning outcomes
599 Overview
600 13.1 Insurance
601 13.2 Assurance
602 Assessment
603 Summary

AIM
At the end of this study unit you should have a clear understanding of the difference
604

between insurance and assurance, and the importance of both to banks.

Key concepts

y beneficiary
y third party
y premiums
y policyholder
y underwriter’s benefit

Learning outcomes

At the end of this study unit you should be able to do the following:
• Explain the difference between insurance and assurance.
• Discuss different assurances.
• Name and explain the factors on which premiums are based.

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OVERVIEW
Insurance and assurance are two terms that are often confused and used interchangeably,
605

as both are associated with financial products that protect clients’ interests. However, there
are subtle differences between them. In this study unit we discuss the key differences
between insurance and assurance.

13.1 INSURANCE
Insurance is a contractual agreement between the insurance company and the buyer
606

(policyholder) that the insurance company will compensate the policyholder if the latter
suffers a particular loss or damage. In order to remain covered under the insurance policy,
the policyholder must continue paying a premium regularly, as agreed. The cover provided
by the insurance company is approximately equal to the damage or loss suffered by the
policyholder. An insurance policy comes with a fixed validity period and specific insured
amount, which the insurance company is liable to pay during the validity period. If the
policyholder fails to pay the regular premium or does not renew the policy, then the
policy will lapse, and the insurance company will no longer provide the cover, neither
will it reimburse the premiums already paid.

The underlying principle of insurance is the sharing of risk by several parties to safeguard
607

the insured parties against unexpected events such as fires, accidents and theft. The party
who undertakes the risk is the insurer and the party who wishes to be protected from
loss is the insured party. These insurances are taken out over the short term. Short-term
insurance is renewable annually.

Insurance protects the insured parties against the uncertainties of the future. For example,
608

Thando takes out third-party liability insurance before she drives her new car on the
road. She hopes that she will never have to make a claim on the policy, but she is insured
against the possibility of an accident.

Insurance companies are known as underwriters. Underwriting means that the

609

insurance companies assume specified risks and the insured party pays a premium for
the privilege of being protected against unforeseen events. Premiums are usually payable
in advance on a monthly basis.

Examples of insurance companies are Old Mutual, Sanlam, Discovery and OUTsurance.
610

Banks offer insurance services to all their clients through subsidiary companies or
insurance companies and perform this service through their own insurance brokers. These
brokers act as go-betweens who bring together the insurance company that issues or
underwrites the policy, and the buyer who is the client requiring the insurance services.

Most businesses need to take out insurance to cover themselves against the loss of
611

profits that would result from a loan, for example. Such insurance policies would cover
continuing overheads such as salaries and interest payable, loss of trading profits and the
cost of temporary premises. Credit insurance is taken out by most businesses to provide
against the possibility of bad debt.

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 13.2 ASSURANCE
Assurance means that the event covered by the policy is certain, or assured, to happen.
612

In other words, the insurance company assures to pay for an event that is certain to
happen, such as death. Assurance policies are life insurance policies and are taken out
on a long-term basis.

The primary objective of most life assurance companies is to give protection to dependent
613

relatives by promising to pay out a sum of money in the event of the death of the person
whose life has been assured. This person is called the assured. Banks usually deal with a
range of assurance companies and earn a commission on sales.

614 The table 13.1 shows the difference between insurance and assurance:

615 Table 13.1: Differences between insurance and assurance

Basis for Insurance Assurance

comparison

Meaning Insurance provides protection against Assurance provides

uncertain events such as fire, theft, financial coverage for
accidents and floods. events that are certain to
happen, such as death.

Objective Insurance helps to reinstate the financial Assurance pays out the
position of the insured and to maintain assured sum when the
financial stability during an unforeseen event takes place.
event.

Underlying Insurance is based on the principle of Assurance is based on the

principle indemnity. principle of certainty.

Type General insurance products include Assurance includes life

fire insurance, marine insurance, motor insurance (except term
insurance, health insurance and liability insurance), such as whole-
insurance. life assurance, annuity plans
and endowment plans.

Claim Compensation or the benefit under the Compensation or the

payment policy is paid only when an uncertain benefit under the policy
event happens. is payable on occurrence
of an insured event or on
maturity of the policy.

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Contract General insurance plans are normally Long-term contracts run

duration short-term plans that can be renewed for the entire life of the
year after year. Insurance plans with insured.
a specific time duration include term
insurance, which comes with a tenure.

Coverage Coverage is provided against various Coverage is provided

risks that may lead to an unforeseen against the definite event.
situation.

Premium In insurance, the policyholder pays In assurance, the

payment the premium periodically to remain policyholder pays the
protected against an insured risk. premium periodically to
receive the benefits when
the certain event happens.

Source: https://www.turtlemint.com/life-insurance/articles/difference-between-insurance-and-assurance/

616 The amount of the premium depends on several aspects, including the following:

• the age of the life assured

• the state of his or her health
• the sum assured
• whether the policy is with or without profits

617 Main types of assurance policies

618The following are the main types of assurance policies available to clients:

619 (a) An endowment policy

An endowment policy is a life assurance that provides a lump sum payable either at the
620

end of a specified time or on the death of the assured, whichever occurs first. This policy
serves as a means of saving. The term of the assurance can be arranged to suit the needs
of the individual. The assured may get financial protection for himself or herself, or for
his or her family. He or she may receive a lump sum of money in the future (at or near
retirement age). A middle-aged or older person may take out an endowment policy with
a shorter term, say ten years.

A pure endowment policy does not provide life cover and is an investment policy. On
621

the maturity date (i.e. the expiry of the contracted date), the proceeds are paid to the
policyholder. The proceeds are free of tax if the policy exceeds ten years. The minimum
cover of the policy includes both a life benefit and an investment portion.

622

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623 (b) Whole-life assurance
Whole-life assurance is an assurance that covers the client’s whole life rather than just a fixed
624

term. This assurance differs from endowment assurance in that the assurance company
pays the benefits only on the death of the life assured, whenever it may occur. The
premiums are usually paid for the whole of a person’s life, although some policies specify
that premiums are only paid up to a certain age, after which the policy will remain in
force without payment of further premiums.

625 (c) Universal life policy

A universal life policy combines life cover with investment according to the needs of the
626

assured. 413The premiums are generally higher than for whole-life policies.

627 (d) Term assurance

Term assurance is life assurance that covers a fixed term rather than the client’s whole life.
628

It pays out the benefits only on the death of the life assured. There are no benefits if the
insured person survives the term of the policy, in other words if the person lives longer
than the period of the policy.

Term policies are relatively cheap, and the annual premiums are low in comparison to
629

the sums assured. They may be for a fixed amount assured or for an amount that reduces
over the term of the contract.

There are variations on this type of policy. Instead of paying a lump sum on the death of
630

the assured, the policy may provide regular payments to the beneficiaries for a certain
number of years or provide a mortgage protection policy that will cover the amount of
a mortgage in the event of the early death of the mortgagor.

Activity 13.1

Two weeks after Mathapelo telephonically arranged insurance for her car, her son Lefa
crashed it. Mathapelo’s claim was declined because the policy specifically excluded Lefa
as a driver. However, according to Mathapelo the insurer’s representative confirmed that
Lefa could drive the car and would be covered. Mathapelo did not receive the policy
wording until after the accident, because it was posted to her old address. After analys-
ing Mathapelo’s case, do you think the insurance company was right to decline to pay
the claim? Give reasons for your answer.

Hint: This is a typical incident that families often grapple with. Search online for infor-
mation about similar cases and how they were handled. Did the insurance company
consider all the facts before declining to pay the claim? Also discuss the case with your
fellow students on the Discussion Forum.

43Feedback:

Could you find out whether the insurance company was right to decline paying the claim or
not? You might have found out that Mathapelo had arranged her insurance telephonically.
What had been agreed on the phone would be contractually binding on both parties. The

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insurance company should refer to the recording of Mathapelo’s discussion with their repre-
sentative to determine what they agreed.

44 Assessment

(1) Explain the difference between insurance and assurance.

(2) Explain what would happen if you stopped paying the premium on your insurance
policy as a result retrenchment during the COVID-19 pandemic?
(3) Discuss the different types of assurance.

45Summary

It is important to have insurance coverage as it can provide you with financial security
and assist in mitigating losses. It can also offer a sense of safety for the policyholder
and their family, knowing that financial losses would be protected. In the event of a
policyholder’s death, the family will have enough money to bury the dead and support
themselves for a time.

REFERENCES AND ADDITIONAL READING MATERIAL:

Assured Retirement Group. 2015. Available at: https://assuredretirementgroup.com/what-
631

is-the-difference-between-insurance-assurance/ (accessed on 18 July 2021).

Sejpal, A. 2019. Difference between insurance and assurance. Available at: https://www.
632

turtlemint.com/life-insurance/articles/difference-between-insurance-and-assurance/
(accessed on 18 July 2021).
Team Acko. 2021. Difference between insurance and assurance. Available at: https://
633

www.acko.com/insurance/difference-between-insurance-and-assurance/ (accessed on
18 July 2021).

634

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TOPIC 7
Electronic banking products

AIM
At the end of this topic, you should be able to discuss and explain the basic principles of
635

electronic banking as it is currently used.

Learning outcomes

On completion of this topic you should be able to do the following:

• Define electronic banking based on the products and services available to bank clients.
• Explain the security features of electronic banking that safeguard clients.
• Identify the different types of electronic banking systems.
• Explain the different types of electronic banking systems.

TOPIC CONTENT
636 Study unit 14: Electronic systems

637 Study unit 15: Different types of electronic banking

OVERVIEW
The electronic money system reduces the volume of cash or cheques in the hands of clients.
638

These services increase the times when and the places where basic financial services are
available, with many services now being available 24/7. Most businesses prefer using electronic
systems when paying out salaries to their employees, as it is a safer and more convenient to
use them than to issue cash or cheques.

639

99
Study unit 14
Electronic systems

CONTENTS
640 Aim
641 Key concepts
642 Learning outcomes
643 Overview
644 14.1 Electronic systems
645 14.2 Advantages of electronic systems
646 14.3 Disadvantages of electronic systems
647 14.4 The security of electronic systems
648 Assessment
649 Summary

AIM
At the end of this study unit you should have a clear understanding of electronic systems
650

and the different types of electronic systems available to bank clients.

Key concepts

y electronic
y personal identification number (PIN)

Learning outcomes

At the end of this study unit you should be able to do the following:
• Explain what an electronic system entails and justify its use.
• Evaluate the chances of falling victim to cyber attackers or scammers.

OVERVIEW
Electronic money systems reduce the volumes of cash in the hands of clients. Such
651

services expand the time when and places where basic financial services are available.
In other words, the service is available 24 hours a day. It is a safe and more convenient
way of doing business.

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14.1 ELECTRONIC SYSTEMS

An electronic money system is a system that has been designed to facilitate the exchange
652

of monetary value by electronic means. The global pandemic may have brought the
significance of digital banking to the surface, but mobile and internet banking are not new
phenomena. The pandemic is merely a catalyst of what has already been taking place.

An electronic system reduces the volumes of cash in the hands of clients. This service
653

expands the time when and places where basic financial services are available. In other
words, the service is available 24 hours a day. Many businesses prefer using electronic
systems when paying out salaries to their employees.

14.2 ADVANTAGES OF ELECTRONIC SYSTEMS

654 Electronic banking has many advantages, including the following:

• Increased flexibility and convenience. Transactions can be entered into from any-
where in the world at any given moment by just clicking a button.
• It prevents fraudulent activities. An electronic money system makes it possible to
obtain a historical record of every transaction made. It also increases security while
reducing fraudulent activities.
• Instantaneous. The speed at which financial information can be obtained has never
been faster. Transactions are completed within seconds with the click of a button.
The tedious days of physically delivery cash, making payments and standing in long
queues in the bank are gone.
• Immediate access to funds. Banks offer different services that make funds available
to their clients. One of the common services is the debit card, which can be used to
access funds 24 hours a day via ATMs.

14.3 DISADVANTAGES OF ELECTRONIC SYSTEMS

Note that there are also disadvantages to electronic systems. These disadvantages include
655

the following:

• Online scams. Technology has been developing very rapidly over the last years and
online scams have kept up with these developments. Scammers often pretend to be
representatives of a creditor organisation or a bank and easily convince people to
disclose their personal banking details.
• ATM daily limit. A challenge arises when you need more cash than the set maximum
amount you can withdraw per day. This could be frustrating to a client.
• Specific infrastructure requirements. An electronic system can only be used if
certain infrastructure is in place, including a computer or a smartphone and reliable
internet connectivity.

101
 14.4 THE SECURITY OF ELECTRONIC SYSTEMS
Electronic banking makes it possible for clients to access their accounts by using a
656

personal identification number (PIN), which is unique to each client. This is regarded
as a safe and secure system. The client has to keep his or her pin or code separate from
his or her magnetic strip plastic card so that anyone finding the card cannot access the
account. Clients may choose their own letter or number sequence that is easy for them
to remember.

657 To ensure that electronic banking is secure, the following should be done:

• Use advanced software.

• Request a client to register as a user and to choose his or her own access account and
own pin.
• Provide a client with three opportunities to enter his or her pin correctly.
• Require a client to log on to the computer and use the services within three minutes.
If a client has logged on and does not use the service within three minutes, they will
be logged out again.
• Different banks have different optional security extras that may be selected (e.g. an
SMS that is sent to the account holder if there are any transactions on the account).

Activity 14.1

Can you add any additional advantages of electronic systems to the list in section 14.2
above?

Hint: Conduct an internet search to find the information you need to answer this question. Also
think about how electronic systems have changed your own life for the better, especially during
lockdown. Talk to family members, friends and colleagues about the advantages of elec-
tronic systems that they have experienced. Remember to summarise what you have learned
in your own words when you formulate the answer. Do not simply copy and paste information
from the sources you consult. Remember always to acknowledge the sources you have consulted.

46 Feedback:

Electronic systems are here to stay. The change in people’s lifestyle has necessitated banks
to introduce various technical innovations, including and to give their clients access to their
funds 24/7.

47 Assessment

(1) Define and describe electronic systems.

(2) Discuss the advantages of electronic systems.
(3) How do banks ensure that electronic banking is secure?

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48 Summary

The emergence of electronic systems has made it easier and more convenient to transact
without physically visiting the bank. The global COVID-19 pandemic has accelerated the
use of electronic systems that enable people pay for a very wide range of goods and
services. Although banks have put stringent measures in place, electronic systems are
still vulnerable to unscrupulous users. Banks now offer tips to their clients on protecting
themselves against cyber-attacks and scammers.

REFERENCES AND ADDITIONAL READING MATERIAL:

Business Yield. 2020. Electronic money: How it works, advantages and disadvantages.
658

Available at: https://businessyield.com/funding-trends/electronic-money-how-it-works-

advantages-and-disadvantages/ (accessed on 19 August 2021).
Salamah, NH. 2017. Impact of electronic banking services on bank transactions. International
659

Journal of Economics and Finance 9(2):111–121.

660

103
Study unit 15
Different types of electronic banking

CONTENTS
661 Aim
662 Key concepts
663 Learning outcomes
664 Overview
665 15.1 Automated teller machines (ATMs)
666 15.2 Internet banking
667 15.3 Telephone banking
668 15.4 Electronic products
669 Assessment
670 Summary

AIM
At the end of this study unit you should have a clear understanding of the different types
671

of service that banks offer.

Key concepts

y technology
y electronic
y machines
y computers
y giro

Learning outcomes

At the end of this study unit you should be able to do the following:
• Demonstrate your knowledge on different types of electronic product.
• Name and explain the different types of transactions that are offered by banks.
• Discuss electronic products as a consumer of bank services.

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OVERVIEW
The technology available to banks and the general public has developed so dramatically
672

over the last years that banks can now offer their clients new and expanded services (online
services) based on new technology. Many different types of electronic banking services
are available. Remember that these services have both advantages and disadvantages.

DIFFERENT TYPES OF ELECTRONIC BANKING

Electronic banking is an umbrella term for the process that a client follows to conduct
673

banking transactions electronically without visiting a brick-and-mortar institution. The

following terms all refer to a form of electronic banking: personal computer (PC) banking;
internet banking; virtual banking; online banking; home banking; remote electronic
banking; and telephone banking. PC banking and internet or online banking are the most
frequently used electronic services. Note, however, that the terms used to describe the
various types of electronic banking are often used interchangeably. An EFTS (electronic
funds transfer system) is a system designed to facilitate the transfer of money from one
account to another electronically; computers have made this system (EFTS) possible. In
this study unit we discuss the different types of electronic banking systems.

15.1 AUTOMATED TELLER MACHINES (ATMS)

674

Figure 15.1: Example of an ATM

Source: http://money.howstuff works.com/personal-finance/banking/atm3.htm

105
ATMs are machines that are activated by a magnetically encoded card or smart card that
675

allows a client to perform routine banking transactions, such as withdrawing and depositing
funds, transferring funds between accounts and paying certain obligations. Clients can access
their funds or electronic services through SASWITCH machines. These machines are located
in bank branches, in shopping centres and outside banks. Clients can access their funds via
different ATMs, regardless of which bank they belong to. However, they are charged a fee
for using an ATM belonging to a bank other than their own. ATM cards are also increasingly
being used abroad, thus eroding the market for foreign currency.

ATM clients can only withdraw a restricted amount of cash per day. Bank technology has
676

afforded clients to use their banking apps to change their ATM limits up to a certain threshold.

ATM services are available 24 hours a day. They are computer linked to provide a wide range
677

of banking services and are operated by the latest generation of plastic cards with magnetic
strips and electronic chips that record the cardholder’s personal financial details. Transactions
conducted at ATMs are cheaper than those conducted with bank tellers.

678 Different transactions

679 The following transactions can be done at ATMs:

• savings withdrawals
• savings deposits
• transfers of funds from one account to another
• credit card loans
• balance enquiries on cheque or savings accounts
• payment of mortgages, loans or other bills due
• dispensing of movie tickets, postage stamps, transit tickets
• the sale of gift certificates
• loading of airtime for cellphones
• multilingual access to serve all clients

15.2 INTERNET BANKING

Internet banking is an example of electronic banking that allows a client to operate his
680

or her account electronically. A client needs a personal computer and a reliable internet
connection to gain access to his or her bank account(s) at any time and place.

There are certain basic precautions that you should take to prevent fraudulent
681

transactions if you use internet and telephone banking. They include the following:
• Review your bank statement and reconcile your accounts regularly.
• Under no circumstances should you reveal your secret access code, PIN, password or
other unique identification to anyone, especially not to one of the bank’s staff mem-
bers, as this can be used to access your facility.
• Check the site security certificate for the internet banking site each time before you
do your banking.
• Ensure that a temporary password is changed to a password of your own choice that
is known only to you.

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• Should you be aware that your secret access code, PIN, password or other unique
means of personal identity has been observed by anyone, change it immediately.
• The security of your personal computer is your own responsibility.
• Ensure that you read and are familiar with the terms and conditions of your bank’s
website and the conditions on the website.
• Enter numbers accurately when doing your banking, particularly with telephone
banking.
• Make sure that you make payments to the correct account or beneficiary. The bank
cannot reverse duplicate transactions or payments into the wrong accounts without
the specific consent of the account holders.
• Do not use the browser facility to store your password in order to avoid having to
enter it each time.
• Ensure that adequate anti-virus and security software is installed and enabled on
the computer you use.

682 Clients can do the following transactions via internet banking:

• Arrange or cancel stop orders.
• Stop payment instructions.
• Correspond with the bank.
• Gain access to economic and market information.
• Make inter-account transfers.
• Make balance enquiries.
• Get provisional statements.
• Make electronic account payments.
• Request a cheque book.
• Update personal and demographic information.
• Access transaction history.

683 The advantages of internet banking include the following:

• Internet banking does not restrict banks to areas where they have a physical presence.
• It decreases costs to the banks by decreasing client service staff, as clients perform
their transactions personally.
• There is less cost involved in cheque processing, and lower mail and distribution costs
as statements and other bank notifications can be delivered online.
• It is convenient as clients no longer need to wait in line at a branch during business
hours.
• There is a potential for increased sales through the targeted marketing of clients.
• Revenues can increase owing to greater client retention and a wider market reach.
• It represents a major opportunity for the domestic banks that have high cost-to-
income ratios.

684 The disadvantages of internet banking are the following:

• Hackers may wipe out all the money in a person’s account by gaining access to that
person’s account via their computers.
• It might increase the client’s telephone bill.
• It does not immediately reflect on the account.

107
 15.3 TELEPHONE BANKING
Telephone banking (including cellphone banking) is an example of home banking and
685

involves a variety of arrangements that enable clients to obtain current information

about their bank accounts via a telephone or computer link with a bank. With telephone
banking, bank transactions can be carried out 24/7.

686 The facilities that are available telephonically include the following:

• up-to-date balances
• details of standing orders to which amendments can be made
• transfer between a client’s various accounts
• making payments to other account holders, such as credit card companies, Telkom,
Eskom and Edgars
• buying and selling stocks and shares

Account holders have to key in a security code before any transaction can be made.
687

Security codes help to prevent the unauthorised use of the account. Once the telephone
number has been dialed and access gained, an electronic voice guides the client through
the various functions until the transaction is complete.

Telephone banking facilities are convenient and save time as the client no longer has to
688

visit the bank in person.

15.4 ELECTRONIC PRODUCTS

689 Most businesses use electronic systems to perform different types of business operations.

690 (a) Electronic account payment

An electronic account payment is also known as giro, which is an Italian word meaning
691

turn or transfer. An electronic account payment is a payment that clients initiate from their
own financial accounts and control in an electronic payment environment. Clients use
this facility to pay their creditors, such as Telkom, Eskom or municipalities and clothing
stores. Banks enable these businesses to receive their payments from clients.

692 (b) Electronic fund transfers (EFTs)

Electronic fund transfer is an electronic rather than paper-based system of transferring
693

funds to and from accounts. Multiple debit and credit transfers can be processed on
behalf of clients through the Automated Clearing Bureau (ACB).

694 (c) Payroll service

Payroll service is a service that shows the record of wages and/or salaries earned by or
695

paid to employees during a specific period. Payroll service is a computerised payroll

management system designed according to an individual company’s specifications.
The aim is to reduce the administrative duties of the company concerned, including the
following:

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696 payment of salaries and wages

697 deduction and payment of tax

698 deduction and payment of medical aid

699 deduction and payment of pension fund contributions

700 (d) Cash management

Cash management is a collection, payment, concentration and information service
701

provided to corporate clients to speed up the collection of receivables, to control payments

and to manage cash efficiently. Cash management is an online real-time system that allows
the client direct electronic access to the group company accounts. This service facilitates
transfer between intercompany accounts or accounts of companies in the same group.

702 (e) Statement details

A statement is a record that a bank prepares for a client and it lists all cheques drawn and
703

all deposits made for a given period, along with the account balance. Banks offer current
account statements that reflect the reports to facilitate clients’ reconciliation procedures.

704 (f) Automated clearing house

Interbank transactions in South Africa are done through BankservAfrica. BankservAfrica is
705

licensed by the Payments Association of South Africa (PASA) and regulated by the South
African Reserve Bank and the central banks of African countries. It is authorised to carry
out interbank transfers. The following services are offered by BankservAfrica:

• payment collection
• payment switching, clearing and settlement
• payment consulting
• hosting and operating mission-critical systems
• business process outsourcing
• SWIFT bureau and payment solutions
• disaster recovery and business continuity

Activity 15.1

Have you ever taken a close look at the different transactions offered by South African
banks? Have you ever wondered if you are getting value for your money from the bank?
Use all the sources at your disposal to find out more about the offerings of different banks
and analyse these offerings.

Hint: Discuss this activity with your fellow students in the Discussion Forum. Many of
them bank with different banks. Compare notes with them.

109
 49 Feedback:

In this age of technology, knowledge of electronic banking is essential. Applying the skills will
definitely give you the competency required to stay relevant.

50 Assessment

(1) Discuss telephone banking as an example of electronic banking.

(2) Identify and explain different electronic products aimed at businesses.
(3) Briefly discuss how secure ATMs are.

51Summary

Electronic banking is a valuable client service that is here to stay. It makes the process of
paying salaries to clients easier for banks.

Electronic banking offers many opportunities to clients. Apart from home banking or
the use of ATMs, bills can now be paid electronically. There is less need for carrying cash
because banks have introduced electronic cards.

REFERENCES AND ADDITIONAL READING MATERIAL:

ICICIBank. 2019. What is electronic banking and its types? Available at: https://www.
706

icicibank.com/blogs/banking-innovation/what-is-electronic-banking.page (accessed on
20 August 2021).

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TOPIC 8
Different types of clients and the open-
ing and closing of bank accounts

AIM
At the end of this topic, you should be able to explain the importance of verifying
707

information when opening accounts, the reasons for closing accounts and the steps
involved.

Learning outcomes

On completion of this topic, you should be able to do the following:

• Evaluate different types of banking clients.
• Describe the procedures that must be followed to open a bank account.
• Describe the procedures that must be followed to close a bank account.

TOPIC CONTENT
708 Study unit 16: Different types of clients

709 Study unit 17: Procedures for opening and closing bank accounts

OVERVIEW
Banks need to understand the law that governs the opening and closing of bank accounts,
710

as well as the commercial need to make the process as speedy as possible for clients.
Banks should avoid acts of negligence. Examples of negligence are a company chairman’s
failure to consider the interests of stakeholders, or a bank consultant’s failure to explain
all the procedures involved in the handling of a bank account.

711

111
Study unit 16
Different types of clients

CONTENTS
712 Aim
713 Key concepts
714 Learning outcomes
715 Overview
716 16.1 Married persons
717 16.2 Minors
718 16.3 Divorced persons
719 16.4 Prodigals
720 16.5 Mentally incompetent persons
721 16.6 Persons under the influence of alcohol and alcoholics
722 16.7 Sole proprietors
723 16.8 Informal bodies
724 16.9 Partnerships
725 16.10 Close corporations
726 16.11 Companies
727 16.12 Trusts
728 16.13 Deceased estates
729 16.14 Insolvent estates
730 16.15 Local government
731 16.16 Pension funds
732 Assessment
733 Summary

AIM
At the end of this study unit you should have a clear understanding of the different types
734

of clients that banks serve.

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Key concepts

y executor
y minor
y marital status
y contractual capacity
y inter vivos trust
y testamentary trust
y net worth

Learning outcomes

At the end of this study unit you should be able to do the following:
• Discuss different types of clients.
• Explain the various regulations that guide banks in dealing with different types of
clients.

OVERVIEW
Different rules and procedures apply to different types of bank clients, therefore knowledge
735

of the types of clients is very important. Bank employees need to know about different
types of client to ensure that they act in accordance with the law, otherwise the bank
may incur losses.

736 Different types of clients

Bank clients are differentiated in terms of their diverse requirements. Most receive weekly
737

or monthly wages or a salary, which is often paid directly into the bank account by the
employer. Some clients receive a state pension or a grant, or they may be students who
receive study grants.

16.1 MARRIED PERSONS

Women married in community of property were previously subjected to certain restrictions
738

and their husbands had to assist them in entering into any contract. The Matrimonial
Property Act 88 of 1984 was abolished with effect from 1 December 1993. This gave all
women full contractual capacity; in other words, a married woman can now enter into
contracts without her husband’s consent.

739 Married women can open accounts such as the following without their husbands’ consent:

• current accounts (no overdraft facility)

• any kind of credit deposit account
• make loans as long as she is not in a joint estate.

740

113
Married women may also sign all documents pertaining to the above, including cessions,
741

pledges and loans.

Both spouses need written consent from the other if a contract concerns their joint estate.
742

This will affect aspects such as the following:

• mortgage bond or immovable property

• shares, stock, debentures, etc.
• withdrawal of money held in the name of the other spouse
• binding himself or herself as a surety receiving encumbered furniture
• receiving money that is due to the other spouse
• donating any assets to another person

This is why the marital status (the state of being unmarried, married or separated) of an
743

individual is important to the banker, especially when an account is opened. Note that
unmarried persons include those who are single, divorced or widowed.

16.2 MINORS
A minor is defined as a person under legal age, that is, under the age at which he or she
744

is given full civil rights. A person is considered to be a minor until the age of 18 years in
most countries, but 21 in others. A minor does not have capacity to enter into any legally
binding contract or agreement. A minor needs to be assisted by a parent or guardian in
order to enter into a valid and binding agreement. In terms of section 87(1) of the Banks
Act 94 of 1990, a minor over 16 years may open and operate a bank account without the
consent of his or her guardian.

Most banks allow minors under the age of 16 to open and operate savings accounts with
745

assistance from the parent or guardian. These accounts are often conducted with low or no
bank fees to promote a spirit of saving and to establish a relationship with these minors.

16.3 DIVORCED PERSONS

In cases of extreme tension between the partners, the bank may need to insist that both
746

husband and wife sign on a joint account, irrespective of the mandate. Often the family
house has to be sold to provide a fair distribution of their assets.

16.4 PRODIGALS
The Cambridge dictionary defines a prodigal as someone who spends or uses large
747

amounts of money, time, energy and so on in a way that is not very wise. A prodigal
person may be treated as a minor until the parent or guardian certifies him or her fit to
operate a bank account.

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16.5 MENTALLY INCOMPETENT PERSONS

When a client is mentally incompetent, the bank terminates its mandate to operate the
748

client’s account. The client’s relatives should apply to the Court of Protection for the
appointment of a receiver to handle the client’s affairs, as provided for in the Mental Health
Amendment Act 3 of 1984. The receiver should be recorded in the probate register used
to maintain a record of events in the lives of clients. The original appointment document
should be seen. An ordinary photocopy is not acceptable because forgery is so easy.

16.6 PERSONS UNDER THE INFLUENCE OF ALCOHOL AND

ALCOHOLICS
A person under the influence of alcohol can be regarded as temporarily mentally
749

incompetent until he or she becomes sober. After that, he or she can be allowed to open
a bank account like anybody else. If a person is an alcoholic, the bank may need someone
to open and manage that person’s accounts on his or her behalf. The same procedures
as explained in sections 16.4 and 16.5 above may be followed.

16.7 SOLE PROPRIETORS

A sole proprietorship is a business owned and operated by one person. It is also known
750

as a sole trader operation. The business is merely a part of the owner’s overall estate.
Creditors of the business can attach the owner’s personal assets, which are not necessarily
used in the business.

A sole proprietor can open and operate a bank account in his or her own name and/or
751

in the name of business, but all assets and liabilities in respect of both accounts accrue
to the personal estate of the sole proprietor. No distinction is made – only one estate is
recognised. Many sole traders have a separate bank account for their business.

Banks may require proof that the business exists, but the identity of the sole proprietor
752

will also be fully investigated and confirmed.

16.8 INFORMAL BODIES

Informal bodies are not recognised as separate legal persons with a legal entity. Examples
753

of informal bodies are social clubs (stokvels), churches and associations.

Banks need the constitution of an informal body before it will be allowed to open a new
754

account. The informal body must appoint and authorise specific persons to represent
the body at the bank. Scrutiny of the rules and regulations of the body will assist in the
operation of the account. Individuals (representatives) must have positive identities,
decision-making authority on behalf of the body, signing power and a mandate. Any
changes in the authorised signatories should be scrutinised for validity.

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The death of a signatory does not affect the operation of the account, although for practical
755

reasons he or she should be replaced. The minutes of the meeting and the resolution
taken to replace a member as a signatory are required by the bank.

16.9 PARTNERSHIPS
A partnership involves at least two and at most 20 partners or joint owners who bind
756

themselves to one another. The rights, duties and responsibilities of these people may be
covered by a partnership agreement. Their bank account is operated in the name of the
partnership, for example Masakhane Club. The mandate given to one or more partners to
act as signatories at the bank must be signed by every partner. The mandate incorporates
the joint and several liabilities of all the partners.

Most banks ask for the deed of partnership, especially when borrowing is anticipated.
757

The deed will be photocopied and entered into the probate register. On the death of a
partner, the account is frozen and a new one is opened for the remaining partners.

16.10 CLOSE CORPORATIONS

A close corporation has no shareholders, only members who have an interest in the
758

enterprise. This interest is expresses as a percentage of all the interest in the corporation,
with a total percentage of 100%. Unlike companies, there is no distinction between the
owners and the management. The close corporation may consist of a minimum of one
and a maximum of ten persons. A member may transfer his or her interest to another
person, even an outsider, provided that all the other members agree.

A close corporation is a separate legal entity, which requires a resolution submitted to

759

the bank when a bank account is to be opened. Copies of the founding statement and
certificate of incorporation should be submitted to the bank. Representatives of the close
corporation have signing authority.

Since the implementation of the new Companies Act 71 of 2008, no close corporation
760

can be registered in South Africa, and no conversion from company to close corporation
is allowed. However, existing close corporations are maintained.

16.11 COMPANIES
A company is a business formed in terms of section 19 of the Companies Act 71 of 2008.
761

The memorandum and articles of association are needed for a company’s registration.
A company needs a resolution or a request-to-open-an-account form from a person duly
appointed by the board of directors to act on its behalf.

762 There are two main types of companies:

• Private company. It has at least one and not more than 50 shareholders, the transfer
of shares is limited and there must be at least one director. The final words of its name
must be (Proprietary) Limited, which are abbreviated as (Pty) Ltd.

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• Public company. Membership is unlimited, with a minimum of seven shareholders,

and there should be at least two directors. The last word in the name must be Limited.

763 Companies must give banks the following documents:

• a certificate of incorporation
• a memorandum of association
• articles of association
• a bank’s mandate detailing who is to be a signatory, who may endorse bills, etc.

16.12 TRUSTS
A trust is often described as a tripartite legal relationship. A trust is a structure which has
764

been set up by the founder to which property is transferred and is then administered
by trustees on behalf of one or more beneficiaries, in accordance with the deed of trust
or will (as the case may be).

A trust account is a legal arrangement through which funds or assets are held by a third
765

party (the trustee) for the benefit of another party (the beneficiary). The beneficiary may be
an individual or a group. The creator of the trust is known as a grantor or settlor.

A trust can be defined as a tripartite legal relationship. A trust is a legal arrangement

766

through which funds or assets are held by a third party (the trustee) for the benefit of
another party (the beneficiary). The creator of the trust is known as a grantor or settlor.
You can register two types of trusts in South Africa, namely an inter vivos trust and a
testamentary trust. The inter vivos trust is created between living persons, whereas the
testamentary trust is derived from the valid will of a deceased person.

A common example of a testamentary trust is where a parent leaves a sum of money in his
767

or her will to be invested and held in trust for the children until they reach a certain age,
often 18. A trustee is the person who looks after this money until the children reach the
age when they can have the money. The trustee will invest the funds to receive interest
on it and pay the money to the children in accordance with the terms of the trust. Trustees
are appointed by a trust deed.

If there is a breach of trust, for example if the trustee acts criminally and steals the money,
768

the beneficiaries can sue the bank for damages.

When trustees open a bank account, the bank should see the trust deed and all trustees
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should be able to sign cheques. When one trustee dies, the remaining trustees continue
to act. When a member of the trustees becomes bankrupt, it does not necessarily mean
that he or she has to be removed, unless a co-trustee applies to the court for the removal
of the bankrupt trustee.

770

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 16.13 DECEASED ESTATES
A deceased estate comes into being when a person dies, leaving property or a document
771

that is a will or purports to be a will. Such an estate must be administered and distributed
in terms of the deceased’s will or in terms of the Intestate Succession Act 81 of 1987 (when
there is no will). The procedure that must be followed to administer a deceased estate is
prescribed by the Administration of Estates Act 66 of 1965 (as amended).
If the deceased left a valid will, then an executor must be appointed by the master of the
772

high court in terms of the will. The executor gathers the assets of the creator of the will,
pays all taxes, debts and expenses, and distributes the net estate as ordered in the will.
This is called winding up the estate. A female executor is called an executrix.
If there is no will, an application must be made to the Master of the High Court to seek
773

an appointee as an executor. Once appointed, a letter of executorships will be issued.

The executor may open one or more deceased estate accounts, provided that each is
774

covered by the appropriate mandates and documentation.

16.14 INSOLVENT ESTATE

An insolvent estate arises when a person does not have money to pay his or her debts
775

on maturity, and therefore has a negative net worth (i.e. the liabilities are more than the
assets). Like a deceased estate, an insolvent estate is wound up, and the assets and net
proceeds are distributed to creditors. The trustee of the insolvent estate is responsible
for winding up the estate.

A letter of trusteeship is issued by the master to be presented to the bank by the trustee
776

before opening an account for an insolvent estate. All the accounts opened must have the
words “insolvent estate” as part of the title of the account, as stipulated by the Insolvency
Act 24 of 1936.

In some cases a business may be liquidated. This means that its assets are sold and,
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after all the expenses have been paid, the net proceeds are passed along to creditors,
bondholders and shareholders. Payments are made in accordance with the laws and
contracts protecting each class of creditor. The business’s account is stopped. A liquidator
is appointed to wind up the affairs of the business. The bank may give advice about the
available security. This security may be used to recover the money owed. If there is not
enough money to pay all debts, a further claim is instituted against the company.

16.15 LOCAL GOVERNMENT

Local governments (provincial government and municipalities) are regarded as having
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separate legal personalities. It is therefore appropriate for each government entity to

open a bank account in its name in accordance with the Public Finance Management
Act 1 of 1999 and the Municipal Finance Management Act 5 of 2003. Arrangements for
signing are made at management level. The government provide certified copies of the
resolution when requested to do so by the bank.

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16.16 PENSION FUNDS

Registered pension funds are legal entities and are governed by the Pension Funds Act
779

24 of 1956.

Below is a list of the required documentation when opening bank accounts for pension
780

funds:

• a certified copy of the certificate of registration issued by the Registrar of Pension Funds
• a copy of the rules approved by the registrar that govern the passing of resolutions,
the committee’s powers, banking and borrowings, signing arrangements and the
designations of authorised officials

Activity 16.1

You have now learned about various types of bank clients. Some clients’ accounts are
terminated by banks, or banks will only allow them to have accounts if they have the
consent of their guardians. Name three groups of clients whose accounts will be termi-
nated or who need their guardians’ consent to have a bank account. Explain why these
clients’ accounts are terminated or why they need their guardians’ consent.

Hint: Remember to summarise what you have learned in your own words. Do not copy and paste
your answers from the sources you consulted. Remember always to acknowledge all your sources.

52 Feedback:

Always answer questions without copying and pasting from sources or from the study guide.
This will help you to make sure that you understand what you have learned. The correct answer
can be found in the study material above.

53 Assessment

(1) Explain why anyone would consider registering a trust.

(2) What are the differences between a sole proprietorship, a partnership and companies?
Explain these differences.
(3) Name the two main types of companies and explain their different characteristics.
(4) Discuss and explain the regulations that guide banks in dealing with different types
of clients.

54 Summary

A banker must always establish a good relationship with the client when a new account
is to be opened. Knowledge of the different types of clients is very important, as differ-
ent regulations and procedures apply to each. Bank employees need to know the dif-
ferences to ensure that they do not break the law and the bank does not incur losses. A
banker must explain things properly to the client. He or she should be tactful and avoid
confusing the client.

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 ADDITIONAL READING MATERIAL:
Business Yield. 2020. Electronic money: how it works, advantages and disadvantages.
781

Available at: https://businessyield.com/funding-trends/electronic-money-how-it-works-

advantages-and-disadvantages/ (accessed on 19 August 2021).
Dommisse Attorneys Inc. 2021. Types of trust in SA and the advantages of one up.
782

Available at: https://www.golegal.co.za/wp-content/uploads/2016/12/Banks-Act-1.pdf

(accessed on: 19 August 2021).
Forbes, E. 2015. 10 things to know about South African Trust. Available at: https://www.
783

financialinstitutionslegalsnapshot.com/2015/12/10-things-to-know-about-south-african-
trusts/ (accessed on 19 August 2021).
South African Government. 1999. Public Finance Management Act No. 1 of 1999. Available
784

at: http://www.treasury.gov.za/legislation/PFMA/act.pdf (accessed on 19 August 2021).

South African Government. 2020. Deceased estate. Available at: https://www.justice.gov.
785

za/legislation/acts/1987-81.pdf (accessed on 19 August 2021).

South African Government. 2020. South African Reserve Bank on discontinuation
786

of cheques. Available at: https://www.gov.za/speeches/south-african-reserve-bank-

discontinuation-cheques-18-nov-2020-0000 (accessed on 19 August 2021).

787

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Study unit 17
Opening and closing bank accounts

CONTENTS
788 Aim
789 Key concepts
790 Learning outcomes
Overview
791

792 17.1 Opening a bank account

793 17.2 Operating bank accounts
794 17.3 Closing bank accounts
795 Assessment
796 Summary

AIM
At the end of this unit you should have a clear understanding of the importance of
797

verifying information when opening accounts, the reasons for closing accounts and the
steps involved.

Key concepts

y dormant
y freezing
y identification
y confidential

Learning outcomes

At the end of this study unit you should be able to do the following:
• Operate a bank account effectively.
• Explain the procedures that are followed to close a bank account.
• Explain the legal requirements for opening a bank account.

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 OVERVIEW
The banker has the opportunity to make a good first impression on the client during the
798

process of opening a new account. The client needs to understand the account he or
she is opening and steps that should be followed when opening or closing an account.

17.1 OPENING A BANK ACCOUNT

South Africa is a member country of the Financial Action Task Force (FATC), an
799

intergovernmental policy-making body that establishes international standards aimed

at preventing money laundering and terrorist financing. When bank accounts are opened
in South Africa, FATC standards must be obeyed. South Africa’s Financial Intelligence
Centre Act (FICA) 38 of 2001 (amended in 2017) aligns South African practices with those
of the wider international community. FICA enables South Africa to promote compliance
with the law, identify proceeds of crime, and combat money laundering and terrorism
financing. All financial institutions have to comply with FICA, which stipulates that they
have certain obligations.

800 Obligations imposed by FICA when opening accounts

The effective identification of clients (knowing who they are, where they are located and
801

the source of their funds) is required. Identification information now needs to be verified
by means of documentary evidence. A client who wishes to transact with a bank in his
or her personal capacity needs the following documentation:

• a green South African ID book or an ID card

• a South African passport if their ID document has been lost or stolen and the theft or
loss thereof has been reported to the relevant authorities
• recent proof of their residential address, for example a utility bill (municipal rates and
taxes invoice), a statement from another bank, a mortgage statement, a pay slip or
salary advice from an employer, a SARS tax return document or a lease agreement

The above information must also be obtained for all parties related to that client (i.e. any
802

party authorised to transact on the account or on behalf of the client). For a corporate
entity, information is also required for the persons who control the entity (i.e. shareholders
of companies or members of close corporations).

It is recommended that banks do the following when a client wishes to open a

803

bank account:
804 (a) O
 ffer the client privacy to avoid any embarrassing questions or confidential information
from being overheard.

805 (b) T ake care of details as simply as possible. Use simple language, not technical banking
terms. Be quick and efficient.

806 (c) B
 rief the client on the details of the service, especially the following:
• Inform the client about the interest rates applicable to his or her account.
• Explain any rules concerning deposits and withdrawals.

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• Explain the minimum balance requirements and any applicable service charges.
• Explain the reconciliation of a bank statement by using a blank statement.
• Explain what happens when payments are refused owing to insufficient funds.
• Show the client how to operate ATMs, which transactions he or she can do at an
ATM and how to protect their cards.
• Explain all the different bank services.

807 (d) Introduce the new client to your manager or other supervisor, if time allows.

808 (e) F ollow your financial institution’s rules and procedures for opening new accounts.

The following is a generic procedure that should be taken into account when opening
809

an account; procedures may differ from bank to bank:

• The application form must be completed.

• The client must have a valid identity book.
• The client’s current address must be confirmed.
• Credit references must be checked.
• The account will be accepted if everything is in order.
• If the client’s address is unclear or there is no trace of it, the account must be declined.
• If the client has judgments against him or her, or if he or she has been declared
bankrupt at some stage, the account must be declined. (This is usually applicable to
transactional accounts.)

17.2 OPERATING BANK ACCOUNTS

Every client, whether old or new, must be treated with respect and shown how important
810

he or she is to the bank. There are various ways in which banks interact with clients. Let’s
have a look at them below.

17.2.1 Bank statement

The bank should keep accurate records of all transactions to avoid inaccuracies in the
811

bank statements. Bank statements are important for various reasons:

• They reflect the deposits and payments made by clients to various beneficiaries.
• They serve as an audit trail, showing the various transactions made against the account.
• They enable the client to compare his or her account against the payments he or she
has made.

17.2.2 Over-crediting an account

An account may be over-credited owing to entry to the wrong account by the bank. The
812

bank must rectify any mistakes as soon as possible, otherwise a client may be unjustly
enriched.

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17.2.3 Incorrectly debiting an account
If the bank incorrectly takes money from the client’s account, it is obliged to refund the
813

amount owing to the client. The bank is liable for any damage caused to the client’s credit
standing and reputation.

17.2.4 Stopping an account

814 Accounts may be stopped for the following reasons, among others:

• sale of a company or partnership

• upon written instruction from the client
• irresponsible conduct of an account
• death
• change in partnership

17.2.5 Freezing an account

815 Accounts are normally frozen for the following reasons:

• A client is declared insolvent or is in liquidation.

• A client is legally incapacitated.
• Upon the death of a client.
• Upon the death of a surety or guarantor.
• When a court order is received.

17.2.6 Dormant account

If an account is inactive or dormant, the bank contacts the client to find out why the
816

account is not used. The client then has the option to begin depositing into the account
or closing the account.

17.3 CLOSING BANK ACCOUNTS

817 Banks must follow the procedures below when an account is closed:

• Adjust the available balance to pay off the accrued interest or bank charges.
• Any deposit made but not reflected in the current account should be included.
• Any unprocessed payment should be taken into account.
• Any payment presented after the account has been closed must be returned.
• Debit orders must also be cancelled.

818

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Activity 17.1

You have decided to purchase a house and approach your bank, Zana Bank, for a home
loan. Zana Bank approved your home loan request, but the amount was less than you
required to buy a house. You then approach Soweto Bank and get approved for the
amount you need to buy your dream home. One of the requirements of Soweto Bank is
that you must open an account with them. You therefore decide to close your account
at Zana Bank to open a new account at Soweto Bank. Explain the procedures that you
must follow to close your old bank account and to open a new account with Soweto Bank.

Hint: Try to answer this question without copying and pasting from other sources.
Then compare your answers with the information in the study unit. This will help you to
remember the content and to understand the study material.

Feedback:
55

I trust that you can now answer questions without copying from other sources. Your answer
must include the procedures mentioned in sections 17.1 and 17.3 above.

56 Assessment

(1) Explain the legal requirements that must be met when you open a new bank account.
(2) Describe in detail how you would interact with a client if you were a banker.
(3) Explain the procedure that must be followed to close a bank account.

57 Summary

A banker must always establish a good relationship with the client when a new account
is to be opened. He or she must explain the process and the details of the account to
the client. A banker must always be tactful and try not to confuse the client. He or she
must learn the name of the client, welcome the client with a smile and introduce him- or
herself to the client. The banker can then go on to explain all the services available to the
client at present or in the future, as well as all the legal requirements that must be met
when opening a bank account.

ADDITIONAL READING MATERIAL:

Fourie, E. 2021. FICA compliance is a priority. Available at: https://complyadvantage.com/
819

knowledgebase/the-financial-intelligence-centre-act-fica/ (accessed on 21 August 2021).

Payne, K & Foreman, D. 2021. How to close a bank account. Available at: https://www.
820

forbes.com/advisor/banking/how-to-close-a-bank-account/ (accessed on 21 August 2021).

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