Commercial mathematics
Banking
Banking can be defined literarily as the business activity of accepting and safeguarding money owned by individuals and entities and release of the money whenever the needs arise by the owner. It is the business of managing money and where money is involved everything must be carefully assessed, valued and measured.
Mathematics and Banking are closely connected. Extensive Maths is involved in keeping track of the money in a bank. Banking is a world of numbers and Mathematics is used in the way accounts are handled for calculating interest rates and for determining credit scores. Needless to say, mathematical precision is essential. Banks handle substantial sums of money and inaccuracies in the calculation can create huge negative ramifications.
Mathematics and Banking are tightly linked. Banking requires constant use of mathematics. e.g Complex formulas are necessary to compute interest and loans. Not only does banking require extensive math skills, it also requires intense precision and accuracy .Banking and mathematics are inexorably intertwined.
Correlation between Banking and Mathematics
- Cash Transactions
- Fund Transfer
- Bank Reconciliation
- Loans and Interest Rates
- Income and Expenditure
- Portfolio Management
- Risk Assessment
Cash Transactions
When someone deposits or withdraws money from a bank, Mathematics is involved to calculate the total in their accounts. Precision and accuracy is key.If a bank employee (teller) accidentally puts too much money into someone’s account, it will cost the bank money and if too little money is put into someone’s account, it can greatly damage the bank’s image.The same goes for withdrawals. Accurate Mathematics is essential to all cash transactions to ensure that correct amount/money is coming and going to the correct places (accounts).
Fund transfer
This can be an internal transfer i.e.transfer within a bank or a transfer from one bank to another bank. In Fund Transfer, Mathematics is also involved because the commission and other charges has to do with calculation. For example, a transfer of N3,000 to another bank will attract a COT charge of N3 (i.e =N=1 per mille). Other forms of transfer like fx transfer, payment of salary, remittance to government agencies all involve figure.
Bank reconciliation
Reconciling of account means the process of verifying the accuracy of the register (list of entries) by an individual or company entries in the register with the entries in the bank statement. Simple addition and subtraction mathematical skills are all that are required.
Loans and intrest rates
Loans
This involves complex Mathematics. First, the bank needs to calculate how high of a loan it should give (obligor limit) and how much you will be paying each month for the loan (rental). Calculating this requires consideration of a wide variety of factors ranging from how long the loan is for to how strong your credit history is.
Interest rates
The concept of interest rates is perhaps the most frequently used mathematical concept in banking. Interest rate is simply the cost of money over a specific period of time e.g. if a bank is willing to lend money to a borrower for a year at a rate of 10 %,the cost of borrowing over a year’s time is 10% of the original sum borrowed. So the cost of taking out a N1,000 loan for a year equals 10 % of N1,000 = N10.
Income and expenditure
Income increases the bottom line of an organisation or an individual and this is done through additional method while expense has to do with the subtraction from the bottom line.
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