PART B: BANKING OPERATIONS AND SERVICES Chapter 6: Deposits Nothing can stop the man with the right mental attitude from achieving his goal; nothing on earth can help the man with the wrong mental attitude. Thomas Jefferson

Learning Objectives By the end of this chapter, learners should be able to: Classify the various types of deposit Explain the usage of each deposit account Elaborate the process of becoming a depositor Distinguish the feature of each deposit account

Introduction Deposits of a bank are classified under the liability of fund to a bank. A deposit is the major source of fund to a bank. The depositors/ customers of a bank are the creditor and the bank will become the debtor.

Types of Deposits Savings Account Current Account Fixed Deposit Account Negotiable Instruments of Deposits (NIDs)

Savings Account Is an interest bearing deposit account. Previously account holders are given a passbook but nowadays commercial banks will issue statements rather than passbooks. Depositors can also get their statements online via the internet. Besides passbooks, the account holder can also use the ATM card for easier and more convenient withdrawal of funds from his/ her account. Besides that, the account holder may also deposit money via cash deposit machine.

Savings Account Banks also offer trustee account and accounts for minor. Interest on a savings account is calculated on the account’s outstanding balance at the end of each day. However, interest is credited to the account every six months; i.e. on June 30 th and December 31 st each year. Interest=Principal x Time x Rate

Savings Account Also offered under Islamic Syariah principle under Al-Wadiah Yad Dhamanah princilple; where the bank accepts deposits from customers looking for safe custody of their funds, at the same time, allowing the customers to withdraw their money at any amounts any time. Can be opened by individuals, societies, associations, and clubs whether by Muslims or non-Muslims.

Types of Savings Accounts Individual Savings Account Joint Savings Account Savings Account for associations, societies and clubs

Opening an Individual Account An individual needs to have an identification card and to come in person. He/ She has to fill a form and sign specimen signature cards. He/ She is also required to sign in the passbook and the signature will be covered by a spectroline sticker. The signature later will be used to verify withdrawals using passbook by viewing the signature using ultra-violet light.

Opening a Joint Account The applicants (two or more) should fill up a Joint Mandate Form and all applicants have to provide identification cards (or passport).

Opening a Society/ Club/ Associations Account Required documents are: – A certified copy of license or certificate issued by the Registrar of Societies; – A certified copy of an extract of resolution passed by the committee; and – Identification Cards of office bearers.

Current Account The difference between current account and savings account, for current account, cheques can be used for depositing and drawing money. A cheque can be transferred to another party without prior notice to the bank and is payable on demand. Another characteristic, interest is not paid for current accounts. Only commercial banks can offer current accounts.

Current Account A current account holder can have an overdraft facility provided that he/ she has prior agreement with the bank. Current accounts can be individual, joint, sole proprietor, company and trustee account. To open an account, a customer is required to have an identity card (or passport) or Memorandum and Articles of Association for a company. To open a new current account, normally a bank would require an introducer and a minimum initial deposit.

Fixed Deposits/ Time Deposits An investment/ deposit account where fund placed with a bank for a period of time to earn interest as quoted by the bank. Has better returns than a savings account. Fixed deposit period can be 1, 2, 3 … up until 60 months. Interest is fixed at the time the deposit is taken. However, interest rate for more than 12 months can be negotiated between the customer and the bank.

Fixed Deposits/ Time Deposits Calculation of interest; Islamic FD is also available under al- Mudharabah concept. No interest is paid, but is based on profit sharing ratio. The profit ratio is 70:30, of which 70% is for the investor and the remaining 30% is for the bank. Interest amount=Principal x Rate x Time

Opening an FD Account Simple document such as an identity card or any other identification such as passport is required when opening an account. Minimum deposit required: – One month – RM5,000 – 2 – 60 months – RM1,000 Can be opened by: – Individual aged 18 years and above including non-residents of Malaysia – Joint individuals – Societies – Association and clubs – Companies

Deposit Certificates Will be issued to depositors upon opening the account. If the depositor wants to renew/ terminate the FD account, the depositor can notify the bank before the existing FD matures. If he/ she does not notify the bank, the bank will automatically renew the FD.

Negotiable Instruments of Deposits (NIDs) Introduced in Malaysia in Designed as a new instrument for commercial banks to mobilize domestic savings from the public. A Ringgit NID is a bearer instrument issued by a commercial bank or financial institution in Malaysia certifying that a certain sum of money in Ringgit has been placed on deposit for a specific period at an agreed rate of interest.

Characteristics of NIDs A short-term NIDs is for a period of not earlier than 90 days and not later than 364 days from date of issue. A long-term NIDs is for a period of not earlier than 12 months and later than 60 months from the date of issue. Deposit is payable to whoever is the holder at maturity date. Has nominal value denominated in multiples of RM50,000 (minimum) up to RM10 million per certificate. No maximum amount of placement, subjected to bank’s amount. Tenor is in a multiple of three months with minimum tenor of three months and maximum tenor of five years.

Characteristics of NIDs Can be sold before maturity date and will be determined at a prevailing market rate. The issuer shall not purchase its own NIDs. Interest given is based on market rate. Calculation of interest accrued is based on number of days or on a 365 days basis. Interest payment for tenor one year or less, payment on maturity date. If tenor more than a year, interest payment will be done on each anniversary date of issue.

Advantages of NIDs Is a form of fixed deposits but is transferable instrument which does not bear the name of the beneficial owner. Its transferability allows a Ringgit NID can be turned into cash at any time by sale in secondary market. Is liquid and has ready marketability; makes an attractive short-term investment for individuals, businesses, trust funds and other organizations with temporary inevitable cash balance.

Types of NIDs Short-term NCDs with maturity between 90 – 364 days. Long-term NCDs with maturity between years. Zero-Coupon NCDs with maturity of 3 months and without interest and sold at discount. Floating rate NCDs with maturity of 1 year and interest is not fixed. Interest is dependent on KLIBOR.

ANY QUESTIONS End of Chapter 6