Financial Sector

Question 1

What is the financial sector?

Answer 1

the financial sector of the economy refers to all firms involved in the provision of financial services.

Question 2

financial services

Answer 2

all products offered by financial institutions that enable people to use their savings to earn a return

Question 3

Examples of financial institutions

Answer 3

1. commercial banks
2. credit unions
3. development banks
4. stock exchanges
5. insurance companies
6. investment banks
7. building socities

Question 4

The financial sector functions

Answer 4

1. main function- financial intermediation
2. payment services
3. foreign exchange services
4. insurance

Question 5

Financial intermediation

Answer 5

refers to the collection of funds from savers (those with excess money) and lending it to borrowers (those in need of money)

e.g. a commerical bank- saver’s deposit

Question 6

What is a commercial bank?

Answer 6

A financial institution with the main objective of maximising profits.
1. acquires the funds used for lending through deposits
2. must keep customer deposits safe or customers would not make any deposits with them
3. pay interest to depositers overtime to enable them to not withdraw their deposists
4. interest paid is cost to commercial banks, they earn revenue from the interest charged on loans given to lenders

Question 7

Functions of a commercial bank

Answer 7

1. accept deposits from customer
2. providing loans to customers (interest is charged revenue)
3. providing payment services- debit cards, cheques, credit cards, can pay utility bills on behalf of the depositer from the depositers account

Question 8

a credit union

Answer 8

a non-profit financial institution that is owned and controlled by its members. the main objective of a credit union is to promote thrift or savings among its members.

1. only members may deposit money with the credit union or borrow money from it
2. normally pay a higher interest rate on deposits and charge a lower interest rate on loans
3. no pursuit of profit as the aim of a credit union is to focus on its members
4. revenue from loans must cover operating expenses and interest paid on deposits

Question 9

development bank

Answer 9

1.