Examkin

Question

Difficulty: HardBanking: Functions and Services to Trade

A manufacturing enterprise in Lagos enters into a supply contract where its monthly raw material invoice varies based on the volume of timber delivered. The enterprise wishes to authorize its creditor to claim the exact variable sum due directly from its commercial bank account at regular intervals. Which banking service is most suitable for settling this trading obligation?

  1. Direct debitAnswer
  2. B
    Standing order
  3. C
    Credit transfer
  4. D
    Bank draft

Answer

Direct debit is the most suitable banking service because it grants authorization to a supplier (creditor) to draw varying sums directly from the buyer's account as invoices become due.
Direct debit is an arrangement whereby an account holder authorizes a third party (creditor) to collect varying amounts of money from their account at agreed intervals. This makes it ideal for commercial transactions like utility bills or trade supplies where monthly invoice figures fluctuate based on usage or delivery volume.

Step-by-Step Solution

1
Analyze the nature of the transaction and payment requirements.
The payments are recurring, fluctuating in amount (variable), and need to be drawn by the creditor directly from the debtor's account.
Identifying who initiates the transaction and whether the amount is fixed or variable determines the correct banking service.
2
Compare banking payment mechanisms.
A standing order is debtor-initiated for fixed amounts; a direct debit is creditor-initiated for variable amounts; credit transfer requires manual initiation per transaction; a bank draft is for single guaranteed payments.
Matching transaction characteristics to bank facility definitions isolates the correct instrument.
3
Select the appropriate instrument.
Direct debit fits all criteria of creditor initiation and variable periodic payments.
Direct debit provides an automated, flexible payment solution specifically designed for recurring variable commercial debts.

Key Concept

Direct Debit vs. Standing Order in Commercial Banking Services
Rate this question

Topics

Banking: Functions and Services to Trade

More questions from this topic