What is a financial institute?

According to (Cambell,2011), An enterprise such as a bank whose primary business and function is to collect money from the public and invest it in financial assets such as stocks and bonds, loans and mortgages, leases, and insurance policies. Further, according the definition of (Farlex,2011) it is an organization, which may be either for-profit or non-profit, that takes money from clients and places it in any of a variety of investment vehicles for the benefit of both the client and the organization. Common examples of financial institutions are retail banks, which take deposits into safekeeping and use them to make loans to other customers, and insurance companies, which do not take deposits, but provide guarantees of payment if a certain situation occurs in exchange for a premium. From the above definition we can say the role of financial institutions is to encourage/promote the process of investment in order to gain financial benefits for themselves and their clients. In order to make the matter more obvious, I am going to discuss the commercial banking system as a financial institute and how it benefits to its clients in financial term and what kind of services/products they offer. Commercial bank as a financial institute:According to (Elements of banking) Commercial bank is the financial institution which acts as a financial intermediary which collects credit from lenders in the form of deposits and lends in the form of loans and they convert short run deposits into longer run. The acts as an intermediary, accepting deposits and paying interest on them and creating a loans and charge the borrowers interest at a higher rate. Such commercial banks offer loans, mortgages, credit cards, leasing, saving accounts, banks lockers to its consumers and other businesses. Asset Product and Liability Products:The Services offer by commercial banks is categorized into two main groups asset products and liability products. Bank liabilities are the funds bank obtain and the debs they incur, primarily to make loans and purchase securities. Bank liabilities include various types of deposits, borrowings, and other liabilities. Our money that we deposit in bank for us it is regard as an assets, and bank regarding as a debt. That is all process we call bank liability. Bank acquires funds by issuing (selling) liabilities, such as deposits, which are the sources of funds the bank uses. (Frederic)

Types of bank liabilities CHECKING ACCOUNT SAVING ACCOUNT

Checking account In this service Checking deposits are a bank accounts that to write checks to the third parties. Checking deposits include all accounts on which can be drawn non-interest-bearing checking account. In commercial banks checkable deposit is considered as an asset for the depositor because it is part of the person financial wealth. The depositors are able to withdraw funds and the bank is obligated to pay whenever a request is made by the depositor. In all this process checkable deposits are a liability for the bank.(The Economics of Money, Banking and Financial Market) Saving account Saving account are very different to the other accounts, they do not have any specified maturity dates or contain any size limits. The saving account will terminate when the holders choose and additions or withdrawals are made at any time. Officially, when commercial bank sends a request it must be seven days notice prior to withdrawal, but however this restriction is not applicable within a normal practice or conduct. No penalties in the form of lost interest are invoked due to withdrawals. Saving accounts are often referred to as passbook savings. The reason for this bold statement is because traditionally the saver received a small book in which bank teller recorded all withdrawal and additions as well as including interest. However the presentation of the book was required always in order to make transaction. Saving accounts are considered to make up a figure slightly more than one fourth of bank deposits.(commercial baking Edward w. Reed/Edward k.gill) Bank liabilities are the money borrowed from all depositors. They range from retail businesses or to the interest of the general public or even wholesale. This is achieved through areas of money market such as the interbank sterling deposit market. The banks gain income by earning their profit by trading in capital or money. The banks will take in deposits and then will lend it out again with an interest attached to it. The interest that banks can charge on loans has to be significantly higher than that paid on deposits.(element of banking david palfreman) Banks will obtain funds by issuing debts (liabilities). This will be achieved in the form of demand deposit and savings and time deposit. These fund (saving account amount) will include interest that a bank liabilities will entail. They will have to pay to the borrower.(money, banking, and financial market Llodyb. thomas )

ASSETS The Bank uses the funds that it has acquired by issuing liabilities, by purchasing income earning assets. The bank assets are thus naturally referred to as uses of funds and the interest payment earned on them are what enable bank to make profit. ( The Econoy of Money Banking and Finacial Markets.) Types of bank Assets product LOANS

 Loans

Credit card and overdraft

Loans are perceived as the largest source of income for bank. Commercial banks are involved in making loans to its customers following the principal of profit making activity. The Bank assets are in the form of loans however in recent years they have generally produced more than half of bank revenues. Bank loans include a personal relationship between banker and borrower. The largest categories of loans for any commercial banks are commercial and industrial loans made to businesses and real estates. Commercial banks will also make consumer loans and will lend to each other. Commercial banks will give loans to customers in the most common form of residential mortgages, also in the form of credit unions, business loans, consumer loans, student loans ETC

Credit card and overdraft Banks grants loans to individuals, commonly known as consumer loans, though several arrangements. Many consumer loans are for durable and tangible goods automobiles, for instance other are general purpose loans, credit card loans. Credit cards and overdraft arrangements are granted on the spot, after a successful application. Overdraft privileges allow customers to obtain automatic credit when they write checks in excess of their demand deposit balance. Credit cards are extremely profitable for banks. Firstly, the banks that issues the card repays the merchant at a discount of anywhere from 2 to 5 per cent of the value of merchandise purchased. Also the interest rates that are changed on credit card balance are often extremely high. As a result banks typically earn a great return on credit card more than 10 percentage points higher than the interest rate. Thus credit card/overdrafts are a lucrative business for banks. Overdrafts will not incur a charge unless the person is over the agreed amount. However credit cards will always incurs a charge whenever it is used.

Banks give loan to the customer and its make extreme profit, those fund bank given in a shape of loans thats liabilities for customer because customer use money from the bank. And then the bank gives loans (given to customer) for banks are assets product. Banks also charge interest on the credit card and they make profit. (Money, banking, and financial market Llodyb. thomas )

(Q2) Interest rates affect in UK

Rising UK interest rates will cause profits at Britain's high-street banks to increase. This is because an increase in the interest rates will have a n adverse effect on the borrower as they will have to pay

more on the loan amount they have taken out. Thus as mentioned earlier would greatly benefit the bank. However the opposite is also true if the base rate is low which is controlled by the Bank of England then the loan repayments will be less and thus will benefit the borrower rather than the lender. With the economy recovering from recession it is extremely important for banks to gain consumer confidence by allowing individuals to gain loans again. this is because money circulating in the economy will only generate an increase in lending and borrowing which will affect the bank positively. As explained by. Jonathan Pierce, a banking analyst at Credit Suisse, said: "We would expect a 1.5 per cent rate rise the level priced into the money market between now and December 2012 to boost domestic bank revenue by 1.5bn. "The deposit base is so large that even a 50 basis point *0.5 per cent+ increase in spread on a 1.5 per cent base rate rise would add 2.5bn to UK domestic bank revenues."(www.independent.co.uk)

http://www.independent.co.uk/news/business/news/banks-profits-soar-as-interest-rates-rise2219850.html

Central Banking

The central bank is commonly known as an organisation. The main feature and function of a bank of this sort and to regulate capital supply the money as credit and pump it into the economy, Central banks have many different functions; however other organisations or institutes in any economy could also carry out some of the features of the central bank. For instance the issuing of currency is commonly a task that a central bank is known to do, however other banks can also fulfil these obligations. Nevertheless a central bank plays a pivotal role in any economy. The bank interest rate become the leading rate of interest in the UK also set the central bank, the other banks related their interest rates to it.

Functions of the bank of England Like any central banks, Bank of England play vital role in the growth of economy of UK. The major functions of Bank of England are as follows to it the functions of the bank of England are very similar to the function of any central bank. In fact many of the central banks throughout the world were modelled on the bank of England. These are ten functions but Ill explain only four: Operating the governments account Controlling the issue of notes and coins The issue and redemption of government stock Operation the exchange equalisation account Carrying out the governments monetary policy The banks international role Operation accounts for the banks Lender of last resort Supervising the bank The treasury bill issue

Operating the governments account: As the governments bank, the bank of England is responsible for running the account of the entire government departments, which in itself is a huge task in terms of the sheer volume. As in total the value of transactions carried out by the government.

Controlling the issue of notes and coins: In conjunction with the treasury (the governments finance department), the bank is responsible for printing bank notes.it determines the size of the note issue, which must be increased to meet seasonal needs and in the longer term to meet the need of an economy which, is constantly growing, and therefore the number and value of transactions are increasing. Similarly, it must print an appropriate quantity of each bank note and ensure that torn and dirty notes are replaced. Operating the exchange equalisation account: The banks are able to influence the value of sterling and other currencies in the foreign exchange

markets. The account holds all of the UK reserves of gold and foreign currencies. When the sterling is weak (it has become less valuable in terms of other currencies in the foreign exchange market) then the bank of England will sell some foreign currency, for instance the US dollars, in exchange for the pound sterling. This reduces the supply of sterling in the foreign exchange market and increases the supply of the foreign currency; this tends to increase the value of sterling and to reduce the value of the foreign currency and to bring about a state of equilibrium in the market. When the sterling is particularly strong the bank will and must operate the account in the opposite direction-sell sterling in exchange for dollars- in order to keep down the value of the pound and to increase the value of the dollar. Accounts of the bank: Other British banks will also keep accounts with the bank of England, and through these they are able to settle transactions with one another, i.e. to draw cheques on the bank. The Bank of England will maintain accounts for overseas banks. as well as the British bank. The central banks are account through which it is possible to carry out transactions relating to loans between countries and through such hold account for the IMF and other international institutions. The balances of the British banks accounts with the bank of England form part of their cash reserves in that they can draw upon them at any time. This as they have maintained the minimum amount, it is reckoned they need for the day to day transaction that are settled though the accounts. (Mastering Banking D.P.whiting 2nd editiion)

Q 4:- why central banking important

The central bank is responsible for providing its economy with funds when banks cannot cover a supply shortage. In other words, the central bank prevents the country's banking system from failing. The primary role of central banks is to provide their countries with price stability by controlling inflations. A central bank will also act as the regulatory authority of a country. Over time it has proved that the central bank can best function in these capacities by remaining independent from governments fiscal policy. And thus are uninfluenced by the political concerns of any regime in power. The central bank should also be completely divested of any commercial banking interests. Today the central bank is government owned but however separate from the country's ministry of finance. Although the central bank is frequently termed the "government's bank" as it handles the buying and selling of government bonds. The operation of all the banks in the country is to decide the interest rates, deposit rates. The purpose of the central bank is to ensure that the country's economy is stable and thus the citizens interests are protected against any unwanted activities by the banks.(www.investopedia.com)

Read more: http://www.investopedia.com/articles/03/050703.asp#ixzz1sRfbB04O

(Edward et al, 1989)

Candace L. , Marshall W.(2007) TCP/IP For Dummies, 6th Edition, John Wiley and Sons Ltd

Commercial banking (fourth edition) Edword W.Reed / Edward K.Gill Mastering bank (second edition) (D.p whiting) Elements of banking (second edition) David Palfreman and Philip Ford Money, Banking, and financial Markets Lloyd B.Thomas
(Campbell R. Harvey,2011), Financial institution, Farlex Financial dictionary available at http://financialdictionary.thefreedictionary.com/financial+institution