A question is usually asked by the banking public why they are not getting interest on their accounts and the answer is not as simple and straightforward as one would assume. However, the banking public needs to understand that several factors apply that determine the interest on deposits.
These include:
1. Tenure of the deposit
2. The type of account
This article, therefore, seeks to create awareness to the public on the type and tenure of accounts that may earn interest. The tenure and type of account are best classified into two categories namely, demand deposits (current account) and term deposits.
Simply put, demand deposits are deposits held by the bank which can be withdrawn on demand, without prior notice. In our market, these are normally referred to as Current Accounts. Due to the nature of operation of demand deposit, these may not earn interest unless the deposit is held for a considerable time beyond one day.
Savings account is an interest-bearing account. The account pay a modest interest rate, their safety and reliability make them a great option for parking cash you want available for short term needs. Savings accounts by operation have some limitations on how often you can withdraw funds, but generally offer exceptional flexibility that’s ideal for building an emergency fund or saving for a short-term goal or simply sweeping surplus cash you don’t need in your current/demand deposit account so that it can earn you more interest.
Term deposits are investment deposits made for a predetermined period, ranging from a few days to several years. The depositor receives a predetermined rate of interest on the term deposit over the specified period. Funds deposited for longer periods command a higher interest rate. For a term deposit, the money is kept for a long period and interest rates payable on a savings account are dependent on the period of deposit (tenure). Therefore, account holders can earn high interest on term-deposit if the tenure of the deposit is long. Funds cannot be withdrawn from a term deposit account until the end of the chosen period without incurring a financial penalty, and withdrawals often require written notice in advance. At the end of the period, the depositor has the choice of withdrawing deposited funds plus earned interest or rolling over the funds into a new term deposit. The most common form of a term deposit is a bank certificate of deposit (CD).
Demand deposits and term deposits refer to two different types of deposit accounts available at a bank or similar financial institution. Demand deposits and term deposits differ in terms of accessibility or liquidity, and in the amount of interest that can be earned on the deposited funds. Demand deposit accounts offer greater liquidity and ease of access as compared to term deposits but pay lower interest rates, and they may also include various fees for handling the account. Depositors can withdraw any or all the funds in a demand deposit account at any time without penalty or prior notice required, although some banks charge a small fee if you exceed their limit of monthly withdrawals.
Term Deposits are one of the best investment options for people who are looking for a stable and safe return on their investments. In Term Deposits, the sum of money is kept for a fixed maturity and the depositor is not allowed to withdraw this sum till the end of the maturity period. That is why they are called Term Deposits because they are kept up to a particular term.
1. Demand deposits and term deposits refer to two different types of deposit accounts at a financial institution.
2. Term deposits, also known as time deposits, are investment deposits made for a predetermined period, ranging from a few days to several years, and earn a high interest rate as compared to demand deposits.
3. Demand deposit accounts offer greater liquidity and ease of access as compared to term deposits but offer no or lower interest depending on the tenure of the deposit.
Banks by nature of their business are intermediaries and they would prefer term deposits for purposes of lending than demand deposits hence banks will pay interest on term deposits, unlike demand deposits. A Savings Culture is also good for the economy.
Author: Tillas Gopoza is an Economist, and writes in his capacity as the Chief Economist: Bankers Association of Zimbabwe