(a) Distinguish between: (i) a mortgage bank and a merchant bank. (ii) a commercial bank and a development bank. (b) Explain any four functions of commercia...

Answer Details

(a) Distinctions.

(i) Mortgage bank versus merchant bank. A mortgage bank specialises in providing long-term loans for the purchase, building or development of houses and landed property, using the property as security. A merchant bank provides wholesale banking services to companies and large investors, such as acceptance of bills, equipment leasing, corporate finance, underwriting of shares and advice on mergers; it deals mainly with firms, not small individual depositors.

(ii) Commercial bank versus development bank. A commercial bank accepts deposits from the public and grants mainly short-term loans and overdrafts, operating for profit through many branches. A development bank provides medium- and long-term finance and technical advice for development projects in sectors such as agriculture and industry, often with government backing and a developmental rather than purely profit motive.

(b) Four functions of commercial banks.

• Accepting deposits: they receive savings, current and fixed (time) deposits from the public for safe keeping.
• Lending (granting credit): they give loans and overdrafts to customers, thereby creating credit.
• Agency and payment services: they honour cheques, make and collect payments, standing orders and remittances for customers.
• Safe custody of valuables: they keep documents and valuables in safe deposits.
• Provision of other services such as foreign-exchange dealing and financial advice.

Examination reminder: commercial banks are best remembered for the two core functions of accepting deposits and lending, from which credit creation flows.