One of the most important chapters of the subject

1. DEPOSITORY INSTITUTIONS:
ACTIVITIES AND
CHARACTERISTICS.

2. Mohamed Lukman Moalim Hassan
Assistant Lecturer
Email: mlukman.moalim@gmail.com
Tell: +252 - 618135555

3. INTRODUCTION
Depository institutions include commercial (or simply Banks) saving and loans
associations (S&L), saving Banks and credit unions. All are financial intermediaries
that accept deposits . These deposits represent the liabilities (Dept) of the deposit
excepting institutions, with funds raised through deposits and other funding
sources, depository institutions both make direct loans to various interties and
invest securities, their income is derived from two sources:
1. The income generated from loans they make and securities they purchased,
and
2. Fee income

4. ASSET/LIABILITY PROBLEMS OF DEPOSITORY
INSTITUTIONS
The asset/liability that depository institutions face is quit simple to explain, a
depository institution seeks to earn a positive spread between the assets it invest in
(Loans and securities) and the cost of its funds (Deposit and other sources). The
spread is referred to as spread income or Margins.
Ingenerating spread income a depository institutions faces several risks, these
include, regulatory rate risk, interest rate risk. Credit risk also called default risk,
refers to the risk that the borrower will default on a loan obligation to the
depository institutions or that the issuer of security that the depository institutions
holds will default on its obligation.

5. TYPES OF LIABILITIES
Both the amount and the time of liabilities are known with certainties, a liability
requiring a financial institution to pay $50,000 six moths from now would be an
example, depository institution know the amount of money that they are
committed to pay (Principle plus interest) on the maturity date.
The following table shows classifications of the liability regarding to the amount
and certainty related to it

6. TYPES OF LIABILITIES
Liability type Amount of cash
outlay
Timing of cash out
lay
Example
Type 1 Known Known Amount of money
which known time
and known maturity
Type 11 Known Uncertain Life insurance
Type 111 Uncertain Known Certificates of deposit
CD
Type 1V Uncertain Uncertain Auto mobile and
home insurance

7. BANK SERVICES
Commercial banks provide numerous of financial services in our system, the
services can be broadly classified in to the following portions:
Individual banking
Institutional banking
Global banking

8. INDIVIDUAL BANKING
These of banks encompasses consumer lending, residential, mortgage lending,
consumer installment loans, credit and card financing automobile and boat
financing, student loans and individual oriented financial services. Individual banks
are personal friends and the common banks that have biggest existence currently
with in the population.

9. BANK FUNDING
Describing how banks raise funds is one of the most crucial parts of understanding
of the banks, there are three sources of funds for banks, these include:
Deposits
None deposit borrowings, and
Common stock and retained earnings
Banks are highly leveraged financial institutions which means that most of their
funds come from borrowing

10. DEPOSITS
There are several types of deposits accounts:
Demand deposits (checking accounts) pay no interest and can be withdrawn up
on demand
Saving deposits pay interest typically below market interest rate and do not have
specific maturity and usually can be withdrawn up on demand
Time deposits or also called certificates of deposits CD have affixed maturity date
and pay either a fixed or floating interest rate. Some of the CDs can be sold in the
open market prior to their maturity if the depositor needs fund.

11. RESERVE REQUIREMENT AND BORROWING
A bank cannot invest every $1 for every $1 it obtains in deposit, all banks must
maintain a specified percentage of their deposits in a none-interest-bearing
account. These specified percent is called reserve ratio, and the amount of dollar to
be kept is called required reserve. If actual reserves exceed required reserves the
difference referred as excess reserve. Banks temporarily short of their required
reserve can borrow reserves from banks that have excess reserves, the market
where banks can borrow or lend reserves is called funds market. The interest rate
charged to borrow funds from this marks is called funds rate.