IN chapter 28 we described the different types of savings products and how banks brand them to educate and attract customers.
We discussed the features of savings products which encourage customers to keep more in this key bank product. We noted how there is a full suite of savings product offerings for all ages from children to retirees.
This chapter discusses another savings product commonly known as a Fixed Deposit.
Opening a Fixed Deposit is very similar to opening any standard bank deposit account. The main differences are:
•For a Fixed Deposit, the customer is committing to a pre-determined interest rate which remains constant for the duration of the deposit.
•The amount of a Fixed Deposit is fixed for the life of the deposit.
•The period of the deposit is agreed upfront.
•Withdrawal of funds before the agreed maturity date could result in penalties which could include forfeiture of the interest earned from the time the Fixed Deposit was set up to the time of cancellation.
•Once the Fixed Deposit matures, the customer may not have a relationship with the bank unless they have other bank products. This is why banks prefer that the Fixed Deposit customer avails other longer term bank products as this will enable them to have a relationship and make it easier for them to meet their “Know Your Customer” requirements. Both the capital and interest earned on the Fixed Deposit can then be initiated from and mature into the operating account operated by the same customer.
•The Fixed Deposit is usually issued at no cost to the depositor as part of the incentives to attract longer term deposits from customers.
The attraction of this product is that it gives the customer an opportunity to park their money in a high interest bearing account for a specific period of time pending investment due at a specific future date.
The depositor is also able to know the amount of interest he or she will earn from the deposit at the time they deposit.
This information helps in planning as neither party is able to change the rate during the tenure of the deposit even when some key economic fundamentals such as inflation and market rates have changed.
This means that the bank benefits as the market rates rise while lower market rates during the period of the fixed deposit tends to benefit the customer.
Either way, the two parties cannot change the agreed interest rate.
This is only possible once the parties agree to renew the fixed deposit.
As the name of this product implies, Fixed Deposits have a fixed period in which the customer agrees to keep the money with the bank.
The bank and its customer can agree any tenor although typical tenors are 1 month, 3 months, 6 months, 12 months, and 18 months.
However, sometimes, due to unforeseen circumstances, customers require the funds earlier, which usually leads to penalties such as forfeiture of interest earned before the fixed deposit is terminated.
While Fixed Deposits have a predetermined maturity date when they mature, other terms could include automatic rollover of the fixed deposit if no disposal instructions are issues by the customer ahead of maturity.
As indicated before, unlike a typical savings account where interest earned can be credited back to the same account, interest earned on Fixed Deposits can only be credited to a separate account such as a nominated current account in the name of the same customer.
Interest on Fixed Deposits is usually much higher than that paid on savings accounts.
This is to compensate in part, to the inflexibility of this product in terms of interest, tenor and amount.
If you have a big lump sum which you would like to invest at a future date and you would like to earn high interest rates in the meantime, then the Fixed Deposit is your go-to product.
Contact your bank now for their specific terms and conditions.
By Ralph Watungwa