7 Business finance Caribbean Business Chapter Seven Caribbean

7 Business finance Caribbean Business Chapter Seven Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance 7. 1 7. 2 7. 3 7. 4 7. 5 7. 6 Banks Central banks Banking risk and regulation Income and saving Business finance Stock markets Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance 7. 1 Banks Caribbean Business Chapter Seven Business finance Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Banks ● Accept deposits from the individuals and businesses. ● Make loans. ● Provide financial services such as: ● Credit cards ● Purchase and sale of foreign exchange ● Bank drafts and telegraphic transfers. Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Banks earn revenue from… ● The spread between interest rates for borrowing and lending. ● The spread between buying and selling rates foreign exchange. ● Fees for bank drafts and other services. ● Payments for use of credit and debit cards. Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Banks need funds to cover… ● ● ● Operating expenses such as salaries The risk that customers will default on loan payments Obligations such as funds deposited with the Central Bank Taxes Profits for their shareholders Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Commercial bank services ● ● Chequing accounts Savings accounts Fixed deposits Payment through ● Cheques ● Debit cards ● Bank drafts ● Telegraphic transfers ● Loans ● Mortgages (for real estate purchases) ● Foreign exchange ● Safety deposit boxes Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Other financial companies ● ● ● Trust companies Merchant banks Development banks Offshore banks Specialist mortgage lenders Insurance companies … and many others Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance 7. 2 Central banks Caribbean Business Chapter Seven Business finance Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Central bank functions (1) The government’s bank ● Controls the currency ● Manages public debt ● Promotes financial stability ● Manages monetary policy ● Influences interest rates ● Issues Treasury Bills ● Manages foreign exchange and holds reserves Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Central bank functions (2) The banker’s bank ● Holds commercial bank reserve requirements ● Regulates commercial banks ● Operates payments system ● Lender of last resort Also… ● Research, data collection and analysis ● Financial and economic education Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance 7. 3 Banking risk and regulation Caribbean Business Chapter Seven Business finance Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Banking risk and regulation The central bank regulates commercial banks to protect depositors. There should be: ● Not too much lent to any single borrower ● Enough cash for customer withdrawals ● Sufficient funds in low-risk lending. Some central banks also regulate insurance companies and credit unions. Deposit insurance schemes protect most bank customers. Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Intervention was needed when… ● ● Many large international institutions collapsed in 2007 and 2008. Jamaican financial institutions were under pressure in the 1990 s. CL Financial could not meet its obligations in 2009. Stanford International Bank was forced to close in 2009. Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Danger!! Unrealistic promises of very high returns usually signal… ● Pyramid schemes ● Unregulated ‘investment’ schemes ● Ponzi schemes Investors risk losing all the funds they put in. Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance 7. 4 Income and saving Caribbean Business Chapter Seven Business finance Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance A household budget covers… ● ● ● ● Rent or mortgage Food and groceries Transport Electricity and monthly utilities Other regular commitments Discretionary spending (wants not needs) Savings Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance How the average Barbardian household spends its money Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Why people save… ● ● ● To guard against risks – accident, fire, sickness To guard against unemployment To buy a ‘big ticket’ item For a future goal, such as university education To build up funds for retirement To accumulate capital to start a business Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance The amount saved depends on… ● ● ● ● Income – High or low? Rising or falling? Regular spending commitments Thrift – natural saver or big spender? Immediate goals – vacation or car repair Long-term goals – real estate or business Retirement plans Stage in life Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Savings rate and the economy ● ● ● Economic outlook – bright or gloomy? Interest rates – high or low? Inflation – influences real interest rates Tax incentives – to save or spend? Financial institutions – do these encourage saving? Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Ways to save ● Commercial banks ● Savings accounts ● US dollar accounts ● Fixed deposits ● Life assurance ● Endowment policy ● Pension plans ● Credit unions ● Shares ● Savings accounts ● Fixed deposits ● Group savings ● Partner ● Sou-sou ● Meeting-turn ● etc Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Investment… ● Carries an element of risk ● Should earn a higher return than savings Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Ways to invest ● ● Starting a business Buying shares Buying real estate Mutual funds (unit trusts) ● Money market funds ● Equity funds ● Growth and income funds Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance 7. 5 Business finance Caribbean Business Chapter Seven Business finance Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Debt and equity ● Debt is a financial investment which earns regular interest payments. ● Debt does not bring ownership. ● Debt is rewarded as capital. ● Equity is an investment which brings a share in ownership and profits. ● With equity, there is no guarantee of regular payments – all depends on profitability. ● Equity is rewarded as enterprise. Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Short-term finance ● Bank loans – the full amount is borrowed for the duration of the loan. ● Bank overdrafts – borrowing at a higher rate of interest. Only funds needed, up to a maximum limit. ● Suppliers’ credit – often 30, 90 or 180 days. Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Long-term finance ● ● ● ● Bank loans Mortgages Bonds Shares Venture capital Development banks Government agencies Soft loans Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance 7. 6 Stock markets Caribbean Business Chapter Seven Business finance Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Stock exchanges ● Shares in public companies are listed and traded on a stock exchange. ● Major stock exchanges include New York, London, NASDAQ, Mumbai and others. ● In Caribbean stock exchanges: ● Fewer shares are listed than in major exchanges. ● The total value of shares is much less. ● Shares are traded less frequently. Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Listing a company’s shares ● ● ● A merchant bank prepares a proposal for an Initial Public Offering. A prospectus gives detailed information. The prospectus is approved by the regulator. The company and its shares are registered. The prospectus is published. Shares are offered to investors. Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Share trading ● ● ● ● Shares are traded by stockbrokers. Stockbrokers charge commission on a trade. Stockbrokers use on-line electronic trading. Offers and bids are made electronically. Both parties are bound by the sale contract. Payment is within three days. Share ownership is recorded in a depository. Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Benefits and risks ● ● Shareholders receive dividends from profits. There is a capital gain if share price increases. Shares can be used as collateral for loans. If a company is in trouble: ● Dividends are cut. ● The share price falls. ● Shares are less acceptable as collateral. ● With bankruptcy, share value falls to zero. Caribbean Business for CSEC® Principles of Business © OUP 2010

7 Business finance Useful words ● Index – measures the overall change in share prices in a stock exchange. ● Portfolio – an investor’s holding of shares. ● Bear – sells shares, expecting prices to fall ● Bull – buys shares, expecting prices to rise ● Stag – buys a new share issue, expecting prices to jump ● Bubble – prices soar, then fall sharply or crash Caribbean Business for CSEC® Principles of Business © OUP 2010