WAEC Economics 2022 Theory — Question 8

Model answer

(a)(i) A mortgage bank is a financial institution that specializes in granting loans to individuals and corporate bodies for building purposes. Such loans are repaid by instalments spread over several years. While a merchant bank is a financial institution that provides specialized services like acceptance of bills of exchange, corporate finance, portfolio management, equipment leasing and acceptance of deposits. (ii) Commercial banks are financial institutions that perform the services of accepting deposits and using such money to make loans and other financial services available to customers. The loans are usually for short and medium terms. While a development bank is a financial institution set up to provide long term loans to groups of individuals and governments for development projects. They provide financial assistance in high risk, low profit and long gestation period investments which are unattractive to commercial banks. (b) Functions of commercial banks: (i) Acceptance of deposit — Customers' money can be kept in any of the different commercial banks' accounts: Savings, current or demand deposit and time or fixed deposit accounts etc. (ii) Lending of money — Commercial banks make available loans and over-drafts. (iii) Commercial banks provide facilities for the safe keeping of valuables. (iv) Commercial banks provide facilities for domestic and foreign remittance. (v) Commercial banks provide trust services for individuals and organizations. Trust services include the management of trust funds. (vi) Commercial banks act as agents for their customers in the purchase and sale of securities. (vii) Commercial banks offer advisory services to customers. (viii) Commercial banks discount bills of exchange for their customers. (ix) Commercial banks act as executors of will for their customers. (x) Commercial banks help the Central Bank to implement governments' monetary policy. (xi) Commercial banks sell foreign exchange to their customers.