When the bank makes the advances in a lump sum, to be repaid in lump sum or in forms of installments with interest at any future date, is known as loan. These loans may be of short and long term.
Types of Advances
Working Capital Finance (Running Finance / Current Finance / Cash Finance)
Running Finance is short-term loan usually given for the working capital management. The running finance is suitable for meeting day to day financial needs of the Business. Running finance is usually given for a period of one or less than one year.
In cash finance a certain amount of cash is available for the borrowers at all the times. A limit is first sanctioned to the borrower against the security of the goods which may be made like in the form pledge or hypothecation. Then, on his needs, the amount is transferred from cash finance account to the borrower’s current account from where he can withdraw the money.
The borrower can take finance unto his limit sanctioned by Bank’s authorities the amount cannot be withdrawn in lump sum, while interest is paid on the amount withdrawn from the bank. Cash finance is normally given for seasonal needs but in some cases it can be given for regular needs.
Under such arrangement the customer is allowed to withdraw the amount excessive from his balance. But the limit of amount is sanctioned by the bank and given for a fixed period.
Term Finance (Short Term / Medium Term)
It is loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate. Duration of loan is generally three to five years. Repayment usually takes the form of periodic payments that normally include part principal plus interest in each payment.
Project Finance (Medium Term / Long Term)
Project finance is a way to finance an activity using debt where the debt is repaid from the funds generated by the activity. This loan is for medium to long term, and repayment takes place in periodic payments.
Customized Products for SMEs
These products are specially designed for certain sectors or industries. Every bank has its own range of customized products that cater the needs of various customers.
Non-Fund Based/Contingent Liability
Letter Of Credit
Letter of credit (L/C) is the type of guarantee, which the Bank extends on behalf of its customer in favor of the exporter.
Letter Of Credit (Import)
The Bank in order to finance commerce and trade extends its prestige financial strength by establishing overseas letters of credit, on behalf of the customers and thereby undertakes to pay the amount stated on the letter of credit or accepts a bill of exchange on behalf of customer, in return for delivery of the commercial and shipping documents.
Letter Of Credit (Inland)
The Bank, in order to finance trade and commerce within the country establishes inland letter of credit and thereby undertakes to pay the amount stated on behalf of its customer, in return for the delivery of commercial and other documents provided there documents are strictly in accordance with the terms and conditions of the letter of established by the Bank.
Letter of Guarantees
A bank guarantee is an undertaking by the bank at the request of a party, whereby the bank – in the event of default by the principal in the fulfillment of his obligations to make payment to the beneficiary within the limits of specified sum of money and within the specified period of time. Guarantees are generally given by banks, insurance companies and other guarantors. These guarantees are given in the form of performance guarantees and repayment guarantees in relation to projects in the same country or another country which involves supply of goods or services or the performance of work. These guarantees are currently an important tool of international trade.
General requirements (documentary and security) for availing financing facilities
Securities requirement depends on the type of loan, however; brief description of securities is given as under;
Mortgage is a contract whereby the interest in any specified immovable property is transferred to the banker in order to give the security for the payment of debts. There are two types of mortgages;
Mortgage by legal charge
In a mortgage by legal charge or technically “a charge by deed expressed to be by way of legal mortgage”, the debtor remains the legal owner of the property, but the creditor gains sufficient rights over it to enable them to enforce their security, such as a right to take possession of the property or sell it.
In Pakistan, the mortgage by legal charge is most common way used by banks to secure the financing. It is also known as registered mortgage. After registration of legal charge, the bank’s lien is recorded in the land register stating that the property is under mortgage and cannot be sold without obtaining an NOC (No Objection Certificate) from the bank
Equitable mortgages don’t fit the criteria for a legal mortgage, but are considered mortgages under equity (in the interests of justice) because money was lent and security was promised. This could arise because of procedural or paperwork issues. Based on this definition, there are numerous situations which could lead to an equitable mortgage.
In an equitable mortgage the lender is secured by taking possession of all the original title documents of the property and by borrowers signing a Memorandum of Deposit of Title Deed (MODTD). This document is an undertaking by the borrower that he/she has deposited the title documents with the bank with his own wish and will, in order to secure the financing obtained from the bank.
Hypothecation is a term where goods are charged for the purpose of security. But the possession and ownership remains with the owner of the goods.
Pledge is a contract between the borrower and the bank whereby the goods are transferred into the banker’s possession while the ownership remains in the possession of the borrower. This possession remains with the bank until the payment of loan is dully made. In case of default, the bank can sale the goods after giving the notice.
Personal guarantee is the guarantee of person(s) having capacity to repay the finance in case of default. The guarantors shall have to give their NIC copy, copy of registry of property and sign the guarantee paper. The bank judges whether the guarantor has worth equal to the amount of loan or not.
Liquid assets are among the most basic form of financial resources used by consumers. The standard savings account is not the only form of investment that can be properly classified as a liquid asset. Money market fund, SSC/DSC shares, bonds and mutual funds are all examples of interest bearing investments that can undergo liquidation and provide quick cash when necessary. While the actual market liquidity of each asset may vary, the key is that the process of converting or selling off the asset to raise money will be simple and can be accomplished in a short period of time.
Other types of securities also include;
- Lien on Export Proceeds
- Third Party Guarantees
- Assignment of Receivables
- Charge on Assets of company
A deposit account is a current account, saving account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank’s books, and the resulting balance is recorded as a liability for the bank, and represents the amount owed by the bank to the customer.
State Bank of Pakistan through commercial banks has always opened a world of convenience for an individual and/or a small and medium-sized business. Which includes all the banking services; however, opening a bank is essential part of accessing the formal banking sector. Advantages to opening deposit account are as under:
Advantages of Bank Account
Bank provides safety to the deposits kept with them. The depositors can withdraw the deposited money as and when depending upon the type of account.
The bank account holder can make payment through the savings and current account. The payment may be regarding electricity bills, insurance premium, etc. The bank also makes direct payment on the standing instructions of the customer.
The bank account makes it possible for the businessmen to conduct their business operations smoothly not only in the domestic trade but also in the foreign markets.
The bank can directly collect money of the customer in respect of dividend, salary pension or from debtors. The collected money is then deposited in customer’s bank account.
The bank provides safe deposit locker facility to its account holders to keep their valuables like gold jewellery, share certificates, property documents, etc.
Account Opening Documents
Listed below are the minimum requirements for Opening of account, however, some of the banks may require additional documents.
- Duly filled Account Opening Application
- Specimen Signature Card
- Attested copy (ies) of National Identity Card of individual (s). CNIC of the individual must also be verified through NADRA.
- Service card or any other evidence of salary (for salaried person)
- Attested copy of Registration Certificate of the firm. If the firm is unregistered the fact is to be mentioned on the Account Opening Form
- Copy of NTN/assessment order (if applicable)
- Certified copy of Partnership Deed (in case of partnership)
- Latest Financials of the firm
- In case of non-salaried/un-employed individual, KYC should be conducted with extra vigilance and source of income/ funds should be validated prudently.
- In case of illiterate person, a passport size photograph of the new account holder besides taking Left and Right thumb impressions on the account opening application & Specimen Signature Card (SSC).
- In case of a customer with shaky signatures the account should be opened as ‘Photo Account’. All cheque withdrawals are in physical presence of customer.
- In case the signatures mismatch with CNIC, undertaking as per Annexure XXII to be obtained from him/her.
Types of Account
Basic Banking Accounts
In 2006, to accommodate the banking needs of low income groups, State Bank of Pakistan allowed Basic Banking Accounts across all over Pakistan. This is primarily aimed toward helping the low income group to benefit from the banking services without having the pressure to maintain specific balance amount with the banks.
General features of the account are listed below;
- No limit on minimum balance, however some banks require minimum amount for opening BBA account. In case where balance in BBA remains nil’ for a continuous six months period such accounts will be closed
- No fee (service charges) for maintaining BBA.
- Customers will be allowed a maximum of two deposit transactions and two cheques withdrawals are allowed, free of charge, through cash/clearing per month
- Statement of account will be issued once in a year
- No profit will be paid
- Withholding tax and Zakat are taken into account, wherever applicable.
Current Bank Account
In current account, amount can be deposited and withdrawn at any time without giving any notice.It is also suitable for making payments to creditors by using cheques. Generally bank does not pay any interest on current account. Nowadays, some banks do pay interest on current accounts.
Current account is of continuing nature and as such there is no fixed period.
Some of the banks also provide additional features like cheque book, pay order, demand draft, online banking etc.
The main objective of saving account is to promote savings.
There is no restriction on the number and amount of deposits.
Withdrawals are allowed subject to certain restrictions.
The money can be withdrawn by cheque.
The rate of interest payable is very nominal on saving accounts. Saving account is of continuing nature. There is no maximum period. Some of the banks also provide additional features like debit card, pay order, demand draft, online banking etc.
It is a kind of cheque, which is issued by the banks, on the demand of the client. On the Demand Draft there are different heads mentioned on that such as the amount to be sent, the name of the person to whom it is to be sent. It is very convenient and safe method of sending the money from one place to another.
If one person issues the DD in the name of other person, then it can be transferred to the account of the second person easily. When DD is issued, it is given to the person, who wanted to make it. At that time Bank will have no concern with that DD but an advice is sent to the concerned branch that we have issued the DD of such amount and on the name of this person, and you will pay him on the demand of the client. This DD can be closed before the issuing the amount. On issuance the DD, Bank takes some commission. It can be in Pakistani Rupee or in any Foreign Currency.
It is Negotiable Instrument (such as draft) which instruct a payer bank to pay a certain sum to a third party or an order issued by the Bank and payable on itself, through this client can easily transfer the money from one person to another within the same city. It is a written document on which the certain commission is to be paid and certain documents are filled by the client. This amount is needed to be deposited with the Bank before issuance of pay order.
It is also a way of sending the money from one place to another. Like DD certain forms are to be filled. In this the message bill is not sent through the paper, but with the help of the fax or things like that. All other processes are same as of the DD.
Islamic Banking Products
Letting on lease. Sale of a definite usufruct of any asset in exchange of definite reward. It refers to a contract of land leased at a fixed rent payable in cash and also to a mode of financing adopted by Islamic banks. It is an arrangement under which the Islamic banks lease equipments, buildings or other facilities to a client, against an agreed rental.
A form of partnership where one party provides the funds while the other provides expertise and management. The latter is referred to as the Mudarib. Any profits accrued are shared between the two parties on a pre-agreed basis, while loss is borne by the provider(s) of the capital.
Musharakah means a relationship established under a contract by the mutual consent of the parties for sharing of profits and losses in the joint business. It is an agreement under which the Islamic bank provides funds which are mixed with the funds of the business enterprise and others. All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by every partner strictly in proportion to respective capital contributions.
It is a contractual agreement for manufacturing goods and commodities, allowing cash payment in advance and future delivery or a future payment and future delivery. A manufacturer or builder agrees to produce or build a well-described good or building at a given price on a given date in the future. Price can be paid in installments, step by step as agreed between the parties. Istisna’a can be used for providing the facility of financing the manufacture or construction of houses, plants, projects, and building of bridges, roads and highways.
Musawamah is a general kind of sale in which price of the commodity to be traded is bargained between seller and the purchaser without any reference to the price paid or cost incurred by the former.
Details of Islamic Banking Products can be accessed at:
Branchless Banking (online banking, mobile banking etc)
Branchless Banking is a type of banking that takes place where the banking customer does not need to visit a branch or central location of the bank. Rather, banking business may be completed through technological services, such as online, over the phone, or through an ATM; it is significantly cheaper alternative to conventional branch-based banking and many people are able to complete all their banking online without ever having to visit the bank. Each of these technologies serve to deliver a set of banking services and are part of distribution channels that may be used either separately or in conjunction to form the overall distribution channel strategy.
A recent example would be the partnership model by Telenor Pakistan (the second largest cellular provider in Pakistan) and Tameer Microfinance Bank (a Branchless Banking license holder from the State Bank of Pakistan). These two organizations came together with Telenor serving as an agent to Tameer and providing 2,500 of its 175,000 retail shops across the country as sub-agents for Branchless Banking services. The brand was named ‘easypaisa‘ and launched in Oct 2009.
Online Banking is a system that allows individuals to perform banking activities at home, via the internet. Online banking through traditional banks enable customers to perform all routine transactions, such as account transfers, balance inquiries, bill payments. Account information can be accessed anytime, and transactions can be done from anywhere.
One can check the balance every day just by logging onto one’s account. In addition to checking balances and transactions, one can catch discrepancies in the account right away and deal with them swiftly. The best part is that this can be done anywhere! As long as one has Internet access, one can practice online banking.
Bills are paid online, the necessity of writing checks, affixing postage and posting the payment in the mail is eliminated. Once the amount is entered and the payee is checked off, the funds are automatically deducted from the payer’s choice of account. While there is usually a fee for online banking, it can be extremely low.
Mobile banking means you can avail all the services mentioned below through your mobile phone
- Withdrawal at banking agent
- Deposit at banking agent
- Bill payment
- Mini-statements and checking of account history
- Alerts on account activity or passing of set thresholds
- Balance checking in the account
- Domestic fund transfers
- Micro-payment handling
- Mobile recharging