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Commercial banks as option for personal financial solutions

Commercial banks are more widely dispersed across the country than other financial institutions although there has been some scaling down of some full-fledged banking services and branch closures.

Like credit unions, they have largely focused on the intake of funds by various types of deposits and lending to facilitate the satisfaction of various needs, long term and short term. The larger ones have been able to compensate for the limited products and services they offer by the offerings of their subsidiaries and associate companies.

The commercial banks are public companies, some of which are listed on the stock exchange. Their ultimate objective is to make a good profit for their shareholders in order to build wealth for them and to distribute good dividends to them.

They are largely Jamaican owned, but some do have major shareholders who are not Jamaicans. Considering that dividends in Jamaican dollars mean nothing to them and that the Jamaican dollar is a weak currency, it is important to them that the level of profit in Jamaican currency grows at a level that maintains profit levels and dividend payments at about the same level or better in foreign currency.

As deposit-taking companies, commercial banks are supervised by the Bank of Jamaica, BOJ, just like building societies and merchant banks. The BOJ is not only interested in ensuring that the customers of the commercial banks are protected and that the banks operate with the highest level of prudence and integrity. It is interested in maintaining the stability of the financial system.

Commercial banks take in the funds of their customers through several types of deposits, including savings accounts, current accounts, and time deposits. Savings accounts, on which the rates to customers are low, provide a stable supply of funds to the banks for lending and investing.

Customers keep current accounts for transactions purposes and are generally not paid interest on account balances. They may end up paying interest in cases in which they have an overdraft facility and use more funds than what is in their account.

Time deposits are more beneficial to the customer who wants a higher rate of interest and who does not need to have access to funds as often happens in the case of savings accounts. The customer deposits funds into the bank for a specified time at an agreed rate and may withdraw all or some of the principal and interest at maturity or may roll over the principal only or the principal and interest for a term and at a rate agreed with the bank. In many cases, though, the rate is less than may be obtained on short-term fixed-rate securities.

Perhaps due to a lack of understanding of how the financial system works or mere satisfaction with how things are, many depositors short-change themselves by keeping funds they have no plan to use for a long time in savings accounts. Others often choose to keep rolling over funds on deposit without checking for the better rates that are available on short-term government securities or money market funds.

Commercial banks help their customers to achieve some of their goals through the credit facilities that they offer. Unfortunately, many borrowers fail to manage the loans well and end up doing serious harm to their reputation and financial situation.

Some customers, for example, interpret overdraft facilities as a tool for facilitating living above their means. Even more hazardous to their financial well-being is the high-interest credit card, which has destroyed the credit rating and financial well-being of its abusers.

The aggressive marketing of the credit facilities of the commercial banks to the public in the form of pre-authorised loans and credit cards, while growing business for them, is not necessarily good for customers who lack the discipline to manage their spending effectively.

Nonetheless, the commercial banks offer opportunities to their clients to fund education, business, and asset acquisition, for example, if they qualify for loans.

One particularly important purpose for which commercial banks lend is for home ownership – a goal that means the world to many Jamaicans. They lend to buy on the open market but also to buy land and for home improvement.

To widen the services and products they offer, some commercial banks have invested in investment and insurance companies, for example. Through them, they are able to offer trading in stocks, bonds, unit trusts, and mutual funds, as well as to provide whole-life insurance, critical illness coverage, and credit life insurance, among other products and services.

Commercial banks have a place in providing personal financial solutions. Individuals, though, must shop around to the extent they are able or seek assistance to make wise decisions whether relating to making money on their money or borrowing to make fulfilment of their goals a reality.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.

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