University of Palestine International Business And Finance Management Accounting For Financial Firms Ibrahim Sammour.

University of Palestine InternationalBusiness And Finance Management

Accounting For Financial Firms

Ibrahim Sammour

Accounting For Banking

Definition of bank: A financial institution that is licensed

to deal with money and its substitutes by accepting time and demand deposits, making loans, and investing in securities. The bank generates profits from the difference in the interest rates charged and paid.

Another Definition: An organization, usually a corporation,

chartered by a state or federal government, which does most or all of the following: receives demand deposits and time deposits, honors instruments drawn on them, and pays interest on them; discounts notes, makes loans, and invests in securities; collects checks, drafts, and notes; certifies depositor's checks; and issues drafts and cashier's checks.

Through this definition, it is assumed that banks as an intermediary institution between groups of people that who have surplus funds which called "savers" and with some groups who need this money which called "investors" as described as follows

BANK Objectives

Financial Institutions Banks

INVESETORS

Savers

summary

a bank can be defined as any business organisation that offers acceptance of deposits, which is subject to withdrawal on demand and grants loans and credits to private individuals and business firms on commercial basis

Banking Goals

1. Profitability2. Safety3. Liquidity

Banks’ major roles/functions:

Intermediation function Payment function Guarantor role Risk management function Savings/investment advisor role Safekeeping/certification of value Agency role (usually through a trust

department) Policy role

Types Of Banks

1 -Central Bank The entity responsible for overseeing the

monetary system for a nation, Central banks have a wide range of responsibilities, from overseeing monetary policy to implementing specific goals such as currency stability, low inflation and full employment. Central banks also generally issue currency, function as the bank of the government, regulate the credit system, oversee commercial banks, manage exchange reserves and act as a lender of last resort.

Objectives of Central Banks:

The main objectives of central banks as following:

1- To provide their countries' currencies with price stability by controlling inflation.

2- Acts as the regulatory authority of a country's monetary policy

Objectives of Central Banks:

3- Administering policies of Balance of Payments which includes:

a. Encouragements of Exports. b. Monitoring public debt. c. Minimum import for

consumption

What are the main functions of central bank?

The important functions of Central Banks are as follows:-

1-Sole right of note issue.2-Banker to the state 3-Banker's bank..4-Banker's clearing house

The important functions of Central Bank

5-Lender to the last resort S-Financial agent.7-Effective monetary policy. 8-External functions

How the Central Bank Influences an Economy

A central bank can be said to have two main kinds of functions:

1. Macroeconomic when regulating inflation and price stability and

2. Microeconomic when functioning as a lender of last resort.

Revenues and Expenditures of Central Banks

Revenues OR Profits:1. Received /Charged Interest

on foreign investments.2. Received /Charged Interests

on local investments. 3. Income through exchange

rate differences.

Revenues and Expenditures of Central Banks

Expenditures:1. Issuing expenses.2. Paid interests on the legal and

optional reserves. 3. Administrative expenses and other

expenses.4. Custom given to foreign currency

fluctuations

5. Custom end of service compensation.

2 -Commercial bank-: A banker or bank is a financial institution

that acts as a payment agent for customers, and borrows and lends money. The first modern bank was founded in Italy at Genoa in 1406; its name was "Banco di San Giorgio" (Bank of St. George).

Banks act as payment agents by conducting checking or current accounts for customers, paying cheques drawn by customers on the bank, and collecting cheques deposited to customers' current accounts..

Commercial bank Banks borrow money by accepting funds

deposited on current account, accepting term deposits and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current account, by making installment loans, and by investing in marketable debt securities .

Banks provide almost all payment services, and a bank account is considered indispensable by most businesses, individuals ,and governments.

Commercial bank Banks borrow most funds borrowed from

households and non-financial businesses, and lend most funds lent to households and non-financial businesses, but non-bank lenders provide a significant and in many cases adequate substitute for bank loans, and money market funds, cash management trusts and other non-bank financial institutions in many cases provide an adequate substitute to banks for lending savings to.

Definition of commercial bank:

An institution which accepts deposits, makes business loans, and offers related services. Commercial banks also allow for a variety of deposit accounts, such as checking, savings, and time deposit. These institutions are run to make a profit and owned by a group of individuals.

Functions of commercial banks:

The functions of commercial banks are divided into two categories as follows:

1- Traditional functions: 2- Modern functions:

Traditional functions:

1. Accepting different types of Deposits.2. Making different types of loans and

advances to customers.3. Bank guarantees and letters of guarantee4. Financing foreign trade through opening

documentary bills of credit.5. Dealing with securities sale and purchase;

either for or on behalf of their clients.6. Dealing with foreign exchange, traveling

cheques, and transfer money.

Modern functions:

1. Credit card services2. Consumer loans3. Mortgages4. Financial advisors5. Management of investment funds6. Savings deposit7. Foreign exchange transaction8. Provision of credits

Modern functions:

9. Portfolio management10. Equipment leasing11. Venture capital loans12. Assets management services for firms like:a. Banking services for firms (Business

liquidity loans, capital investment loans).b. Brokerage services.c. (Investment banking) Stock exchange listing

trading, cleaning and settlement services).

Resources of funds for Commercial banks:

The resources of funds for

commercial banks can be divided into two parts: as follows:

1- Internal resources:

2- External resources:

Internal resources:

A- Paid Capital.

B- Undivided profits.

C- Legal and optional reserve.

External resources:

A- Deposits of all kinds

B- Lending from Central bank.

C- Lending from another institutions

Structure of A Typical Financial System

Regulatory Institutions

Money market Capital market

Financial Institutions Non-deposit institutionsDepository institutions

Commercial banks

Savings institutions

Credit unions

Security brokersReal estate investmentInvestment institutions(Mutual funds)Finance companiesInsurance companiesMortgage companies

3-Islamic Banking:

A banking system that is based on the principles of Islamic law (also known as Sharia, or Shariah) and guided by Islamic economics. Two basic principles behind Islamic banking are the sharing of profit and loss and, significantly, the prohibition of the collection and payment of interest. Collecting interest is not permitted under Islamic law

Islamic Banking An Islamic bank is a financial institution which

identifies itself with the spirit of Shariah, as laid down by the Holy Qur'an and Sunnah, as regards its objectives, principles, practices and operations. An Islamic bank does not normally lend money except interest-free loans which are termed as Qard Hasanah (Benevolent Loans) while loans on service charge, not exceeding the actual administrative cost of such loans, have also been permitted by Muslim Scholars.

Principles of Islamic banks:

Islamic banking has the same purpose as conventional / traditional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). The basic principle of Islamic banking is:

1. Sharing of profit and loss. 2. Prohibition of riba' (interest).

Functions of Islamic Banks:

Other banking services; such as, money transfers, bill collections, trade in foreign currencies at spot rate/ etc., are provided on a commission or charge basis. Yet, the main differences of functions between Islamic and commercial banks are in the services dealing with interest; such as:

A- Deposits:

Type's of deposit accounts at Islamic Banks:

All the Islamic banks have three kinds of deposit accounts: current, savings and investment.

1- Current accounts 2- Savings accounts 3- Investment account

1 -Current accounts

An account balance which can be drawn upon on demand, i.e. without prior notice. Current or demand deposit accounts are virtually the same as in all conventional banks. Deposit is guaranteed.

2 -Savings accounts Savings deposit accounts

operate in different ways. In some banks, the depositors allow the banks to use their money but they obtain a guarantee of getting the full amount back from the bank..

Investment account

Investment deposits are accepted for a fixed or unlimited period" of time and the investors agree in advance to share the profit (or loss) in a given proportion with the bank. Capital is not guaranteed.

B-Loans:

Banks adopt several modes of acquiring assets or financing projects. But they can be broadly categorized into three areas:

investment, trade lending.

Resources of Funds for Islamic Banks:

Self resources: a- Paid capital. b- Public Reserves. c- Retained profits. External resources: a- Current deposits. b- Investment deposits. c- Lending from another Islamic

institutions.

4 -Specialized hanks:

Banks serve specific type of economic activities; including agricultural sector, industrial sector, and other specialized real estate activities.

Functions of specialized banks:

1. Facilitate credit conditions2. Give long-term loans3. Lenient in accepting collaterals.

The main differences between Specialized and commercial banks.

Item of comparison

Commercial banks

Specialized banks

Capital

Safety element Component participation element

Owned to stockholders

Owned to Government

Standard of return

Profit based Service based

Types of Specialized banks:

1. Industrial banks.2. Agriculture banks.3. Housing banks.

Fund Resources of specialized banks:

1. Capital2. Surplus of public treasury.3. Foreign loans and grants of all

kinds.

THE END