Banking Currency And Finance Notes B.Com 1 ~ Sea Of Knowledge

B.Com 1

Notes Of Banking Currency And Finance

Part One Money

1. Define money. Discuss the functions and importance of money.

Overview:

The evolution of civilization leads to the evolution of money. Many things like commodities, skins of animals, cattle, crops, precious stones, mettles, were used as a term of exchange. In the barter transections ( exchange of goods to goods) these all things use as a term of exchange. With the introduction of commercial banks the paper note credit instruments and plastic money. These were the circumstances under which the money as an important medium of exchange was originated and developed.

Definition:

According to an earlier German economist (Knap) “anything which is declared by the state as money is money”.
R.P.KENT says “ Money is anything, which is commonly used and generally accepted as medium of exchange or a standard of value.
According to (Roger Miller) “Anything which is generally accepted in payment for the goods and services or the repayment of debts is money”.
According to Walker, “money is what money does”

Functions Of Money:

Money perform various functions. The primary and secondary functions are called static functions. These functions are performed in every economy whether it is traditional economy. The dynamic functions are performed only in modern economies where inventions and innovations are taking place. The money serves the functions as below:

“Money is a matter of functions four………….

A medium, A measure, A standard and A store”

There are two major functions of money.

a. Primary functions.

b. Secondary function.

Primary functions:

1.Money As Medium Of Exchange:

2.Standard of value:

The purchasing and selling are done through the money. In the other words money is used as a medium of exchange, which remove the problem of double co-incidence of wants in barter system. The use of money as a medium of exchange promoting the efficiency in the economy.

i. It has reduced much of time spent in exchanging goods and services.

ii. It has also promoted efficiency by allowing people to specialize in any area in which they have comparative advantage and receive money payments for labour.

3.Money as unit of account:

The another important function of the money is that it provides a unit of account. The monitory unit of account helps to measure the value of goods and services. For example we measures weight in kg. Distances are measured in km, similarly the value of goods and services are measured in money. So money is a yardstick which allowed an individual to measure the comparative value of goods and services.

4.Money as a standard of deferred payments:

In today economy buying and selling of goods are made on the basis of credit. So money is a medium of exchange. Which are used to settle the debts maturing in future. Debts are stated and paid in terms of unit of account.

5.Money as a store of value:

6.Unit of account

Money also functions as a store of value. The money, which you have today, is a side to purchase a thing later on. So they wait for until he has to desire to spent it. Money held’s in the form of cash is considered highly liquid assets.

Secondary functions:

Money has the potential to influence the economy. It influences the price level, interest rates, utilization of resources etc.

1. Aid to specialization, production and trade:

The use of money helped in removing the difficulties in the barter system. The market mechanism, production of commodities. Expansion and diversions of trade etc. Have been facilitated by the use of money.

2. Influence on income and consumption:

Money has a direct influence on the income and consumption of the country. When the production is increased due to increase on demand, so automatically the incomes will also increase. In the other words we can say that due to increase in income, the consumption of goods and services increase as compare to past.

3. Money as instrument of making loan:

The people deposit their saving into the bank. The bank advances loan to the industrialist and farmers or investors. So the saving of the people is transferred to the investment.

4. Influence on the economic policy:

Money has a direct impact on the economic into the bank. The bank advances loan to the industrialist and formers or investors. So the saving of the people are transferred to the investment.

5. Basic of bank credit:

Bank provides loans from their cash reserves, so the volume of money will effect due to increase or decrease of the money supply.

6. Liquidity of property:

Money gives a liquid form to the property. A property can be easily converted into liquid form due to money.

1. Define barter system? What are the inconveniences of barter system?

Overview:

In the ancient time man was self-sufficient in his needs. He was able to find the foods. But with the passage of time the needs become complex and the production is in surplus. So the peoples exchange commodities with commodities. This exchange is called barter.

Barter system:

Barter is a system in which the direct exchange of goods and services for goods and services. The barter was possible due to the limited wants of the human being even today barter system is still used in international trade.

Definitions:

R.H.PARKER

“Barter is the direct exchange of goods and services without the use of money as either means of payment or a unit of account.”

G. THOMES

“Barter is a form of trading in which goods are exchanged directly for other goods without the use of money as an intermediary. “

H.S.SLOAN

“Barter is a direct exchange of commodities or services of one person for goods and services of other people without the use of money.”

Inconveniences:

1. Double co-incidence of wants:

The Barter System needs the matching of wants of the two parties’ co-incidence. A person has to fund another person who is ready to accept the goods of the first person in the exchange of his own goods. It is necessary to fund two persons whose exchangeable goods suit the needs of each other.

2. Lack of common measure:

In barter economy there is no common standard by which the value of the goods to be exchanged can be measured. Thus each transaction which takes place would require to determination of the ratio of exchange between to be exchange.

3. Lack of sub-divisions:

The another drawback of barter system is the lack of sub-division. It means that if there is double co-incidence of wants between two parties but the exchange will not take place even then. These are particularly in these commodities which are not sub-divided.

4. Lack of store of value:

The another problem in the barter system is the lake of storage in a perishable goods. They losses their value as the time passes.

5. Difficulty in transfer of wealth:

The transferring of wealth from one place to another place is very difficult in the barter system. The immovable properly cannot be shifted from one place to another place. Similarly, the transfer of movable assets cannot be easily transferred from one place to another place.

6. Difficulties in tax collection:

The another problem in barter system is collection of taxes in the form of goods from the tax payers. If a good are collected as a tax than it will lose. Its value as the time passes on and secondly the problem of storage is also arise.

How to remove the difficulties of barter system?

The use of money has converted a barter economy into a monitory economy or money economy. The money has overcome the difficulties of barter system in the following ways.

1. Use of money:

Money is used now as a:

· Medium of exchange:

· The goods and services are now purchased and sold with the help of money. The difficulty of double co-incidence of wants has been removed with the help of money.

· Money now serves as a common measure of value. The problem of comparing the prices of goods and services in the market is now simplified.

· With the help of money, the exchange of present goods on credit has been made easier. The problem of deferred payments has been solved with the help of money.

· Money as a liquid store of value has facilitated its processor to purchase any other asset at any time.

· Through money, value can be easily and quickly transferred from one place to another.

2. Liquidity to wealth:

Money imports liquidity to various forms of wealth such as land, machinery and stock stores etc. these forms of wealth can be easily converted into money.

3. Established of financial institutions:

The introduction of money has made it possible to establish financial institutions like central bank, commercial banks etc, which deal in currency and near money assets. Examples bill of exchange, bond and shares.

4. Market mechanism:

In a monitory economy market mechanism operates; the demand and supply are brought into balance by the movement of prices. The decision of what? How? And are whom to produce are determined in accordance with the market conditions.

5. Process of development:

Ina barter economy the process of economic development is slow. With the use of money, division of labour has taken place, technology has developed, trade has expended etc. in a monitory economy, and there is thus an all-around economic progress.

1. Discuss the qualities of a good money system

What are the qualities of good money?

Following are the charactictics /qualities of good money.

1. General acceptability:

The essential quality of a good money material is that, it would be acceptable to all without any hesitation in exchange of goods and services.

2. Stability in value:

The another attribute of the good money is that, the value of the money should be satiable because money is the standard through which we measure the value of other commodities. If the standard itself is influenced by the changes in the demand and supply than how it can serve as perfect money.

3. Transferability:

Money should be easy to carry. So the cow could be not suitable for this purchase. The attribute of the good money is to transfer one place to another place without any difficulty. So we can say that the material is greater in value but less in volume. In short, metals, coins, currency notes and cheques fully meet this test.

4. Storability:

The value of money can be easily store in anything is called good money. For example, gold, silver or paper is ideal for storing. So they are called good money.

5.Divisibility:

The money material should be easily divided into small parts as descried without losing its value. From this point of view, gold, silver and paper money are good money.

6. Informality/homogeneity:

The material used as money must be uniform quality. Otherwise it will not generally acceptable. Natural goals like grains are seldom of uniform quality currency notes are exactly homogeneous.

7. Cognoscibility:

Only that material will be considered as good money, which can be easily recognize by the common man. One purchase of making coins out of the metals and giving them a special design to each type of currency note is to make them promptly recognizable.

8. Recognisability

Good money is recognised even by sight or touch. General public is familiar with the size, colours and shape of the notes.

9. Distinguishable Formation

This means that various values of money must have different sizes, shapes and colours to made them different from one another. The Rs. 5 have not the same characteristics as Rs.10. Money must be distinguished.

10. Elastic Supply.

The supply of notes should be elastic. According to the economic situation the supply of paper currency can increased and decreased.

11. Portable

A good money has the quality of portability. It can be easily port and transferred.

12. Economical

The currency notes can be economical. The good money material should be economical. The cost of printing currency notes and minting coins must be lower.

What are the forms/types/kinds of money?

There are many forms of money. Following are the main forms of money.

metallic money
paper money
bank money
legal money
plastic money
near money

Metallic money:

The money made of any metal such as gold, silver etc is called metallic money. It exists in the form of coins. In our country the coins of Rs. 1, 2 and 5 are the current examples of metallic money. Due to its weight, it is difficult to use this money in large quantity. Therefore coins are used in small amounts only the metallic money has the following two types:

 Full bodied coins

 Token money.

Full bodied coins:

When the face value of the coin is equal to the value of metal contained in the coin, the coin is called a full bodied coin. The gold and silver coins of old times are examples of full bodied coins.

Token money:

When the face value of a coin is greater than the value of the metal it contains, it is called token money. In our country, all the coins are token money.

Paper money:

Paper money refers to notes of different value made of paper which issued by the central bank or government of the country. The paper money can be classified into following types:

Representative money.
Convertible money
Inconvertible money/fiat money.

Representative money:

Representative money is that money which is fully backed by equal metallic reserve. The holder of a bank note can easily get it converted into metallic (gold & silver) form on demand

Convertible money:

It is the form of money which can be converted into gold, silver i.e. metallic reserves. But all these notes issued by the government are not fully backed by gold. The amount of gold kept by the government is a particular proportion of the notes issued.

Inconvertible/Fiat money:

Inconvertible or fiat money is one that we have in our pocket and use in daily business. The face value of such money is more than the value of the paper. e.g. the value of the paper of 100 rupee note is almost nil but its purchasing power is equal to Rs.100. it has this value because it has been declared as legal money by the government, so it is generally accepted as a medium of exchange.

Bank money

This is the most modern form of money this money is also called credit. It only consists of cheques, bill of exchange and drafts.

Cheques:

A cheque is an unconditional order by the client on his bank to pay a certain sum of money to him or to any other party.

Bills of exchange:

A bill of exchange is an order by the drawer to the drawee to pay a sum of money to the drawer or to any other party.

Draft:

Draft is a cheque drawn by a bank on its own branch or the branches of another bank requesting it to pay on demand a specific amount to a person named on it.

Legal tender money

The money that a person accepts as a means of payment and in discharge of debt is called legal tender notice. All the notes and coins issued by the govt. and the central bank are legal tender money. Legal tender money is of two types:

Limited legal tender money:

The money which can be used a means of payment up to a certain limit is called limited tender money e.g. coins.

Un-limited legal tender money:

The money that can be used a mean of payment up to any limit or amount e.g all the notes issued by SBP.

Non legal tender money

Bank money is the form of cheques, bills of exchange, a promissory notes is not legal tender money. Robertson says it “optional money”. So non legal tender money is money which a person may or may not accept as a mean of payment.

Plastic money:

Plastic money means the credit cards, smart cards. Plastic cards which have specially printed set of characters. Recently the use of this money has increase.

Near money:

A type of money which can easily be converted into money. It included deposits, government bonds, printed bonds etc.

1. What is paper money? Discuss the advantages and disadvantages of paper money.

PAPER MONEY

Mr. Hanson has defined “the paper money in the following words, " Paper money means the paper instruments such as bank notes, cheques, bill and other forms which take the place of money and circulate as a medium of exchange.”

On the following grounds paper money is preferred on metallic money.

ADVANTAGES OF PAPER MONEY
Following are the main advantages of paper money :

1. Portability
Notes are easily portable. It is very easy for making the payments in different places and it is preferred than the metallic money.

2. High Value In Small Bulk
No any sort of money can be compared with our modern notes because its weight is minimum and value is high.

3. Economical In Cost :-
The printing of paper money is very quick, cheap, and economical as compared the metallic money.

4. Saving Of Precious Metals :-
The use of paper money has saved a lot of precious metals like gold and silver. The wear and tear of these metals also saved. The precious metals can be used for the productive purposes.

5. Easy In Counting :-
Paper currency can be counted more easily than coins. The counting of metallic money is a very difficult job.

6. Easily Recognizable :-
The paper money is easily recognizable. There is no botheration of testing the genuineness of the money material.

7. Uniform Quality :-
The paper money has another advantage that has a uniform quality and the holder least bothers for possession of new or old money.

8. Useful In Emergency :-
The government can increase its resources by printing of more notes and can meet its requirements.

9. Elastic Supply :-
The volume of paper money can be very easily expanded in accordance with the needs of the country. While the metallic money supply is in elastic.

10. Useful For Development :-
Paper or credit money is very useful for trade and industrial sector. If any person wants to establish factory or wants to import any commodity it facilities him.

11. Stability :-
The value of metallic money changes with the passage of time. But the paper money value remains stable because its weight cannot reduce by using it.

12. Easy Payment :-
Through paper money you can make the payments in million rupees, easity. While it is very difficult to make such payments in metallic money.

DISADVANTAGES OF PAPER MONEY :-

1. Restricted Acceptability :-
The acceptance of paper money is limited up to the domestic country while other countries of the world are not ready to accept in case of payments.
2. Fluctuations In The Rate Of Exchange :-
In case of metallic money the value of domestic currency in terms of foreign currencies, rate of exchange remains stable while in case of paper money it remains fluctuating. The devaluation of one country also brings changes in the rate of exchange.
3. Demonetization Of Paper Money :-
If the Govt. demonetizes the paper money the paper holder will have a worthless pieces of paper in his hand.

4. Lack Of Durability :-
The paper money lacks the essential quality of durability of money. It can be easily destroyed, and then it will have no value.

5. Danger Of Inflation :-

The serious defect in paper money is that there is always danger of its over issue. Generally the less developing countries make the difficult budget and this deficit is met by the issuance of paper money. The price level rises and country faces the inflation.

6. Less Stability :-
There is less stability of value in paper money as compared to metallic money. Sometimes it is over issued and people lose confidence in the value of money and they keep their savings in terms of gold and silver.

No doubt paper currency has also some disadvantages but it is a fact that its advantages are more weighty.

1. Define value of money. Define quantity theory of money. Discuss the effects in changes in money.

Value of money, quality theory of money

The value of money means purchasing power of money. When we say that value of money is increasing, it means that a unit of money can buy more goods and services. Fall in value of money means that less quantity of goods and services can be bought with a given amount. Value of money has inverse relation with the general price level. A rise in general price level would thus indicate a fall in value of money and vice versa.

Money acts as a measuring rod of value for all other goods and services, it is essential that we should know how the value of money itself is determined. What are the factors, which bring about changes in general price level. There are various theories to explain how value of money is determined economic activity. Thus decreasing rate of demand is brings deflation in the economic system. One of those is the quantity theory of money.

1. Quantity theory of money:

According to this theory. The value of money is depended upon the quantity of money is circulation any change in the total quantity of money in change in country effect prices and the changes is prices of goods effect the value of money stats that changes in general price level occur due to changes in the quantity of money in circulation. So that an increase in quantity of money. Causes a rise in price level. A contraction in quantity of money will lead to a fall in general price level. Taussing define the theory as, “double the quantity of money and other things being equal, prices will be twice as high as before, and the value of money is half. Half the quantity of money and other thing being equal, prices will be half of what they were before and the value of money double”.

Equation of exchange:

Fisher has expressed the quantity theory of money in a simple equation which is called equation exchange.

P = M(V) + M’(V’)

P = price M = circulation of money

V = velocity of money M’ = circulation of bank money

V’ = velocity of bank money T = transactions

P = M(V) +M’(V’) If

T M = 10

i. P = 10(5) + 10(5) M’ = 10

10 V = 5

P = 50 + 50 V’ = 5

10 T = 10

P = 100

P = 10

ii. P = 20(5) + 20(5) If

10 M = 20

P = 100 + 100 M’ = 20

10 V = 5

P = 200 V’ = 5

10 T = 10

P = 20

2. Assumption of full employment is wrong:

J.M. keneys has raised an objective that the assumption of full employment is a clear phenomenon in the economy and the theory not clear.

3. Rate of interest ignored:

In the quantity theory by fisher, the influence of the interest rate on money supply and the level of prices had been completely ignored. The fact is that an increase or decrease in money supply has an important effect on the rate of interest. An increase of money supply leads to declaim in the rate of interest and vice versa.

4. Ignored other factors of price level:

There are many determines other than M, V and T which have an important application on the price level. The factors such as income, expense, compultion, population etc had been ignored from the theory.

5. Various variables and transaction are not independent:

The various variable and transactions equation are not independent. As assumed in the theory, the fact is that they vary much influenced each other. Examples when money supply (M) increases, the velocity of money (V) also goes u. take another case. Fisher assumes price (P) is a passive factor and ha not effect on trade/transaction (T). In actual practice when price level rises. It increase profits and promotes trade.

P = 5(5) + 5(5) If

10 M = 5

P = 25 + 25 M’ = 5

10 V = 5

P = 50 V’ = 5

10 T = 10

P = 5

Assumptions of the theory:

1. Full employment:

The theory is based on the assumption of full employment in economy.

2. Transaction(T) and velocity (V) are constant:

The theory assumers that the volume of trade is short run remains constant. So in the case of velocity of money which remains unaffected.

3. Constant relation between M and M’:

Fisher assumes constant relationship between the currency money (m) and bank money.

4. Price level (P):

Price level is a passive factor of increase the equation. (P) is effective by other factors in equation examples P.M.M’.V.V out it doesn’t affect them.

Criticism of the theory:

The quantity theory is subject through the following criticisms,

1. Unrealistic assumption

The theory is based on unrealistic assumptions. In the theory (P) is considered as an in active factors. T, M, M’, V, V’ are constant in short run all these assumptions are covered under other thing remaining same.

Effects Of Changes Of The Value Of Money (explanation check from the book of sardar aslam)

Creditors And Debtors
Traders And Industrialists
Landlords And Tenants
Salaried Groups
Retired Govt Employees And Labours
National Income And Level Of Employment
Effect On Income Distribution
Effects On Govt Revenue

2. Define monetary policy. What are the objectives of monetary policy. Discuss the methods of monetary policy. Or How central bank control credit in the country?

Definition of Monetary Policy

“The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault (bank reserves).”

Many economists have given various definitions of monetary policy. Some prominent definitions are as follows.

According to Prof. Harry Johnson,

"A policy employing the central banks control of the supply of money as an instrument for achieving the objectives of general economic policy is a monetary policy."

According to A.G. Hart,

"A policy which influences the public stock of money substitute of public demand for such assets of both that is policy which influences public liquidity position is known as a monetary policy."

From both these definitions, it is clear that a monetary policy is related to the availability and cost of money supply in the economy in order to attain certain broad objectives. The Central Bank of a nation keeps control on the supply of money to attain the objectives of its monetary policy.

Meaning of Monetary Policy

The term monetary policy is also known as the 'credit policy'. How much should be the supply of money in the economy? How much should be the ratio of interest? How much should be the viability of money? etc. Such questions are considered in the monetary policy. From the name itself it is understood that it is related to the demand and the supply of money.

Objectives of Monetary Policy

The objectives of a monetary policy in India are similar to the objectives of its five year plans. In a nutshell planning in India aims at growth, stability and social justice. After the Keynesian revolution in economics, many people accepted significance of monetary policy in attaining following objectives.

1. Rapid Economic Growth

2. Price Stability

3. Exchange Rate Stability

4. Balance of Payments (BOP) Equilibrium

5. Full Employment

6. Neutrality of Money

7. Equal Income Distribution

These are the general objectives which every central bank of a nation tries to attain by employing certain tools (Instruments) of a monetary policy. In India, the RBI has always aimed at the controlled expansion of bank credit and money supply, with special attention to the seasonal needs of a credit.

Let us now see objectives of monetary policy in detail :-

Rapid Economic Growth : It is the most important objective of a monetary policy. The monetary policy can influence economic growth by controlling real interest rate and its · resultant impact on the investment. If the RBI opts for a cheap or easy credit policy by reducing interest rates, the investment level in the economy can be encouraged. This increased investment can speed up economic growth. Faster economic growth is possible if the monetary policy succeeds in maintaining income and price stability.

· Price Stability : All the economics suffer from inflation and deflation. It can also be called as Price Instability. Both inflation are harmful to the economy. Thus, the monetary policy having an objective of price stability tries to keep the value of money stable. It helps in reducing the income and wealth inequalities. When the economy suffers from recession the monetary policy should be an 'easy money policy' but when there is inflationary situation there should be a 'dear money policy'.

· Exchange Rate Stability : Exchange rate is the price of a home currency expressed in terms of any foreign currency. If this exchange rate is very volatile leading to frequent ups and downs in the exchange rate, the international community might lose confidence in our economy. The monetary policy aims at maintaining the relative stability in the exchange rate. The RBI by altering the foreign exchange reserves tries to influence the demand for foreign exchange and tries to maintain the exchange rate stability.

· Balance of Payments (BOP) Equilibrium : Many developing countries like India suffers from the Disequilibrium in the BOP. The Reserve Bank of India through its monetary policy tries to maintain equilibrium in the balance of payments. The BOP has two aspects i.e. the 'BOP Surplus' and the 'BOP Deficit'. The former reflects an excess money supply in the domestic economy, while the later stands for stringency of money. If the monetary policy succeeds in maintaining monetary equilibrium, then the BOP equilibrium can be achieved.

· Full Employment : The concept of full employment was much discussed after Keynes's publication of the "General Theory" in 1936. It refers to absence of involuntary unemployment. In simple words 'Full Employment' stands for a situation in which everybody who wants jobs get jobs. However it does not mean that there is a Zero unemployment. In that senses the full employment is never full. Monetary policy can be used for achieving full employment. If the monetary policy is expansionary then credit supply can be encouraged. It could help in creating more jobs in different sector of the economy.

· Neutrality of Money : Economist such as Wicksted, Robertson have always considered money as a passive factor. According to them, money should play only a role of medium of exchange and not more than that. Therefore, the monetary policy should regulate the supply of money. The change in money supply creates monetary disequilibrium. Thus monetary policy has to regulate the supply of money and neutralize the effect of money expansion. However this objective of a monetary policy is always criticized on the ground that if money supply is kept constant then it would be difficult to attain price stability.

· Equal Income Distribution : Many economists used to justify the role of the fiscal policy is maintaining economic equality. However in recent years economists have given the opinion that the monetary policy can help and play a supplementary role in attainting an economic equality. monetary policy can make special provisions for the neglect supply such as agriculture, small-scale industries, village industries, etc. and provide them with cheaper credit for longer term. This can prove fruitful for these sectors to come up. Thus in recent period, monetary policy can help in reducing economic inequalities among different sections of society.

Credit control

The central bank is the leader of the money market. It controls the volume of credit for maintaining monitory stability. The credit money is an important of total money supply in the country. The creation of credit beyond desirable limit loads to increase in the prices, imports and decrease in the exports. The result will be an unfavourable balance for payment.

The purposely of the credit control are given below:

a. Stability of internal prices.

b. Stability of the foreign exchange rate.

c. Promoting high employment.

Method of credit control:

The contract bank controls the volume of credit through quantitative and qualitative methods.

1. Quantitative methods:

The quantitative methods relative to the increase or decrease in the volume of credit. These methods are as follows.

a) Bank rate policy:

The bank rate is the rate changed by the central bank on loan against securities. If the central bank increases the bank rate, the interest will also go up. The people will borrow less due to the high rate of interest. The result is that the volume of the credit will be reduced. On the other hand if the bank rate is reduced, the interest/market rate will also be decrease, as a result the public will increase the borrowing from the banks and to volume of credit will be increase.

b) Open market operation:

Open market operation refers to purchase and sale of securities in the open market. When the central bank sells the securities the buyers make payments by means of cheques drawn on commercial bank. The cash will flow from the commercial banks to the central bank. The rates of credit expansion will decrease and vice versa.

c) Change in reserve ratio:

The commercial bank by law are directed to keep a certain percentage of their deposits with the central bank. The central bank charges the ratio according to the need of controlling of credit. If the ratio is raised, the cash available with the bank will be reduced, which will compel them to contract the volume of credit. Similarly when the ratio will be lowed, the credit power will expand. Raising the reserve requirement is an anti-inflationary measure.

2. Qualitative methods:

These methods relates to establishment of rules under which credit creation can be allowed. The qualitative methods are as follows.

a. Credit rationing:

The central bank puts limit for grant on credit. The credit is rationed for each bank during financial crises. The credit for speculators for discouraged and it should be available for describe fields.

b. Direct action:

It means that plenty (tax) is imposed on the commercial banks who don’t follow the policies of the central bank. The central bank can also be refused to grant credit or re-discounting the bill of exchanges.

c. Moral persuasion:

The central bank tries to put indirect influence on the loan policy of the member bank. The commercial bank honoured the persuasion methods and advises of the central bank. The commercial banks should co-operate will the central bank. Otherwise better results cannot be achieved.

d. Margin requirement:

Margin is the part of the prices of securities kept by the bank. It is a protection against the price changes. The contract bank controls the credit by changing the marginal requirements. The marginal percentage is higher for one class of borrower and lower for others. The purpose is to discourage speculators without the other.

Suppose:

Securities = 200000

Loan = 100000

1. Inflation, deflation, reflation and revaluation, remedies and courses.

Define deflation and also explain causes of deflation?

G. Thomas says that, “deflation us a reduction in the general price level due to decrease in the economic activity of a nation”

According to Philips, “deflation is a period during which level of price decline and the value of money raises”.

Causes of deflation:

1. Access production:

The production of goods and services in excess of its demand is a cause of deflation. The price level comes down and the producers may not able to continue their output at present level may make wrong calculation about future demand.

2. Security sales:

The sale of security is cause of deflation. The shares and debentures are sold in the market. The people like to invest their idle money in shares. The purchasing power is checked to the extent of investment in shares and debentures. They can buy loss goods due to low expending capacity. The demand for goods is laver. The supply increases the demand limits. The excess supply bring deflation in country.

3. Low profit:

The low rate of profit is caused deflation. There may be competition in economy. The investment in any sector may be more than the demand. The tight competition lower the rate of profit. The seller try to clear their stick of goods. But excess supply becomes a problem, the business persons cut their profit to retain.

4. Less demand:

The decrease in demand is cause of deflation the demand may decrease due to decrease in income, wage. The excess supply and less demand to a sat back to the economic activity.

Thus decreasing rate of demand is brings deflation in the economic system.

5. High bank ratio:

The high bank ratio is a cause of deflation the bank rate is an official rate of central bank for discounting bill of commercial bank. When bank rate is raise the banks cannot issue loans, the money supply decreases. The business working is effected due to less funds. This high bank rate can work for deflation.

( detail see from book of sardar aslam)

What is inflation also explain the causes and remedies (control) of inflation?

According to Silverman. Inflation is define as, “inflation is the term given to the expansion of money supply, in excess of the amount justified by the state of the trade resulting in a general rise in prices”.

Coul born has beautifully define the term as “too much money chasing too few goods”.

According to the Crowther says, “Inflation is a state of economy in which the value of money is following.

Examples prices are rising.

There are two kinds of inflation:

1. Demand pull inflation.

2. Cost push inflation.

Here we goes to describe the above kinds of inflation in detail.

1. Demand pull inflation:

Some economists believes that inflation is caused by increase in aggregate demand for goods. They say that demand may rise due to many causes including increased money supply for example; people may reduce savings and spend more. As aggregate demand rises for goods and services, firms try to increase production. To this they need more workers, more machines and more raw materials. If these resources are not available because they are already full employed, the firms will not be able to increase output. In this case, rising demand causes inflation.

2. Cost push inflation:

Some economists think that inflation occurs due to rising costs. When the firms pass on their increased costs to consumers in the form of higher prices inflation starts. Important sources of rise in cost include workers demand for higher wages, increase in taxes.

Causes of inflation:

a. Population explosion:

Our population is rising at a very fast that is 3%. On other hand the rate of growth of GNP is not very high that is 5.4%. Thus increase in national output is insufficient to solve the problem of scarcity of goods. Since independence, our population has increase four times.

b. Political instability:

A country’s economy depends upon political stability. Political instability discourages investment and encourages speculation. Under such circumstances, the industrialist and businessman feel unsecure and cannot make good plans. The government also cannot adopt affective measures to control rise in prices.

c. Imported inflation:

A very important cause of inflation in Pakistan is the existence of inflation in their countries. Since 1970’s most countries are experiencing inflation. The result in the Pakistan has to import machinery, raw material and other goods at higher prices.

d. Nationalization:

Due to nationalization of industrial in 1992, people were discouraged to make investment in industrial. Moreover in Pakistan the nationalization industrial did not perform will. They becomes centres of in sufficient production, high prices and poor quality goods were result.

e. Wages increases:

The increase in wages of workers has also contributed to inflation. Increase in wages result in higher cost of production of goods. So their price rises.

f. Climatic factors:

Pakistan economies heavily depend upon agriculture but due to weather condition many crops fall short of target, thus pushing up prices. For example cotton production remain stagnant and below target during previous years. Wheat production has also not kept pace with rising demand.

g. Oil crises:

The oil prices in 1973 created by a large quantity of inflation throughout the world. Import of oil is a high Burdon on our foreign exchange resources. At present 25 persons of our exports are used to pay for oil. From time to time, oil exporting countries increase price of oil, which raises transport cost.

h. Artificial scarcity of goods:

Frequent artificial scarcity of essential items is created (cement, ghee, oil, sugar, etc) and huge profits are charged. Similarly through smuggling, large quantity of essential goods is sent to Afghanistan and India.

Remedies of inflation:

It is the main objective of every government to take proper measures to control inflation.

The main measures which are used to control inflation are:

1. Monitory policy.

2. Fiscal policy.

3. Direct measures and other measures.

1. Monitory policy:

Monitory policy is a policy that influences, the economy through changes in money supply and available credit. Monitory policy is adopted by central bank of country. The various monitory measures which are used to control inflation are grouped under heads.

a. Qualitative control.

b. Quantitative control.

There are:

1. Open market operations

2. Variation in bank rates

3. Credit rationing

4. Varying reserve requirements.

2. Fiscal policy:

Fiscal policy is the deliberate change in either government pending or taxes to simulate or slow down the economy. It is the budgetary policy of government relating to taxes, public expenses, public borrowing and deficit financing.

Fiscal policy is based upon demand management examples, raising or lowering the level of aggregate demand by controlling various. Expenses, government expenses, consumption expenses.

3. Direct measures:

It means the step of government like rationing of goods and freezing of prices and wages. The government can also increase voluntary savings of people by giving them various incentives.

Other measure:

a. Increase in output:

The most effective method to control inflation is to increase the supply of goods. For this purchase, industrial and agricultural output should be increased. However, Pakistan performance in this regard in unsatisfactory.

b. Control of smuggling:

All steps should be adopted to check these evils through publicity as well as punishment. Large quantity of wheat, ghee, and other essential commodities being smuggled to Afghanistan should be control.

c. Industrial peace:

Industrial peace should be control to maintain the supply of goods and avoid the danger of scarcity. The disturbance such as what happened at Karachi during the post years? Should be control.

d. Control of money supply:

Volume of credit and money supply should be control. This can be done if tight monitory policy is followed. Decrease in money supply means less purchasing power with the people.

e. No deficit financing:

Deficit financing should be disco tribute. The development expenses should be meat through taxation, savings. Excessive issue of currency should not be used to meet budget deficit.

f. Population control:

Measure should be adopted to decrees the rate of population growth. The campaign of population planning has already started showing some success.

g. Simple living:

Luxurious life style should be discouraged and simple living should be adopted. The political leaders should themselves adopt simple living and provide an example for others.

Reflation definition

Devaluation definition

Details from sardar aslam book

Part Two Banking

1. Definition, origin and evolution of bank

The term bank or banking is one of those terms that are increasingly being used in business language. With growing importance of the financial sector of a country. Bank are considered to be the major role players.

DEFINITION
A bank is an institution that deals in money. But this definition does not cover all the aspects of banking business as it includes all persons dealing in money, which is not true to be more perfect we can say that:

“A bank is an organized house which borrows money from the people for the sake of providing loan or services of monetary nature to businessmen or need person.”

EXPLANATION
An institution that accepts money of the people or organizations in the form of deposits and does its business is called a bank. Banking system of a country refers to the working process followed by the banking institutions. It is identify through the relationship between the apex bank.

Trace out the origin of banking

“Merchants, money lenders and gold smiths are considered to be the ancestors of banks”’’’. Discuss.

ORIGIN OF BANKING

It is very difficult to trace out the exact origin of banks. It is said that the evolution of banking business is as old as the concept of money. Crowther in his book AN OUTLINE OF MONEY says that the present day banker has three ancestors merchants, money lenders and gold smiths. A modern bank is something of these. It is believed that goldsmiths and grocers of primitive days started keeping deposits of valuables and jewelleries people on the basis of their sound financial position in the community. They charged a certain amount from the depositors for the services rendered in keeping and preserving the valuables in safe custody. But they soon realized that only a small portion of metal and valuable deposited were taken bark by the people even at the expiry of the stipulated period. They therefore began to make profit by lending a part of these deposits. In case of lending, it was not always gold or silver, but issued their receipts which would pass among the people as if they were gold just like cheques in modern banks. The present day banks are performing the same functions as performed by the money lenders and goldsmiths of older days. Therefore it is believed that goldsmiths and moneylenders are the ancestors of banks.

THE WORD “BANK”

The derivation of the world Bank has been differently given by different authors. Same authors think that the word “BANK” has been derived from the Italian word “BANCHI” or “BANCHERII”. The payable used in Italian Business Houses. Some believe that it is derived from the German word “BANCK” meaning heap or mounds. The first public bank of Venice established on 1157 is considered as the first ever Public Bank.

2. Discuss the importance and role of banks

Meaning of Bank

It is generally said that the word “BANK” has been originated in Italy. In the middle of 12th century there was a great financial crisis in Italy due to war. To meet the war expenses, the government of that period imposed a forced subscribed loan on citizens of the country at the interest of 5% per annum. Such loans were known as Compara, Mintuo etc. The most common name was Monte. In Germany the word Monte was named as Bank or Banke. According to some writers, the word Bank has been derived from the word Banke.
It is also said that the word Bank has been derived from the word Banco which means a banch. The Jews money lenders in Italy used to transact their business sitting on banches at different market places. When any of them used to feel to meet his obligations, his banco or banch would be broken by the angry creditors. The word Bankrupt seems to be originated from broken banco. Since, the banking system has been originated from money lending business, it is rightly argued that the word Bank has been originated from the world banco.
Today the word bank is used as a comprehensive term for a number institutions carrying on certain kinds of financial business. In practice, the work Bank means which borrows money from one class of people and again lends money to another class of people for interest or profit.

Definition of Bank

Bank is defined in many ways by various authors in the books on economics and commerce. It is very difficult to define a bank, because a bank performs multifarious functions. Different kinds of bank having different functions may be defined in different ways according to their functions. The evolution of different type of banks, each specialization in a particular field, gives emphasis on each and every kind of bank. A general and comprehensive definition to cover all types of banking institutions would be unscientific and probably impossible. Each type of bank should have its own definition explaining its specialized functions. Legislators have understood this difficulty and that is why the Bill of Exchange Act 1882 (England) defines thus A bank includes a body of persons, whether incorporated or not, who carry on the business of banking.
From this definition it is clear to us that any institution which performs the various banking functions may be termed as bank. But in practice it is found that many banking functions vary from time to time and country to country. It is not possible on the part of a single bank to perform all the banking functions at the time. So there originated numbers of specialized banks with the objective of performing one or more functions. As for example, Central Bank, Commercial Bank, Industrial Bank, Agricultural Bank, Co-operative Bank etc., are in the practical field.

Dr. Herbert L. Hart has defined a Banker as “A Banker is one who in the ordinary courses of business honours cheques drawn upon him by persons for whome he receives money on current account. According to Sir John Paget No one and no body corporate and otherwise can be a Banker who does not (i) take deposit accounts (ii) take current accounts (iii) issue and pay cheques drawn upon himself (iv) collect cheques crossed and uncrossed for his customers.”

Hilton Banking Commission defines Bank or Banker in the following words:“Every person, firm or company using in the description or its title, Bank or Banker or Banking and accepting deposits of money subject to withdrawal by cheque, draft or order.”

Vise Sec. 5(1) and 5(B) Banking Co’s Ordinance, 1962.
Banking Ordinance 1962 (Pakistan) defines Banking as Accepting for the purpose of lending or investment of deposits of money from public, repayable on demand or otherwise and withdrawal by cheque, draft, order or otherwise.

In view of the above definitions, a simple and short definition can be given as Bank is an institution which deals in money and credit. According to this precise definition A bank accepts deposits of money in savings and current accounts at lower rate of interest or profit and gives on credit to needy persons and businessmen at a higher rate of interest or profit. It also transfers money for the clients from one city or country to another and also performs various other agency services for earnings.

Importance of Banking

Bank play a significant role in the economic development. The overall economic of a country is absolutely dependent on the efficient banking system. Industrial, agricultural and commercial progress of a country is not possible without a good banking system. The importance of banking may be stated as follows:

1. Capital Formation

Economic development depends upon the division of economic resources from consumption to capital formation. Capital grows out of savings. Banks play the prime role in accumulating capital by collecting the scatered savings of the people. Thus banks render a valuable service towards the development of a country by encouraging the growth of capital.

2. Inexpensive Media of Exchange

Modern Banking provides inexpensive media of exchange. Issuing of currency notes is a great achievement of modern banking. In addition the cheques issued on the banks are frequently used instead of money in transacting business. Thus the cheques economise the use of currency notes.

3. Development of Trade and Industry

Bank utilise their collected funds by advancing loans to commercial and industrial undertakings. In respect of foreign trade also, banks render a valuable service by issuing letter of credit etc.

4. Reservoirs of Funds

Banks acts as the reservoirs of money in the country. In times of economic, crisis the bankers come forward to help the Government by purchasing the Government securities or by advancing loans.

5. Transfer of Funds

Banks facilitate the transfer of funds from one place to another safely and at a very cheap cost through bank drafts, mail transfers, telegraphic transfer, travellers cheque etc.

6. Dealing in Foreign Exchange

Banks deal in foreign exchange by purchasing and selling foreign currencies and by issuing letters of credit. Foreign remittances of funds are possible only through banks.

7. Money Market Operations

The structure and ups and downs of money market in the country are largely dependent on the bankers activities. Under the guidance of the central bank all the banks in the country do their best for the sound management of money market.

8. Service to Customers

Banks perform various agency services on behalf of their customers. They collect or make payments of bills of exchange, dividend, insurance premium etc, on behalf of their customers. They act as the trustees ore executors of documents etc. They also extend financial advisers to their customers.

Functions of Modern Bank

The following is the list of functions or services rendered by a modern bank:

1. Bank provides inexpensive media of exchange through its cheques etc.
2. Bank keeps deposits of public.
3. Bank finances trade and industry.
4. Bank keeps in capital formation by economic savings.
5. Bank acts as Reservoir of funds.
6. Bank deals in foreign exchange and finances foreign trade.
7. Central Bank issues notes and controls money supply.
8. Central Bank controls credites, exchange and the money market.
9. All the banks participate in the development of money market.
10. Bank facilitates the transfer of funds from one place to another.
11. Specialized banks helps in the development of agriculture and industry.
12. Banks acts as the custodian of customers valuables.
13. Bank acts as underwriters for raising capital or loan by Government, Public Bodies and Campanies.
14. Bank acts as trustees and Executor of will and documents on behalf of their customers.
15. Bank acts as the correspondent and representative of its customers, other banks and financial institutions.
16. The Bank collects and makes payments of Bills of Exchange on behalf of its customers.
17. The bank makes payments and collects in respect of subscriptions, insurance premiums, rents, salaries etc, and also receives pension dividends and payment of utilities bills on behalf of their customers.
18. Bank advances loans and extend financial advices to its customers.
19. Bank Discounts Bills.
20. Bank purchases and sells stock exchange securities.

Qualities of Good Banking System

Every bank is a dealer in money and credit. It generally deals in with others money and not with its own money. It takes deposits from the public and again lends to its customers for the sake of interest or profit.
Thus, the operation of banking business is very risky one. A bank must have some qualities in operating its functions efficiently and successfully. The qualities of good banking may be summarized as below”

1. Adequate Capital

A banker must have adequate amount of capital. A large scale operation and execution of various functions of a modern bank require large amount of capital at the initial stage. Thus, without sufficient capital no large scale banking can flourish.

2. Good Reputation

Reputation is the most important factor in the progress of a bank. To be successful, a bank must have ample reputation in the money market. Reputation of a bank depends upon the qualifications of the directors and on the efficiency of management and workers.

3. Liquidity.

Money which is dealt in by a bank is not its own, so a banker must always keep himself ready to meet the claims of his depositors. He should keep sufficient amount of cash reserve and should keep some assets in such a way that these can be encashed at any moment. He should not block his fund by advancing loans for long periods rather he should always prefer short term credits.

4. Security and Safety

In respect of advancing loans safety should be the main guiding principle for a bank. The loans advanced by the banker must be secured. The persons to whom the advance is to be made, must be studied carefully before the lending of money. According to R.S. Sayers, The good banker is one who can distinguish the sound from the unsound borrower.

5. Economy

Economy in expenditure should be maintained for the proper operation of banking business. A good banker will always try to maximise his profit at a minimum cost.

6. Effective Publicity

A bank should adopt various scientific methods of advertisement for the proper publicity of business.

7. Localization

Good locality of a bank is another quality. The bank should be located in the business centre so that it can flourish its business successfully.

8. Speciality

To be successful, a bank should be specialized in any one or more fields of banking. An agricultural bank always aim at financing the formers for agricultural purposes. Industrial bank provides long terms credits to the industries. The individual commercial banks are also specialized in different fields of banking.

9. Good Show within the Office

The bank office should be well equipped with modern amenities proper sitting arrangement should be made within the bank office for its customers.

10. Good Personnel and Efficiency

The officers and the employees of the bank must be efficient in their work. They should be well trained in different fields of banking. Furthermore they should be well behaved and polite in the manner and must possess pleasing personality.

Classification of Banks

Introduction:

A commercial bank is an organization, which deals in money. It accepts the saving of the people and then these deposits are advanced to other people. In the whole process the bank earns money. Commercial banking is the need of today’s economy. In all the economic activities like consumption, exchange, trade, investment, etc. banking is important.

Definition:

A banker is an institution which receives deposits and advances loans.(Kinely)

Definition:

A banker is a dealer in capital or more properly a dealer in money. He is an intermediary party between the borrower and the lender.( Gilbert)

Definition:

A baker collects money from those who have it spare or who are saving it out of their incomes. It lends money to those who require it.(Crowther)

Banks are classified into various types on the basis of their functions, ownership, domicile etc. the main types of banks in Pakistan are:

Functional Classification

Central Bank:

This is the most important bank of the country. All the countries of the world have their own central bank. In our country state Bank of Pakistan is the country’s central bank. In England the Bank of England works as central bank.

The central bank is the head, the leader and the supervisor of the banking and monetary system of a country. It controls the flow of money and credit in the country. It is not a profit seeking institution.

Commercial Bank:

These banks are profit seeking institutions. They receive deposits, advance loans and create credit. These banks also perform the agency and utility services for the people. In Pakistan National Bank of Pakistan(NBP), Habib Bank limited(HBL) are performing functions of commercial bank.

Industrial Bank:

Industrial banks provide medium and long term loans to the industry. These banks solve the special financial problems of the industry by providing funds for the purchase of raw material, machinery etc. in Pakistan we have Industrial Development Bank of Pakistan(IDBP), Small and Medium Enterprises Bank(SME) and Pakistan Industrial credit & Investment Corporation(PICIC).

Agricultural Bank:

This bank provides financial assistance to agriculture sector. Bank provides loans for purchase of seeds, fertilizers and agricultural equipment. Agricultural bank provides short term and long term loans to the farmers and land owners at lower rate of interest. Agricultural Development Bank of Pakistan (ADBP).

Investment Bank:

The main functions of these banks are the sales and purchase of shares, bonds and securities. In 1966, Investment Corporation of Pakistan (ICP) was established before this, there was no such institution in Pakistan.

Saving Bank:

These banks collect saving of the people. These banks have been established to promote saving habits among the people of low earning. In Pakistan we have institutions like National Saving Centre (NSC) and Post offices. Commercial Banks also act as saving banks.

Exchange Banks

These are the banks which provide foreign exchange to the importers and exporters of the country. These banks convert local currency into foreign currency and make foreign payments.

Mortgage Banks:

These banks mortgage land, houses and other property and advance loans. Such banks exist in some countries but there is no mortgage bank in Pakistan.

On The Basis Of Ownership

PUBLIC BANK:

These banks owned and supervised by the government. In Pakistan we have NBP as a public bank.

PRIVATE BANK:

These are private sector banks owned by corporations such as MCB, ABL etc.

COOPERATIVE BANKS:

These banks provide services for the small scale business and provide short and medium term loans. In Pakistan these banks are working under corporate societies Act 1925. e.g. Punjab Cooperative & Federal Cooperative bank.

On The Basis Of Domicile

Domestic bank:

These are the banks that are registered with the country. E.g. NBP, HBL.

Foreign Banks:

These are the banks which are registered in foreign countries. e.g. Standard Chartered Bank, Citi Bank.

Scheduled banks:

The banks which work under the control of Central banks are known as Scheduled Banks. These banks must have paid up capital not less than Rs. 5 million.

Non Scheduled Banks:

The banks which are not working under the supervision of the central bank are known as Non Schedule banks. These banks have minimum paid up capital of Rs. 50,000 but not more than Rs. 5 million. e.g Small Business Finance Corporation.

According to Incorporation

Chartered bank:

These are the banks which are established by the order of the king (royal Order). These banks functions laid down by their charter.

Statutory Bank:

These banks are formed by the order of the head of state or by the special act of parliament. The main object of these banks is the welfare of public and profit is not so important e.g. SBP.

Functional Classification Of Banks
Banks may be classified according to their functions. Different kinds of banks, with different functions may be summarized as follows:
(a) Central Bank
A central bank is the most important institution in the banking system of a country established with the objective of regulating the banking and monetary system of the country. It issues notes and currencies within the country and is entrusted with responsibility of maintaining the price level in the country stable. It acts as banker to the Government and it directly or indirectly controls the activities of all other banks. State Bank of Pakistan is Central Bank of our country.
(b) Commercial Bank
Such type of bank is cheerfully engaged in financing internal trade. It deals in short term credit. It takes deposit from public through different type of deposit accounts and invests that collected fund in advances and loan of short period to the trading and commercial undertaking. This type of bank is familiar in most of the world. In our country, for example, National Bank of Pakistan, Habib Bank Limited, United Bank Limited, Muslim Commercial Bank Limited and Allied Bank Limited are the commercial banks.
(c) Industrial Bank
Such institution specialises in financing industry. It provides long term credit to people who carry on industrial enterprises. Industrial Development Bank of Pakistan (IDBP) and Pakistan Industrial Credit and Investment Corporation (PICIC) are the examples of industrial banks.
(d) Agricultural Bank
Such bank provides long and short term finance to agriculturists for their agricultural purposes. Long term capital is required for acquisition and improvement of land and purchase of heavy machinery and equipments. Short period capital is required by the farmers for current expenditure on seed, manures, wages etc. Agricultural Development Bank of Pakistan (ADBP) is the best example of agricultural bank in our country who provides long term, medium term and short term loans to the agriculturists.
(e) Exchange Bank
Exchange bank deals mainly in the finance of the foreign trade of the country. It deals in foreign exchange. On otherwards, the main function of such bank is to buy and sell foreign currencies, rather titles to foreign currencies in the form of bills of exchange, drafts, telegraphic transfers etc. It purchases the bill of exchange which arise in connection with the import and export trade of the country and they deal in exchange. The exchange banks liquidate the international indebtiness by exporting and importing precious metals and securities, if necessary, they purchase bills in the international money market and deposit them with their banking agents inbig commercial centres like London, Paris, New York etc. They draw and sell their own drafts on these deposit accounts.
(f) Cooperative Bank
This type of bank is organised mutually by the persons of similar occupations within the objectives of providing banking and credit facilities to the members. Generally in every country. Government patronises co-operative banks in order to encourage the cultivators, fisherman, workers in the factories etc.
(g) Mortgage Bank
Mortgage bank advances long term credits against securities of immovable properties like, agricultural lands, buildings and machinaries etc. Generally, credit is give to the agriculturist, small industries or house builders. This type of bank is essential in an under developed country where capital supply is very limited. In our country, House Building Finance Corporation is functioning as mortgage bank providing long term loans to house builders against securities of building and land property.
(h) Savings Bank
Such banks provides facilities to people to save money. This type of bank is established with the objective of promoting the thrift or saving habits among the people of small incomes. It takes deposits from the public and lands the collected funds to traders. Depositers are allowed to withdraw money from their deposits twice in a week. Post offices in Pakistan carry on functions of saving bank. Of course commercial and other bank also accept saving deposits.

1. Define credit. Discuss the uses and abuses of credit. Elaborate the importance of credit

Definition of credit

Uses of credit

Abuses of credit

Importance of credit

Note: check the book of sardar aslam

2. Instruments of credit define. Define cheque its features, types of cheque.

CHEQUE
Section B of the Act defines a cheque as, ‘’A bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.’’ A cheque is a bill of exchange but a bill of exchange often is not a cheque. A cheque is always payable on demand. The person drawing or making the cheque must be a customer of the bank and must be having the required find as deposit with the bank.

PARTIES TO A CHEQUE
The parties to a cheque are

Drawer

He is the maker of the cheque. He must be the holder of the account at the bank and must sign the cheque as per specimen signature.

Drawee

He is the banker with whom the A/C is maintained by the drawer of the cheque.

Payee

He is a person named in the cheque to whom or to whose order the payment is to be made.

ESSENTIALS OF A CHEQUE
A cheque must have the following features / essentials.
i. It must be in writing but should not be written by a pencil.
ii. It must be an unconditional order to pay. The drawer must not pay any condition for the payment of cheque.
iii. It must be signed by the person giving it.
iv. Cheque must be drawn upon a banker not else.
v. It must be for the payment of a certain sum of money only.
vi. Amount of money must be written in figures and words.
vii. The cheque must be payable on demand

TYPES / KINDS OF A CHEQUE
Cheque may be of different types. Some of them are

Order Cheque
Order Cheque is a which is expressed to be so payable or which is expressed to be payable to a particular person without containing words prohibiting transfer or indicating that it will not be transferable.

Open Cheque
They are payable in cash at the counter of the banks to the bearer of the cheque.

Crossed Cheque
These type of cheques are not uncashed at the counter but which can be collected only by a bank from the drawer bank. But these days an individual can also draw a crossed cheque for the purpose of safety and security in certain cases.

Bearer Cheque
A bearer cheque is that which can be cashed for the bank by the bearer of the cheque. Any person who is in possession of a bearer cheque can cash it without any difficulty.

3. What are the reasons of dishonouring of cheque. Or Discuss the various causes for termination of a Cheque. OR In what ways a banker can refuse to make the payment of Cheque. OR Discuss the various reasons for dishonour of a Cheque.

TERMINATION OR DISHONOR OF CHEQUE

Dishonour of cheque means a cheque returned unpaid by the banker. A bank can refuse to make the payment of a cheque under the following given circumstance:

Present after banking hours:

Cheque should be presented within mentioned banking hours; otherwise bank will not make the payment of a cheque.

Amount is not sufficient:

The bank can refuse to pay the amount of cheque if the account of a customer shows a less balance than the amount of cheque.

Branch is not particular:

If the cheque is wrongly presented to another branch in which drawer has no account then the banker can refuse to make payment of cheque.

Account is not particular:

If the cheque is not concerned to particular account the bank will not make any payment.

Date of cheque is not clear:

Date is very important factor of a cheque and a banker has a right to reject the cheque if the date is not properly entered or properly written.

Post-dated cheque:

If the cheque is presented for payment before due date of cheque, then the bank will not make the payment of cheque and returned unpaid.

Out dated cheque:

Banker can also refuse to make the payment of a cheque if the cheque holder has not presented it within six months.

Difference in amount:

If there is any difference in amounts written in words and figures; then the banker can refuse the payment of cheque.

Signature does not match:

Banker can terminate the payment of cheque, if the signature of drawer on cheque does not tally with the specimen provided to the banker.

Material alteration:

If the drawer has made the changes in amount, date or name then the banker can refuse to make the payment of cheque.

Torned cheque:

If the cheque presented to the bank for payment is wholly or partly torn or repaired, it may be returned dishonour by bank.

Lost cheque:

If the cheque of the customer has been lost and the banker has informed about this event, the bank will not make payment of this cheque.

Crossed cheque:

In case of crossed cheque cash is credited in the account of customer but if the customer presents the cheque at the counter for payment then the banker will refuse to make the payment.

Death of customer:

The banker cannot make the payment of the cheque after the notice of customer’s death has been received. The amount relates to legal heirs.

Garnishee order:

If the court orders to the customer’s bank to stop payment. The bank cannot honour any cheque.

Frozen account:

Banker will not make the payment to the customer whose account has been frozen by the government.

Closed account:

An old customer can issue a cheque against the closed account. The banker cannot make payment for this kind of cheque.

(A). Define Endorsement.

(B). What are the different kinds of Endorsement?

ENDORSEMENT
The word Endorsement has been derive from the Latin word ‘’Indorsum’’ which means ‘’On the back’’. Anything written or printed on the back of a deed or instruments is called endorsement. When the member or holder signs his name on the negotiable instrument for the purpose of negotiation i.e. direction to pay the amount to another person is called Endorsement. Section 15 of the Negotiable Instrument Act 1881 defines Endorsement as

When the maker or holder of a negotiable instrument sign the same, otherwise than as such maker for the purpose of negotiation on the back or face therefore on a slip of paper or so signs for the same purpose a stamp paper intended to be completed as a negotiable instrument he is said to endorse the same and he is called the endorse.

KINDS OF ENDORSEMENT
Different kinds of Endorsement are as follows.

i. Blank or General Endorsement
When the endorser simply put his signature on the back of the instrument without specifying the name of the endorsee, it is said to be general endorsement. The holder can convert it in full endorsement by writing the name of the payee above the signature of the endorsee.

ii. Special or Full Endorsement
It specifies in addition to the signature of the endorser the person to whom or to whose order the instrument is payable.

iii. Restrictive Endorsement
An endorsement which prohibited further negotiation of the instrument is called restrictive endorsement. For instance if a cheque is endorsed saying “Pay A only” or “Pay A for A/C of B” the endorsed has no power to transfer his right further.

iv. Partial Endorsement
An endorsement which makes the transfer of the instrument from the endorser to the endorsee after the fulfilment of stated conditions is called Partial Endorsement.

Sans Recourse
When a person wants to exclude his liability to the endorse or any subsequent holder in case of dishonour of the instrument. The Endorser fees himself from his liability on a negotiable instrument by writing the words SANS RECOURSE after the name of the endorsee. He should make it clear that he endorsee or the holder should not look to him for payment in case of the dishonour of the instrument. The endorsee may refuse to take an instrument with such an endorsement.

What do you understand by the term Crossing of a Cheque?

CROSSING OF A CHEQUE

A Crossing is a direction to the paying banker that the cheque should be paid only is a specified banker named in crossing. A cheque is said to be crossed when it bears across it is face the transfers lines without any words on them.
Crossing prevents the cheque from being cashed by anyone except the payee. This ensures safety of payment by means of cheques. It affords security and protection to the true corner. Cheques are crossed in order to avoid losses arising from open cheques. However it does not affect the negotiability of a cheque.

Define a bill of exchange and its different kinds.

BILL OF EXCHANGE

A bill of exchange is a written acknowledgment of a debt. It is written by the credit and accepted by the debtor. Section 5 of the Act define a bill of exchange as ‘’An instrument in writing containing an unconditional order, signed by the makers directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument.

Kinds of Bill of Exchange
A bill of exchange is of the following types.

i. Inland Bill
A bill of exchange which is drawn in a country and is payable anywhere in the same is called an Inland Bill. For example if a bill is drawn in Pakistan and is payable in any city of the country it will be considered as an Inland Bill.

ii. Foreign Bill
If a bill is drawn in one country but is payable in any other country, this type of bill of exchange is called a foreign bill. For example it has been drawn by a businessman in Pakistan in the name of other businessman living in Japan, the payment of the bill of exchange will be among the two businessman of different nations therefore this kind of bill of exchange is called Foreign Bill.

iii. Commercial Bill
A bill which is drawn for business purposes is called a Commercial bill. Sometimes a businessman does not pay in cash but issues a bill which is payable in some future date such type of a bill is called a Commercial Bill.

iv. Accomodation Bill
An accommodation bill is a bill whereof the acceptor according to the terms of the instrument stands as a surety for some other person who may or may not be a party thereto.

v. Time Bill
These are such type of bills which are payable on demand on some specified dates. These specified dates may be of present or future.

vi. Demand Bill
The bills which are payable on demand are called demand bills. Such type of bills are generally used for specific purpose.

Who are the parties to a Bill of Exchange?

The parties to a bill of exchange are
i. The Drawer who prepares the bill.
ii. The Drawee in whose name the bill has been drawn.
iii. The Payee to whom the bill has to be paid.
iv. The Endorsee to whom the bill has been transferred by way of endorsement by the payee.

What are the essentials of a bill of exchange?

ESSENTIALS OF A BILL OF EXCHANGE

The following are the essentials of a bill of exchange.
i. It must be in writing.
ii. It must be an unconditional order to pay.
iii. It must be signed by the maker.
iv. It must be addressed by one person to another.
v. It must be written for some certain sum of money.
vi. It must be payable on demand.

What do you mean by Noting of the Bill?

NOTING OF THE BILL

When the bill of exchange is dishonoured by the party, the holder of the bill has a legal right to take action against them. In this regard he prepares a type of Public Notice. It is known as Notery Public which is attached along with the bill and is again presented for repayment. Usually this entry of the bill is made on a separate attached with the bill. If the payment is not made i.e. refused again then the date of the presentation the reference of the register with his signature is entered in the notice. This is called Notice of the Bill.

PROTESTING OF THE BILL

Sometimes due to refusal of payment a certificate or document is issued by the notary public containing all the information about the dishonour. This document is known as protest of the bill. It contains
i. Attested copy of the bill.
ii. Signature of Notary Public.
iii. The name of the person whose bill was protested.
iv. The date and amount of the protest.
v. The cause of the protest.
vi. The reply of the drawee.
vii. The reason of absence of the drawee and the accepted.
viii. The reason for the non-payment of the bill.
ix. The certificate stamp of the notary public

What is Renewal and Retirement of a bill of exchange?

RENEWAL OF THE BILL

Sometimes the drawee of the bill is unable to pay the bill on its agreed date or time. In such a situation the drawee can apply to issue a new bill subject to certain conditions after the agreement of the drawer. This issuance of a new bill for some new time is known as renewal of the bill. After the issuance of the bill the former is considered to be cancelled. But if the drawee again unable to pay the newly issued bill, the first bill with all its farmer conditions becomes payable and valid.

RETIREMENT OF THE BILL

Sometimes the drawee pays the bill before the agreed date enjoying the rebate which is provided to him for prepayment of the bill. This is known as retirement of the bill. The amount of the rebate depends upon the time left for payment and the amount for which the bill is drawn.

What is negotiable instrument? Define the characteristics so kinds of negotiable instrument?

Negotiable instrument:

It is a written document, money. A negotiable instrument is transferable to the another person. Under the negotiable instrument act 1881.

“Characteristics”

Negotiable Instrument have following features.

1. Transferable by delivery:

negotiable instrument is transferable from one person to another by delivery or by endorsement and delivery.

2. Entitled to receive money:

The legal person of the instrument is entitled to receive money mentioned in it.

3. Filing a sue:

The holder of a negotiable instrument has the right to document a sue in his name for payment from all or any of the concerned parties.

4. Transferee is not affected by defective title:

If the transferee must has accepted the negotiable instrument in good faith, then he is not affected by the defective title of the transfer in any way.

“Kinds of negotiable instruments”

There are three kinds of negotiable instruments.

1. Promissory note:

A promissory note is the simple and earliest kind of credit instrument. there is no conditional written promise by one person to another in which the maker promise to pay an demand or at a fixed or determinable date in the future, a stated sum of money pad to or to the order of a.

2. Bill of exchange:

It is a written document drawn by the seller on the buyer to pay certain amount of money on due date.

3. Cheque:

A cheque may be defined as, “a written order of a depositor upon a bank to pay to or to the order of a designated party or a bearer, a specified sum of money on demand”.

1. Define bill of exchange. Discuss the types of bill of exchange

According to Negotiable Instrument Act a Bill of Exchange is “An instrument in writing containing an unconditional order, signed by the maker directing a certain person to pay on demand or at a fixed or determinable future time, a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument.’’
Thus we find the following important features of a bill of exchange:

1. The order to pay a bill must be unconditional one.
2. The order to pay must be made in writing on the bill.
3. The bill must be signed by the drawer of the bill. Without signature of the drawer the bill will not be genuine one.
4. The order to pay under a bill must be addressed to a certain person which, of course, includes individuals, firm, company, corporation etc.
5. The amount to be paid under a bill must be certain one.
6. The money under a bill must be paid in legal tender currency.
7. The amount should be payable to or to the order of a specified person or to the bearer of the instrument.
8. The amount should be payable either on demand or at a fixed determinable future time.
9. The bill must be duly stamped.
10. The other formalities like dating, stating the names of the parties concerned etc. must be observed.
Parties to a Bill of Exchange
Following are the various parties related to a bill transaction
a. The Drawer
The person who draws the bill and puts his signature on it is known as the drawer of the bill. He is also called the “maker” of the bill.
b. The Drawee
The person on whom the bill is drawn is called as the drawee of the bill.
c. The Acceptor
The person who accepts the bill is known as the acceptor of the bill. Usually, the drawee accepts the bill. But sometimes, a third party may also accept a bill on behalf of the drawee. The acceptor puts down his signature across the bill showing his acceptance.
d. The Payee
The person to whom the amount of bill is to be paid is known as payee of the bill. The drawer may make the bill payable to himself or to any other person he likes.
e. The Endorsee
The holder of the bill may endorse the bill in favour of someone else known as endorsee. The person who endorses the bill is called endorser.
f. The Holder
The person who holds the bill and is entitled to realise the amount of the bill from the drawee is known as holder of the bill.

Types of Bills
Bills may be of the following types:
a. Inland Bills
Inland bill means the bill which is drawn and payable within the same country. Thus, the bill which is drawn in Pakistan and will also be paid in Pakistan is termed as an inland bill.
b. Foreign Bill
The bill which is drawn in one country and accepted and payable in another country is known as a foreign bill.
c. Accommodation Bill
The bill which is drawn and accepted by the parties concerned for their mutual accommodation with a view to raise money by negotiating it, is known as an accommodation bill. The parties concerned bind themselves as the drawer and the acceptor without any valuable consideration.
d. Demand Bill
The bill which is payable “on demand” or “on presentation” or “at sight” is known as demand bill.
e. Time Bill
The bill which is payable at a fixed or a determinable future time is known as time bill. The time bill may further be classified as following:
After Date Bill
The bill whose tenure is counted from the date of drawing it is known as after date bill.
Sight Bill
The bill whose date of payment is counted from the date of acceptance is known as after sight bill.
f. Documentary Bill
When a bill is accompanied by shipping documents like, Bill of Lading, Invoice, Insurance Policy relating to goods against which the bill is drawn, is then known as a documentary bill.
g. Sent Bill Or Bills for Collection
When bills are handed over to a bander by his customer in order that they may be collected when due and the proceeds credited to the customer’s account. They are called as Bills for Collection.
h. Bills Negotiated
The bills for which the banker has given the value at once, without waiting for the proceeds after collection.
i. Bills in Set
When bills of exchange are drawn in two or more parts, they are called “bills in set”. The foreign bills are generally drawn in sets of two or three. The each of the set is on a seperate piece of paper, but all parts are worded exactly in the same language except that the parts are numbered as “The 1st of exchange”, “2nd of exchange” etc.
j. Bills Retired
When a bill is withdrawn from circulation or taken back before it is due, it is known as “retired bill”.
Discounting of Bills
A time bill is payable on future date and the holder of the bill is to wait for a specific period of time to receive the amount of the bill. But the modern commercial banks are providing the facilitates of discounting of bill to the holder to have money earlier. For discounting of bill, the bank purchases the bill from the holder at a reduced rate before maturing of the bill and receives the amount of the bill from the acceptor on due date. The reduction in the value of bill at the time of purchase by bank is known as “discount” and it is charged on the basis of interest rate. Thus, discounting of bill is a sort of short term credit given to the holder of the bill by a banker and the discount forms the profit to him.
Discounting of bill very useful from the point of view of traders and bankers. It benefits the importer, exporter and bankers equally. The exporter or seller can get immidiate cash as soon as he handed over the goods to the transporters. The importer or buyer gets enough time to sell the goods after having received it. The bankers earn a lot by effecting these transactions.
Precautions in Discounting a Bill of Exchange
Like advancing other loans and credit, discounting of bills also is a very risky job on the part of the banker. He must be careful and cautious with discounting the bill of exchange and must take the following precautions are measures in discounting of bills:
1. He should examine financial standing of the holder and acceptor of the bill. If the parties concerned have bank accounts with him, the banker can easily learn their financial stability. If there is no such account with him, the banker should refer to the bank where they have got account to know their financial position.
2. The banker is also to examine the financial status of other parties engaged in the bill.
3. The banker should see whether the acceptor dishonoured any other bill in past time.
4. Th banker should satisfy himself whether the bill is a bonafied trade bill which is accepted for value received in course of business. The banker should, as for as possible, avoid the accommodation bills.
5. The banker should examine the bill whether all the formalities as of date, stamp, signature etc, have been compiled with.
6. He must see whether the bill is capable of being endorsed. If so, the banker should see whether the bill is duly endorsed by the payee.
Presentation of Bills
Bill has to be presented first of all before the drawee for acceptance and again in due date it is to be presented before the acceptor for the payment. Thus, presentation of bill may be of two types viz,
1. Presentation for Acceptance
2. Presentation for Payment
1. Presentation for Acceptance
Presentation for acceptance is made not only for the acceptance of the bill but also to fix-up the time, place etc., for the payment. In case of time bill, where the tenure of the bill is clearly stated, the bill is presented for acceptance of the drawee to confirm the stipulated time for payment.
A bill should be presented for acceptance within a reasonable tenure after the drawing or negotiation of the bill.
2. Presentation for Payment
If refers to presentation of a bill before the draw or acceptor or before the agent of the drawee or acceptor for the payment of the bill on due date. The presentation for payment is subject to the following rules:

In case of “demand bill”, the bill must be presented within a seasonable time after its drawing or endorsement as the case may be,

In case of time bill, the bill should be presented for payment on the due date.

The bill should be presented for payment during the business hours of working days.

The bill should be presented for payment at the proper place. The term proper place may refer to any one of the following

(i) The place mentioned in the bill for payment.
(ii) Where no specific place is mentioned in the bill, the address of the drawee or acceptor.
(iii) Where no address is given, of any place where the drawee or acceptor can be found including his residence

2. Write a note on crossing and endorsing of check

Negotiable Instrument:

The negotiable Instruments Act (1881) does not define a negotiable instrument but merely state that a “negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or bearer (Section- 13)

A negotiable instrument is a transferable document that passes freely from hand to hand & forms an integral part of the modern business mechanism.

Endorsement:

Endorsement means the signature of the maker/ drawer or a holder of a negotiable instrument, either with or without any writing, for the purpose of negotiation. The endorsement is done by the payee or endorsee, as the case may be by signing on the instrument customarily on its back & where the space is insufficient on a slip of paper annexed thereto called “allonge”.

There are five kinds of endorsement

1. Blank endorsement: If the endorser signs his name only, the endorsement is said to be in blank and it becomes payable to bearer, e.g. Mahbubul Haq.

2. Special or Full endorsement: An endorsement “in full” or a special endorsement is one where the endorser not only puts his signature on the instrument but also writes the name of a person to whom or to whose order the payment is to be made. Example: Pay to Mr. Rafiqul Islam or order-Sd/Sarafat All.

3. Conditional endorsement: In conditional endorsement the endorser puts his signature under such a writing which makes the transfer of title subject to fulfillment of some conditions of the happening of some events. Example: Pay to Mr. Sarwar Jahan or order after his marriage-Sd/Badrul Kamal.

4. Restrictive endorsement: An endorsement is called restrictive when the endorser restricts or prohibits further negotiation. Example: “Pay to Miss. / A. Pereira only” Sd/Hosne Ara.

5. Partial endorsement: In Partial endorsement only a part of the amount of the bill is transferred or the amount of the bill is transferred to two or more endorsees severally. This does not separate as a negotiation of the instrument. The law lays down that an endorsement must relate to the whole instrument. However, where the amount has been partly paid, a note to that affect may be endorsed on the instrument which may then be negotiated for the balance. This is not done in case of cheques or banker’s drafts.

Give correct endorsement on cheques payable to the order of the following:

i) M/s. Ralli; ii) A. B. C. Co. Limited; iii) A. K. Khan & Co.; iv) A. R. Chowdhury (non-deceased) v) The Dhaka club;

Answer:

I) For M/s. Ralli

P. Ralli

Proprietor/Partner

ii) For A. B. C. Co. Limited.

Z. H. Chowdhury

Managing Director/Chairman

iii) For A. K. Khan & Co.

Aminul Karim Khan

Partner

iv) A. R. Chowdhury

v) For and on behalf of

The Dhaka Club

Azizur Rashid

Treasurer

Crossing:

When an instrument bears across its face two parallel transverse lines or an addition of the name of a Banker, either with or without the words “& Co.”, “Account Payee” etc.

The significance of crossing is that the payment of the instrument can only be made through a Banker( Account Holder). When it is a crossed instrument it gives direction to the paying Banker (Bank) to pay the money to a Banker. Thus the holder of such an instrument must deposit the same into his or same other person’s Bank a/c for collection. An instrument is crossed in order to provide a safeguard against theft of fraud.

Persons who can Cross a Cheque: Crossing is an instruction or a direction to the paying banker. Obviously, the drawer of a cheque is competent to cross it generally or specially. Section 125, however, permits the following persons also to cross the cheque.

(1) The holder of a cheque may cross it generally or specially, if it is uncrossed or may cross it specially if it is crossed generally or may add the words ‘not negotiable’ in case of both types of crossing.

(2) The banker to whom the cheque is crossed specially may again cross it especially to another banker, his agent, for collection. This is called Double Special Crossing.

A general crossing may be converted into a special crossing by a holder by adding the name of a banker to make the payment of the cheque safer. But the reverse is not possible into a general crossing, because such alteration amounts to a material alteration and needs confirmation by the drawer.

Types of Crossing:

Crossing are mainly two types, these are (i) General Crossing (ii) Special Crossing.

i) General Crossing: Section 123 of Negotiation Instruments Act, 1881, defines a general crossing as follows:

Where a cheque bears across its face an addition of the words ‘and company’ or any abbreviation thereof, between two parallel traverse lines or two parallel lines simply either with or without the words “not negotiable” and that addition shall be deemed a crossing and the cheque shall be deemed to be crossed generally.

e.g. (1) (2)& Co. (3) A/c. Payee

(4) Payee’s Account only (5) Not negotiable

ii Special Crossing: Section 124 of the Negotiable Instruments Act, 1881, defines special crossing as follows:

Where a cheque bears across its face an addition of the name of a Banker with or without the words “not negotiable”, that addition shall be deemed a crossing and the cheque shall be deemed to be crossed specially and to be crossed to that Banker.

(1) Pubali Bank (2) Payee’s A/c. at Sonali Bank

(3) Janata Bank (4) Not negotiable Agrani Bank

Opening of Crossing: If the crossing on a cheque is cancelled, it is called opening of the crossing. The cheque thereafter becomes an open cheque. Only the drawer of the cheque is entitled to open the crossing of the cheque by writing the words ‘Pay Cash’ and cancelling the crossing along with his full signature. His initials are not sufficient for this purpose.

The paying banker must be very careful in ascertaining the validity or genuineness of the drawer’s signature opening the crossing. If drawer’s signature (already on the cheque) is forged by the holder in order to open the crossing and the payment is obtained at the counter, the banker will remain liable to the true owner of the cheque. The banker is under an obligation to pay the cheque according to the direction of the drawer conveyed through the crossing on the cheque.

Significance of “Not Negotiable” Crossing:

The terms of not negotiable literally means not transferable. But in case of crossing of a cheque or bill of exchange, the phrase does not mean that the instrument is not at all transferable. The instrument may still pass from hand to hand, but only with certain degree of care and caution. According to section 130 of the Negotiable Instruments Act, any person taking a cheque crossed generally or specially with the words ‘not negotiable’ shall not have and shall not be capable to give a better title to the cheque than that which the person from whom he took it at the first hand.

The cheque remains transferable but its important quality i.e. negotiable is withdrawn. Negotiability means that a holder in due course derives a better title than that of the transferor provided he comes to the possession thereof for value, in good faith and without any reason to believe that the transferor from whom he took it, had a defective title. Not negotiable crossing destroys this feature. Suppose cheque crossed with Not negotiable” has been stolen by B form A and handed over to C who receives it bonafied and for value without any knowledge of B’s defective title. C does not acquire a better title to the cheque, than B. In case of dispute, C will have to return the cheque or pay equivalent in money to A, the true owner of the cheque. C cannot also pass a good title to anyone else, say to D.

A stolen cheque with this crossing is just like a stolen pen and can be claimed by the true owner.

Significance of “Not Transferable” Crossing:

Every cheque is transferable unless it contains words prohibiting transfer or indication intention that it shall not be transferable. If the drawer wishes to make the cheque a non transferable one, he should indicate the fact by the way he draws the cheque e.g. pay A or B only with further words “Not Transferable” should be plainly written horizontally on the face of the cheque. A cheque so crossed restricts the transferability to any other person and is only payable to the person or payee noted therein.

Significance of “Payee’s Account” Crossing:

Section 123 of Negotiable Instruments Act defines that when a cheque crossed generally bears across its face an addition of the words ‘Payee’s Account’ between the two parallel transverse lines, it is known as Payee’s Account Crossing.

It has two characteristics:

a) It cases to be negotiable,

b) The collecting Banker is required to credit the proceeds thereof only to the account of the payee. The collecting Banker will be liable if he does not adhere to this mandate of the drawer. A cheque crossed ‘Payee’s Account’ bearing endorsements subsequent to that of the payee proves that it has been negotiated. If such cheque is paid, the drawer is entitled to sue for conversion. It is a notice to the collecting Banker who will be looked upon as having acted negligently if he disregards the crossing.

3. Define online banking. What are the services of online banking discuss.

4. Write a note on credit card debit card.

5. What are the causes of nationalization of banks? Explain the advantages and disadvantages of such nationalization?

Introduction:

The commercial bank can be opened by private persons or government. A private commercial bank is opened by private persons. The ownership and control remains in their hands. But sometimes the ownership of private banks is taken over by the government. It is called nationalization of commercial banks.

Nationalization of banks:

The government has nationalized all the 23 schedule banks with 2942 branches with deposit of Rs. 1580 crores on Its January 1974. The main purpose of the nationalization of banks was to increase in government revenue and better utilization of monetary resources of the country. After nationalization they were merged into five banks.

 National bank of Pakistan

 Muslim commercial bank

 United bank limited

 Habib bank limited

 Allied bank limited

Causes of nationalization

The causes of nationalization of commercial banks are as under:

Concentration of wealth:

The banks mainly lend to big depositors or industrialists. Many small producers were unable to get loan facility. According to one estimate 200 families borrowed 75% of the total loans and advances. A few people were using the national saving in their own interest. The result was concentration of wealth in few hands.

Misuse of loans:

The loans were issued against securities. There was no check to see whether these were used for productive purpose or not. The use of loans was not in the national interest. These loans were used for hoarding black marketing and speculation.

Loan distribution:

The loan distribution policy for various sectors of the economy was not clear cut. The banks were providing loans in their own interest. According to one estimate only 10% of the loans were issued to agriculture. As a result agriculture remained backward

Protection of black money:

Private Banks of the country protected the black money of high officials. Even the government is not allowed to check the balance of such persons.

Wasteful competition:

The banks were busy in wasteful competition. A heavy amount was being spent on advertisement. Perhaps such expenses were more than Rs. 25 million per year.

Banking profits:

The banks were providing loans to maximize the profit at the cost of national interest. The profit earned by the banks was not helpful in the economic development.

Overseas branches:

The performance of overseas branches was poor. The bank officers were going abroad for the inspection and audit of branches. They were allowed to visit foreign countries and all expenses of tour were charged to the concerned branches. Many of such branches working at loss.

Bank employees:

The employment and promotion in banks was due to deposits. The hard labor devotion and intellectual were useless.

Relatives of bankers:

The bank owners provided key posts to their relatives. They were providing heavy salaries and other benefits. They were not professionals.

Ineffective central bank control: There was ineffective control of the state bank on the schedule banks. They did not follow the policies of the state bank for providing loans.

Advantages of nationalization

Following are the main advantages or effects of nationalization of banks:

Job security:

The job of the banks employees has become secured after nationalization. The other benefits are also allowed to the employees. They receive car advance, house building finance and also entitled to provident fund.

Job opportunity:

The expansion of banking business and opening of new branches has created new job opportunities for many people.

Uniform policy:

All the banks will adopt policy about credit expansion after nationalization. While before nationalization it was not possible.

Use of profit:

Before nationalization all the profit of the bank industry was in few hands but after nationalization it is used for the best interest of the whole nation. So government nationalized them in 1974.

Increase in rural branches:

The nationalized commercial banks have opened branches in rural areas. The rural deposits have increased many times after nationalization.

Control over expenses:

The expenses of nationalized banks have been controlled to a large extent.

Control over credit:

The SBP control over the commercial banks has increased. The credit policy is prepared by the state bank for commercial bank and issues instruction from time to time. Therefore the state bank has got control over credit to some extent.

Banking business:

The government has set up an executive board to look after the administrative work. The business of banking has improved due to the better management.

Service motive:

Before nationalization, there was only profit motive for the banker and service motive was ignored. So it was necessary that banks should be nationalized.

Loans and advances

The state bank of Pakistan declares the loan policy of these banks. All the banks follow the policy. Therefore the loan is provided to industrial and commercial sectors including small industries.

Protection to depositor:

The deposits of the people are saved due to control of government because government is responsible for the risk of loss to the depositors.

Development of banks:

There is a large development in the field of banking after nationalization on January, 1^st 1947 there were 3123 bank branches and on December 31^st,1987 there were 7100 branches.

Disadvantages of nationalization

The following are main disadvantages of nationalization:

fall in standard service
restriction on recruitment
low salaries
control of bureaucracy
immigration of skilled persons
low level of competition
corruption & bad debts

· nepotism & favouritism

1. Define commercial bank. Discuss the functions of commercial banks

INTRODUCTION

It is an uphill task to trace the origin of word “bank”. Some people think that “banco” is the origin of bank. “banco” means a bench. The early bankers had done their business on the benches “banco” means a bench. The early bankers had done their business on the benches “banco” means a bench. The early bankers had done their business on the benches in Lombardy-Italy. There are others who say that “back” is the origin of it. It is a German word and means a joint stock fund. There is no record for checking the correct opinion.

COMMERCIAL BANK

It is rightly said that “like” many other things a banker is easier to recognize than to define “. The activities of the banks are ever increasing. The definition stated today will be out tomorrow. There is no complete definition which covers all the functions of a commercial bank.

DEFINITIONS:

According to KINELY:

“A banker is an institution which receives deposits and advances loans”.

According to GILBERT:

“A banker is a dealer in capital or more properly a dealer in money. He is an intermediary party between the borrower and the lender”.

FUNCTIONS OF COMMERCIAL BANK

Primary or Basic or Major Function

(A) Accepting deposits:

Accepting the deposits is the basic function of banking business. The bank collects money from the public. The lending power of a bank depends upon it. In order to attract the public, the bank introduced various types of deposit schemes. The main deposits schemes are as follows:

1.Current Account or demand deposit:

This type of account is suitable for businessmen. The banks normally do not pay interest (profit) on this account. No deduction of zakat is made on this type of account. The depositors can withdraw the money deposited in the current account any time.

2. Savings Account:

These accounts are suitable for middle-income group people. On this account the lower rate interest rate is given. Deduction of zakat is made on this type of account. In the case of deposits, the depositors cannot withdraw his amount beyond a specific limit fixed by the rules of the bank.

3.Fixed Deposit Account or time deposit:

In the case of fixed deposit, depositors place their money in the bank for a specific period i.e. months to years or more. On this account, bank pays higher interest rate. It is also known as “Time liabilities of bank”.

(B) Making Loans and Advance or Employment of funds:

Bank also advances loans to business, traders and exporters. Infact banks borrow money in order to lend it at higher rate of interest. This is the major source of banks.

The main types of loans guaranteed by the bankers are:

1.Overdraft or Running finance:

Incase of overdraft the customer is allowed to draw certain amount of money over and above their deposited amount. The person who has kept his account with bank can ask for overdraft and the bank can grant him overdraft. The interest is charged from the customers on the overdrawn amount.

2.Cash Credit or Cash finance:

Under this system banks also allow the customers to borrow against the security of moveable and immovable assets for short period.

3.Money at Call or call loans:

These are very short period loans. This advance is given to the stock exchange for a very short period.

4.Discounting of bills of Exchange:

It is very popular type of lending by the bank. The banker after discounting, pays the value of the bill to the holder.

5.Personal Loans:

Banks are now also granting personal loans for the purchase of motor cars, household appliances house repairs etc.

C- Remittance or Transfer of Money

The money can be transferred by bank from one place to another by means of bank demand drafts, (D.D) telegraphic transfers (T.T) mail transfer (M.T) and Pay-order(P.O) etc.

D- Payment of Cheques

The payment of cheques on behalf of his customer is also essential function of a bank. Bank undertakes to pay the proceeds (amount).

MINOR OR SECONDARY OR ORDINARY FUNCTION

Services of Hajj

Banks also provide services of hajj to his customers and public.

Evening Banking

After regular working hours the banks offer evening banking services. In Pakistan utility bills are collected in the evening. The bank also receives deposits after banking hours.

Collection of Zakat

The banker collect zakat from various accounts holders on behalf of Government.

Collection of Income

The bank as an agent collects pension, dividends, rent and interest for the customers.

Acts as Trustee

If a client direct his bank to act as a trusty in the administration of a business. The bank performs this responsibility.

Dealing in Securities

The commercial bank purchase and sells the securities for himself and sometimes on the behalf of the customer.

Advice on Financial Matters

Sometimes the banks give valuable advice on various financial matters to their customers.

Representatives and Attorney

The banker act as attorney and representative of his customers.

Referee

Banks act as a referee and provide information relating to the credit worthiness of their customers.

Issuance of Letter of Credit (L.C)

Banks issue commercial letters of credit for facilitating and financing foreign trade. They also issue letter of credit.

Issuance of Credit Cards

In the modern age the bank issue credit cards to their customers. These credit cards are acceptable worldwide and thus provide special facility to the customers.

Discuss the role of commercial banks in economic development?

Introduction:

Definition:

A banker is an institution which receives deposits and advances loans.(Kinely)

Definition:

A banker is a dealer in capital or more properly a dealer in money. He is an intermediary party between the borrower and the lender.( Gilbert)

Definition:

A baker collects money from those who have it spare or who are saving it out of their incomes. It lends money to those who require it.(Crowther)

Role of commercial banks in economic development of Pakistan

The role of commercial bank in the economic development of Pakistan is discussed as follow:

1. Development of trade:

The commercial banks collect the savings of the people and provide them for trade activities. Successful businessmen work in cooperation with the bank.

2. Development of agriculture:

Commercial banks finance the most important sector of developing economies .i.e. short, medium and long term loans are provided for the purchase of seeds, fertilizers and machinery.

3. Development of industry:

The countries, which concentrated on industrial sector of made rapid economic development. South Korea Malaysia, Taiwan, Hong Kong and Indonesia have recently developed their industrial sector with the help of commercial banks.

4. Development of transport:

The commercial bank financed the transport sector through Prime Minister Transport scheme. It has reduced unemployment on one hand and increased the transport facility on the other hand.

5. Development of foreign trade:

Commercial banks help the traders of two different countries to undertake the business. Letter of credit is issued by the importer’s bank to the exporter to ensure the payment.

6. development of economy:

A sound banking system promotes the economic status of the people by providing them short term, medium term and long term loans.

7. Export promotion cell:

In order to boost the exports of the country, the banks have established export promotion cell. These cells provide information and guidance to the exporters.

8. Employment opportunities:

Banks provide investment and in this way they create employment opportunities.

9. Educational loans:

In Pakistan commercial banks provide educational loans. These loans are called Qarz-e-hasna. These loans are advanced for a long period of time. Qarz-e-Hasna is for those students who cannot afford their educational expenditures.

10. Collection of dividends:

The bank provides very useful services in the collection of dividends on behalf of the customers.

11. collection of zakat:

All commercial banks can collect zakat on behalf of the government, and assists the government in distribution of zakat.

12. collection of taxes:

Commercial banks collect the taxes on behalf of the government.

13. Custodian of precious articles:

Banks also provide locker for the safety of precious articles.

14. Cheap medium of exchange:

By issuing cheques and drafts bank provides cheap medium of exchange.

15. Climate for capital formation:

Capital formation depends upon the level of investment and savings. If the rate of saving is higher, then the rate of capital formation is also higher. Banks can increase the capital formation by stimulating saving and incomes.

16. Increase in saving:

Saving is an essential requirement of economic development. Banks collect small saving which becomes a huge amount. Banks launch different saving schemes to attract the people.

17. Increase or decrease the volume of money:

The commercial banks play a very important role in the implementation of monetary policy. They work under the supervision of SBP and try to increase or decrease the volume of money according to the needs of the economy.

18. islamization:

Islamic economic system is the best for our economy. Banks provide their full support for the introduction of Islamic banking in Pakistan.

19. Investment:

Banks also make an investment in different companies and industries. A developed banking stimulates the growth and capital formation.

20. Investment advising:

Banks also provide the services of advisor for making investment in trade and industry. In the absence of banking system, many businessmen cannot get the services of specialist and may bear loss.

21. idle funds utilization:

The idle funds of individuals and firms get utilized through banks. This help in expansion of productive capacity in a country. People deposit their idle funds in banks because banks allow them interest.

Conclusion:

In short a sound banking is essential for economic development. Banking is the part of a country’s infrastructure. The most important role of banking is capital mobilization which in fact brings development.

3. Define central bank. Discuss the functions of central bank.

The leader and supervisor of all the commercial banks of a country is called Central Bank. It is the backbone of the economy and control all the banking system. In our country the Central bank is State Bank of Pakistan.

Definition:

“An institution charged with the responsibility of managing the expansion and contraction of the volume of money in the interest of general public welfare”(KENT)

Definition:

“the general principles of central bank is that it should act only in public interest for the welfare of country as a whole and without regard to profit as a primary consideration”.(DECOCK)

Definition:

“ A bank, which control credit.” ( W.A.SHAW)

Definition in simple words:

Central bank of a country supervises controls and manages all the banking system of that country.

The functions of Central Bank are:

1. Monopoly of note issues:

Central bank has a monopoly of note issue. No bank issue notes. In Pakistan State Bank of Pakistan issues notes according to the need of public under two principles:

 currency principles

 proportionate reserve system

2.Banker to Government:

Central bank performs following functions as a banker to the government.

 Account holder:

It keeps government deposit and makes payment on government behalf.

 Lender to the Government:

It grants loan to the Govt. and also makes investment in Govt. bills and securities.

 Public debt Management:

Central bank manages public debts and handles financial business connected with it.

 Financial Advisor:

It acts as a financial advisor to the Govt.

3.Banker’s Bank:

Central Bank is a banker’s bank in following ways:

 Maintenance of cash reserve:

Every commercial bank is required to keep a portion of its deposit as reserve with central bank. In Pakistan cash reserve ratio is 7.5% of total deposit.

 Lender of last resort:

Whenever the commercial banks are in any financial problem, they take loan from the central bank at interest.

 Remittance facility:

provides remittance facility to commercial bank.

 Clearing house:

It manages clearing house to perform clearance of cheques among banks.

 Foreign Exchange Reserve.

All the foreign exchange and gold reserve of the country are kept under the custody of central bank.

 Islamization:

Since 1981 the state bank of Pakistan has prepared a program to introduce Islamic banking system.

 Inflation and deflation:

During inflation central bank contracts the amount of credit and increases the amount of credit and currency notes to stabilize the price level

 Stability of exchange rates:

The central bank stabilizes the foreign exchange rates.

 Grants for specialized institutes:

State bank of Pakistan provide grants to specialized financial institutions like ZTBL,ICP,PICIC,SME.

 Regulation of credit:

Central bank is responsible of regulation of volume of credit in economy.

 Export promotion:

State bank of Pakistan has introduced certain export schemes for promotion of exports

 Training services:

It provides training facility for the less experienced staff working in different banks.

 Exchange control:

The central bank manages foreign exchange transactions and enforces exchange control regulations.

 Others:

Central bank performs some other duties as well. It publishes annual reports of economic development and activities, conduct surveys, deals with international agencies like World Bank, IMF, Asia Development Bank.

Define Central Bank. State the origin and growth of central bank. What is credit control, explain the various methods of credit control followed by the central bank of a country?

Definition of Central Bank
In every country, there is a principal bank who is responsible for guidance and regulation of the financial system in the country. Such type of bank is known as Central Bank.
A Central Bank may be defined as
The principle banking institution of a country operating under some degree of state control and entrusted with the special responsibility of maintaining economic equilibrium and stability in the prices and in the overall interest of the country.
Nature of Central Bank
From the above definition we find the following main features of Central Bank:
1. The Central Bank is the principle banking institution of a country.
2. It is operated under some degree of state control. But in practice, the structure of central banks vary from country to country. In U.K. and France, the bank of England and Bank of France are solely owned, managed controlled by the state on the other hand, Federal Reserve System, the Central Bank of the U.S.A is owned, managed and controlled by the private shareholders. Of course, there are some central banks which are owned, managed and controlled jointly by the Government and the private shareholders. e.g., State Bank of Pakistan before nationalisation 1974.
3. The Central Bank is entrusted with the responsibility of maintaining economic equilibrium and stability in prices by controlling money supply and volume of credit with in the country.
4. A central bank does its works not for making profit but in the overall interest of the country.
5. The central bank is reservoir of credit. All other banks can look to it for accommodation.
Functions of Central Bank
The central bank is the pivote of all the banking system. The chief functions of a central bank may be described as follows:
1. Issuing Notes
The central bank has the sole responsibility and monopoly of issuing notes within the country. It is the sole currency authority. The central bank is required to keep a certain percentage of gold reserves against issue of notes. Usually, it keeps 30% to 40% gold as reserve. It undertakes expansion and contraction of the currency along with business demand. Money supply is raised by issuing notes. On the other hand, it can decrease money supply by selling government securities. By enjoining monopoly of note issue it gives uniformity to the system of note issue in the country.
2. Governments Banker
The central bank acts as a financer of the government of the government. It is a government banker not only collecting and paying money on behalf of the government but it also manages the public debts. It keeps the government funds in the custody free of interest. On the other hand it gives loans to the government without limitation of amount. It is the fiscal agent of the government. It helps the government in designing a fiscal policy for the country so it’s also plays the role of financial adviser to the government.
3. Banker’s Bank
It acts as the custodian of cash reserves or balances deposited compulsorily by the scheduled banks. Either by law or custom the member banks are to keep certain portion of their deposits with the central bank as reserve. For example in our country the scheduled or commercial banks are to keep cash reserve with State Bank of Pakistan to the extent of 5% of their deposits. Central Bank also provides short term credit to commercial banks by rediscounting first class bills and other securities. So it plays the role of banker’s bank.
4. Management of Gold Standard
Where the currency of a country is on gold standard, it is the responsibility of the central bank to manage the gold standard in order to control the stability of exchange rate. It regulates and checks the movement of gold in the country. The management of gold standard is not so vital and important these days.
5. Credit Control
It is another important function of central bank. It controls the flow of credit in accordance with the needs of business in the country. Credit plays an important role as the medium of exchange, so its expansion or contractors effects the price level in the country. In order to maintain stability in the price level, central bank controls the volume of credit. Usually, it controls credit by changing bank rate, purchasing and selling securities and by changing reserve rates of the member banks. In this way central bank attempts to control the volume of credit and establishes the business conditions in the country.
6. Clearing House
It is the Clearing House of the bankers. Under this function central bank of facilitates the settlement of bills and cheques of other banks.
7. Exchange Control
It is the responsibility of the central bank of control foreign exchange and maintain the rate of exchange. It purchases and sells approved foreign currencies at the current or fixed rate. It also acts as the custodian of foreign exchange reserve.
8. Lender of Last Resort
As lender of last resort, it is implicit that the central bank assumes the responsibility of meeting directly or indirectly all reasonable demands for accommodation by commercial banks in the times of difficulties and crises. If any commercial bank faces any serious financial difficulty for any reason, it is central bank who comes forward to help it.
9. Custodian of National ReserveThe Central Bank acts as the trustee of the entire economy of the country and thus keeps in its custody all national reserves in form of gold, silver and securities.
Credit Control
Credit plays an important role in maintaining and changing the price level as medium of exchange. It is the responsibility of the central bank to regulate the volume of credit and its direction to maintain stability in the price level.
Following are the main objectives of credit control by central bank
1. Safe Guarding the Gold Reserves
The central bank adopts various measures of credit control to safe guard the gold reserves against internal and external drains.
2. Stability in Price Level
Credit control provides stability in price level in the country.
3. Exchange Stability
Another objective of credit control is to achieve the stability of foreign exchange rate. If the foreign exchange rate is stabilized, it indicates the stable economic conditions of the country.
4. Stability in Investment and Production
Control of credit by central bank also provides stability in the investments and production by making price level stable.
’5. Cooperation
Control of credit is done to promote cooperation with other countries for the purpose of maintaining world economic stability.
Methods Or Techniques of Credit Control
The central bank usually controls the volume of credit through the two types of methods, quantilative and quantitative.
1. Bank Rate Policy
It is also known Discount Rate Policy. Bank rate is the rate of interest which is charged by the central bank on rediscounting the first class bills of exchange and advancing loans against approved securities. This facility is provided to other banks.
Importance
The bank rate is different than the money market interest rate. The charges in bank rate are followed by other banks in the country in changing their interest rate. If the bank rate is raised by central bank, other rates of money also go up. Conversely, the market rate of interest and other rates go down, when central bank decreases its bank rate. These changes effect the supply of and demand for money. Borrowing is discouraged when the rate of interest increases and encouraged when the rate decreases.
Effects of Changes in Bank Rate
The changes in the bank rate may cause the following effects.
a. Changes in Deposit Volume
When the central bank increases the bank rate, commercial banks also increase the rate of interest and consequently the deposits of the banks also increase. Conversely, when bank rate is decreased the deposits of commercial bank also decrease.
b. Controls the Borrowings
When the bank rate is raised, the rate of interest and discount of other banks goes up margin of profit falls and it discourages the businessmen to borrow money and thus the volume of loans and discounting of bills is minimised. On the other hand a fall in the bank rate encourages loans and bill discounting.
c. Changes in the Prices of Shares and Securities
A rise in bank rate makes shares and securities in the market cheaper and conversely, by a fall in the bank rate, shares and securities becomes dearer.
d. Changes in the Volume of Speculative Business
A rise in the bank rate restricts the volume of credit and discourages speculative business. But the volume of speculative business is expended due to the increase in the credit supply.
e. Changes in the Foreign Trade
A rise in the bank rate encourages export and discourages import. A fall in the bank rate encourages import and discourages export. When the bank rate is raised, the demand for home currency goes up and the demand for home currency falls within the bank rate.
f. Changes in Balance of Payment
Due to rise in the export trade, a rise in bank rate causes a favourable balance of payment. But a fall in bank rate causes an unfavourable balance of payment.
2. Open Market Operation
The open market operation means the buying and selling of securities by the central bank in order to influence the money and credit supply in the country. This technique is effective up to some extent in both conditions of inflation and deflation.
3. Change in Reserve Ration
The member banks of central bank are required either by law or custom to keep a certain percentage of their deposits with the central bank. It is called as Cash Reserve Ratio. The central bank may controls credit by changing the reserve ratio. When the reserve ratio is increased the member banks to some extent are discouraged to bank money. When this ratio is falls, the member banks are encouraged to expend credit.
Clearing House
The central bank manages and supervises the clearing house to facilitate the clearing of cheques between banks. Every banker usually receives number of cheques drawn on other banks from his customers as deposits. In other words banks receives cheques drawn on other banks from their account holders. As a result, there arises inter bank indebtedness. For example National Bank of Pakistan receives deposit of cheques worth Rs. 6,000/= drawn on Habib Bank Limited, Habib Bank on the other hand, receives cheques worth Rs. 5,000/= drawn on National Bank of Pakistan. Thus National Bank owes Rs. 5,000/= to Habib Bank and Habib Bank owes Rs. 6,000/= to National Bank.
Interbank indebtedness’s are settle through a central organisation known as Clearing House. “A clearing house is a general organisation of banks of a given place, having for its main purpose, the offsetting of cross obligations in the form of cheques. The indebtedness’s of the member banks are settled only by paying the differences. Generally central bank of the country performs the function of clearing house. In Pakistan, State Bank of Pakistan performs the duty of clearing house.
Role of Central Bank in Economic Development
The economic stability of a country is solely dependent on the Central Bank. It is the only financial institution in the country which is responsible for regulating the banking and monetary system of the country. The need of a central bank in a country is essentially felt considering the following services rendered by a central bank for economic development of a developing country.
1. Capital Formation
Economic progress of a country requires adequate amount of capital. Capital is required for agriculture, industrial and commercial development. But in a developing country like Pakistan. It is a chronic problem to procure capital. Central Bank as a national institution plays prime role in capital formation in the interest of the nation as a whole. As the guardian of the money market, it regulates the capital flow in the country in proper form and suitable time.
2. Credit Control
Credit is one of the most important source of financing trade and industry. The central bank as the controller of credit can encourage a particular sector of economy by adopting selective credit control.
3. Developing Banking System
As a guardian of all banks, the central bank works for the development of banking system of the country.
4. Protecting Interest of the Depositors
The central bank protects the interest of the depositors in banks by guiding, controlling and checking the member banks operations in the country.
5. Stability in Prices
The central bank keeps the price level stable in a country by controlling money and credit supply.
6. Advice to the Government
The Central Bank extends valuable suggestions and advices to the Government in respect of economic and monetary policies.
7. Personnel Training
The central bank in some countries provides training facilities to the bank personnel.

4. Discuss the role of central bank in the economic development of Pakistan. (See from book)

Role of central bank in the country:

In the developing countries, the central bank has to play a much wider role. Besides performing the traditional functions, the central bank has to undertake responsibility of economic growth with stability in these economies. Moreover, since the developing countries do not have well- organised money and capital markets, the central bank has a crucial function to develop the banking and financial system of the country. The central bank performs the following developmental and promotional functions in the developing countries.

1. Traditional Functions:

The central banks in the developing countries perform both traditional and non-traditional functions. The traditional functions of the central bank are : having the monopoly of note-issue; acting as banker to the government; serving as bankers' bank; functioning as the lender of the last resort; controlling and regulating the credit; and maintaining the external stability.

2. Economic Growth:

The central banks in the developing countries should aim at promoting the process of economic growth. Economic growth requires sufficient financial resources. The central bank can ensure adequate monetary expansion in the country. Moreover, as a banker to the government, the central bank can provide funds for initiating investment in the public sector.

3. Internal Stability:

Along with the objective of economic growth, the central bank should also attempt to maintain internal price stability. The developing countries are susceptible to inflationary pressures mainly due to supply -in elasticity’s in the short period. The central bank should adopt such a monetary policy that can control inflationary tendencies and ensure price stability.

4. Development of Banking System:

The developing and underdeveloped countries do not have well-developed banking system. In such an economy, the central bank should not only take measures to develop an integrated commercial banking system, but also should not hesitate undertaking directly the commercial banking functions.

5. Branch Expansion:

In developing countries, the commercial banks generally concentrate their branches in the urban areas. In order to extend credit facilities to the agricultural sector, the central bank should prepare programme for branch expansion in the rural areas.

6. Development of Financial Institutions:

Development of the leading sectors of the economy such as agriculture, industry, foreign trade, etc. requires long-term finances. For this, the specialised financial institutions should be established which provide term-loans to these sectors.

7. Development of Banking Habits:

Through its various credit control instruments (i.e., bank rate, variable cash-reserve ratio, etc.) and by providing discounting facilities to the commercial banks, the central bank exercises full control over the activities of commercial banks. This creates public confidence in the banking system and helps in the development of banking habits of the people.

8. Training Facilities:

A major difficulty in developing the banking system in developing countries is the lack of trained staff. The central bank can provide training facilities to meet the personnel requirements of the banks.

9. Proper Interest Rate Structure:

The central bank can help in establishing a suitable interest rate structure to influence the direction of investment in the country. In underdeveloped countries, a policy of low interest rate is necessary for encouraging investment and promoting development activities. Again, by adopting different interest rates, the central bank can increase productive investment and discourage unproductive investment.

10. Other Promotional Roles:

The central bank can provide a number of other promotional facilities. For example, (a) it can adopt policies to provide help to the various priority sectors, such as agriculture;, cooperative sector, small scale sector, export sector, etc. (b) it can provide guidelines to be followed by the planners about some definite patterns of economic and investment policies; (c) it can publish information regarding the state of the economy and promote research in money and banking.

Conclusion:

In short, the central bank has to play not only regulatory, but also developmental role in the developing countries. In the words of Planning Commission of India, the central bank has to take "a direct and active role (a) in creating or helping to create the machinery needed for financing development activities all over the country, and (b) in ensuring that the finance available flows in the directions intended."

5. Define Banker and Customer? Discuss the nature of relationship between banker and customer?

INTRODUCTION:

The relation between the banker the customer is of utmost important. Both serve the society to grow and the economy to expend. Before we discuss the relationship between the banker and the customer it seems necessary that the two terms ‘banker’ and ‘customer’ must be clear in our mind.

BANKER:

A banker is a dealer in capital or more properly a dealer in money. He is an intermediate partly between the borrower and the lender. He borrows from one party and lends to another.

DEFINITION:

“A banker is a dealer in capital or more properly a dealer in money. He is an intermediary party between the borrower and the lender. OR

“A bank collects money from those who have it spare or who are saving it out of their incomes. It lends money to those who require it.”

CUSTOMER:

A customer is a person who maintains an account with the banker.

DEFINITION:

“A customer is a person who has some sort of account, either fixed or current account or some other relationship with a banker. OR

“Any person may become a customer as soon as he opens an account with the bank.”

“RELATIONSHIP BETWEEN BANKER AND CUSTOMER“

The relationship between banker and customer can be stated in two groups:

a- General Relationship

b- Special Relationship

Banker Customer Relationship

General Relationship Special Relationship

Debtors & Creditor Principal& Agent Mortgagor & Mortgagee

Pledger & Pledge Bailor & Bailee

Financer & Finance Advisor & Advisee

Assignor & Assignee Principal Debtor & Surety

Indemnifier & Indemnity- holder Reference & Referee

Modarib & Aamal Cordial relationship Purchaser & Seller

GENERAL RELATIONSHIP:

Debtors & Creditors:

1 When customer deposits his money with the bank:

The bank becomes the debtor of the customer and customer becomes the creditors of the bank.

2 When loan is taken by the customer from bank:

Then the customer becomes debtor and bank as creditor.

SPECIAL RELATIONSHIPS

Principal and Agent:

The customer is principal and the banker is the agent, when he collects cheques, bills of exchange, drafts, dividends and buys & sells stock and shares on behalf of his customer.

Mortgager & Mortgagee:

When loan is taken against immovable property ( land and building) the relationship is created that of mortgager and mortgagee. The customer is mortgagor and banks as mortgagee.

Pledger &Pledgee:

When the customer pledges movable property with the banker as security for loan, he becomes the pledger and the banker as pledge.

This relationship is also known as pawnor & pawnee.

Bailor & Bailee:

The bank accepts valuables for safe custody from the customer. In this case customer is bailor and the banker as bailee.

Financer & Finance:

When bank advises his client on any important financial matters, bank becomes advisor and client becomes advisee.

Advisor & Advisee:

When bank advises his client on any important financial matters, bank becomes advisor and client becomes advisee.

Assignor & Assignee:

When any obligation or property is assigned to the bank then the bank becomes assignee and client becomes assignor.

Principle Debtors & Surety (guarantor):

If bank provides guarantee for its customer to a third party then the bank is called surety and the customer is called the principal debtor.

Indemnifier and indemnity holder:

“Indemnity is a contract where one party promises to save the other party from the loss caused to him by the conduct of the promisor himself or by the conduct of any other person.”

When the bank makes a contract of indemnity with the customer, bank becomes indemnifier and customer becomes indemnity holder.

Reference and Referee:

When bank informs the state bank or any other authority about the financial status of a customer, bank is called referee and customer is called reference.

Modarib and Aamal:

When a banker provides finance to customer under the agreement of modaraba the relationship becomes that of modarib and aamal. The banker being modarib and the customer aamal.

Cordial relationship between Banker & Customer:

Sometimes the banker is in a position to established cordial relation with this customer by providing reliable and confidential information about the general standing of the people.

Purchaser and Seller:

Under deferred payment sale on mark-up mode of financing. The banker is the seller of the goods financed and the customer is the purchaser of the same.

how the relations may be terminated between banker and customer?

A -Termination by Customer

1. Rate of interest not acceptable:

The customer may close his account if the rate of interest is not acceptable to him.

2. Lack of proper facilities:

If the banker does not give him such facilities as are offered by other banks then the customer may close his account.

3. Lack of services:

If the customer is not satisfied with the services of the bank then he may close his account.

4. Lack of confidence:

If the customer confidence in the bank is declining he may close his account.

5. Change of place of residence:

If the customer changes his place of residence he may close his account.

B - Termination by Banker

1. Closing of account:

The banker may close the account of a customer after giving him reasonable notice if:

2. Customer is convicted of forgery of cheque:

If the customer is convicted of forgery of cheque or bill; the bank may close his account.

3. Habit of drawing cheques:

If he is habit of drawing cheques without sufficient fund in the account, the bank may close his account.

4. Account is not worth full:

If the customer account is not worth full, the bank may close his account.

5. Banker fears:

The banker fears that he would be harmful to him. In this case the bank may close his account.

Stopping payment

The important legal grounds for stopping payment in the account are as follows;

1. Death of a customer:

The banker shall close the account on receiving the intimation of the death of customer.

2. Insolvency of a customer:

On the receipt of notice of insolvency of a customer, the bank cannot honour the cheque drawn by the customer.

3. Insanity of a customer:

If an insanity of a customer is established, the bank will close his account.

4. Garnishee order:

If a company is winding up the order of the court, the banker then cannot honour the cheques of the customer.

Discuss the rights and duties of customer and banker?

CUSTOMER’S RIGHTS AND DUTIES

Rights to draw a cheque:

A customer has a right to draw the cheque for the purpose of withdrawing his balance. He has a right to draw the cheque according to his credit balance.

Right to receive periodical statement:

A customer has a right to receive the statement of accounts from the bank. He receives the statement for knowing his balance or for other purpose.

Right of correction:

In case of over crediting or over debting a customer has right to get his account corrected.

Right to sue bank for wrong dishonour:

If a bank dishonours cheque without any reason then customer has a right to file a suit against the bank.

Right to sue bank for disclosing secret information:

A customer has a right to sue and demand compensation if the bank fails to maintain the secrecy of his account.

DUTIES OF CUSTOMER

Presentation of cheque:

It’s the duty of customer to present the cheque and other negotiable instrument during business hours. If cheque is presented after the business hours then bank may refuse to make the payment.

Cheque book in safe custody;

It is the duty of the customer to keep the cheque book in safe custody. So that no other can misuse it.

Report about theft:

It is the duty of the customer to report to the bank if cheque book is lost or theft. So that no other can misuse it.

Careful filling of cheques:

It is the duty of the customer to fill the cheques with utmost care. Because if there is an error in filling, then bank may dishonour the cheque.

Disclose forgery:

If a customer finds any forgery in the amounts of the cheque issued by him, then it should be reported to the bank. So that bank will not make the payment.

BANKER’S RIGHTS AND DUTIES

RIGHTS OF BANK:

Right of lien:

“Lien means the right to retain a property belonging to some other person until the debt payable by him has been paid.”

The banker has a lien on the goods and securities of the customer, to retain until he pays his dues.

The bank can sell such items after giving proper notice.

Right of set off:

“Set off means adjusting the debit balance against a credit balance.”

It is the legal right of the bank to adjust the debit balance against the credit balance of the same borrow.

Charge interest or commission:

The bank has a right to claim bank charges and commission as compensation for the services provide. The services include collection of cheques, bill of exchange, dividend, etc.

Incidental charges:

The banker has the right to charge the incidental charges.

DUTIES OF BANKER:

Honour cheque:

It is the duty of the banker to honour the cheques drawn by customers. The cheques must be drawn properly and presented to bank during working hours.

Maintain secrecy of accounts:

The bank is bound to maintain the secrecy of his customer account. If the information is disclosed, the business of the customer may suffer in loss. However, the bank can disclose it under special circumstances like compulsion of law, etc.

Execution of standing orders:

The bank abides by the standing orders of the customers in making payment on his behalf such as club, library, insurance premium, etc.

Safe custody:

The banker should take care of the property deposited with it by the customer with or without charges.

Inform about closure of account:

It is the duty of the banker to inform about the closure of account.

3. Discuss the general principles of banking.

Prepare from sardar aslams book. Discuss the securities and types of securities. Prepare from sardar aslams book

Part Three Foreign Exchange

4. Define foreign exchange. Discuss the methods of international payment. ( see book)

5. Define foreign exchange? What are foreign exchange transactions and what are the factors influencing on the foreign exchange?

Foreign exchange means:

1. The currency of the other country.

2. Is a system where by international payments are made.

3. It refers to the rate at which banks buys and sells foreign exchange.

“Foreign exchange transactions”

Foreign exchange transactions are usually put into four categories.

1. Current transactions:

Current transactions are further divided into two classes.

a. Visible trade:

Visible trade is based on the import and export of physical goods.

b. Invisible trade:

The transactions which have direct relation with the import and export of goods.

2. Capital transactions:

Capital transactions are different from the financial transactions, when a country grants aid or give loans to other country, it will be a capital transaction.

3. Short term financial transactions:

If the citizens of one country due to political or economic reasons. Transfer their foreign exchange reserves to other. Country for a short period. It is then said to be a short term financial transactions of a foreign exchange.

4. Working balances:

The commercial banks some time keeps their working balance in foreign money in another country for earning higher profit or fear of devaluation in the home currency.

“Factors influencing foreign exchange”

Main factors:

The main factors which influence the movement of foreign. Exchange from one country to another country are as follow:

1. Leads and legs:

If a country aspect that change in the rate of exchange is likely to be in his favours, there will be a movement of funds to other country.

Effort will also be made to create delay in the settlement of debits. Payments for the imports will be made before the fall due. On the other hand, if a country fears that a change in the rate of exchange is likely to be unfavourable to it than attempt will be made to secure early payment of debts. Efforts will also be made to make payment to the creditor country before the fall due. This factor that influence the foreign exchange is known as leads and legs.

2. Arbitrage:

The demand for and supply of foreign exchange is also influenced by the Arbitrage operation which may be, “Stock Arbitrage” and “Money Arbitrage”. Arbitrage is a process of buying things in one market and selling them at the same time in another market in order to take advantage of the price difference.

3. Political and economic condition:

If there is a political instability and labour unrest in the country, the industrial growth will be adversely affected. There will be a movement of foreign capital outside the country. In case government of the country encourages private enterprises and gives liberal concession, the growth of the exports will be increase and the supply of foreign exchange will also increase.

4. Seasonal factors:

The rate of foreign exchange is also affected by the seasonal fluctuations in the exports in the exports and imports of goods. The central bank and the other foreign exchange dealers try to smooth down the fluctuations in the rate of foreign exchange by purchasing the foreign exchange when the exports are its peak and sell the help up foreign exchange when the imports are its peak.

Describe in brief the method of making international payments?

The main methods which have been adopted for making international payments through the banking system are as follow:

1. Bill of exchange:

It is used for making international payments for the purchase of goods, services and capital transactions. The creditor can draw the bill of exchange on debtor or on his bank under the terms of L.C.

2. Bank draft:

The debtor can make the foreign payment by purchasing a bank draft from the bank. The draft is dispatched by the debtor to the creditor. He can claim the amount of draft from the correspondent bank.

3. Cheques:

The debtor can draw a cheque on his bank. The cheque is send to the creditor. The creditors deposit the cheques in his account. The creditor’s bank collects the amount of the cheques from the debtor bank. This method is used between the friendly countries.

4. Credit cards:

The debtor makes the payment to his bank, the bank issues a credit card. The debtor keeps the card with himself. When he visits to foreign countries, he can get foreign currently against this card. The debtor makes the payment personally to the creditor.

5. Letter of credit:

The importer opens an account with his bank in favors of exporter. The amount is paid in the bank. The bank issues a L.C. this L.C send to the exporter’s bank for making payment on amount of goods imported.

6. Traveller’s cheques:

Travellers cheque is an order drawn by a bank upon a self to pay a specified amount of money on demand to the purchaser of traveller cheque. The paying bank after comparing the signatures of the purchaser of a cheque, and makes the payment.

7. Telegraphic transfer:

The debtor makes the payment to the banker. The banker sends a telegraphic massage to his correspondent’s bank to make the payment. The bank can send the massage by cable to overseas countries. His method is the quickest method of payment.

6. What is exchange control? Methods and objectives of exchange control

What is exchange control? Various methods of exchange control.

Exchange control:

Is a system through which the rate of different foreign currencies is determined.

Methods of exchange control:

In order to achieve objective of the exchange control. Some methods are applied which are defined as:

1.“UNTILATERAL AND BILATERAL METHODS”

In unilateral; method the government apply exchange control without consultation with the other governments. But in bilateral method a government applies exchange control with the mutual understanding and consultation with the other governments.

Unilateral methods:

1. Exchange pegging:

Exchange pegging refers to the policies of fixing the exchange value of the currently according to the some deserved rate. When exchange rate is fixed higher than the market rate, it is called pegging up and if the exchange rate known as pegging down.

2. Standstill agreement :

In this agreement the relationship between two countries in term of capital movement remain unchanged. The debtor country is allowed to replay loan in instalment or the short term loans.

3. Compensation agreement:

According to this agreement goods of equal value are exported and imported from each other country. Hence, no balance is left and no foreign exchange is involved.

4. Payment agreement:

In this method Creditor country will export more and more to debtor country and the creditor will import less and less from the debtor country to settle the account.

5. Foreign exchange rationing:

Government has the right to direct all the exporters and other investors to surrender all foreign exchange with the central bank. Foreign exchange so collected can be retaining by fixing quota of the amount and the rate of foreign exchange.

6. Blocking of foreign exchange:

During emergency a country may block the foreigner to transfer their funds in their home accounts.

2. BILATERAL METHODS:

1. Cleaning agreement:

When two countries agree to settle their accounts in their home currencies, through the central bank, this method is known as cleaning agreement.

2. Moratorium application:

A legal authorization to debtor to stop payment is known as moratorium application. It is used to solve temporary problems of payment. A country can stop to make payments for imports and interest on capital.

Discuss the import and export latter of credit.

What is import L.C and export L.C?

Import letter of credit:

In presence days. Most of the foreign trade payment are made through L.C. the trade is very much finance by these letters. L.C have provided a good facility both the importer and exporter. The importer, have the confidence in bank promise to make the payment rather than on the importer for his imports. Moreover the importer will make the payment only when the goods are shipped and the relevant documents are received. On the issuance of an import L.C, the importer will fill the application form all the relevant information regarding the imports will be based on the contract of the sale and include important items of the contract like. Value of the imports, place of shipment, and unloading details. On the satisfaction of the bank for information supplied, it will signed and acceptance agreement bounds the importer to make the required payments as and when he will be director.

Export letter of credit:

In foreign trade transactions, there is a risk of payments of goods exported because the exporter is unaware of the credit standing of the importer. Naturally, he will follow a way by which he is satisfied and be sure to have his payment. The commercial bank in foreign country undertakes the obligation to make payment to the exporter, which is minimizing the rise of the exporter. Hence a commercial L.C is issued by the importers bank to the exporter for this purpose.

Receiving the L.C from the issuing bank, the exporter will examine the following information

a. Advise number:

The L.C must have an invoice number for further references and identification given by the advising bank.

b. Value of the L.C:

The value of the merchandise. Shipped and the amount of the L.C to be paid by the bank.

c. Importer’s name:

The name of the importer as mentioned in the L.C must be checked by the exporter.

d. Time period of payment:

In sight a L.C, the payment will be made immediately by the issuing bank, but in case of time lender of credit, the payment will be made after some mentioned period of time.

e. Shipping document:

The exporter must carefully prepare the shipping documents in accordance with the terms of the L.C. in case of the any defect the issuing bank may refuse to honour the draft.

f. Expiry of L.C:

L.C must certain an expiry date. Hence it is very necessary that there should be a reasonable time with the exporter to arrange shipment.

What is letter of credit (L.C)? Describe its advantages?

The import and export of goods throughout the world is usually arranged by means of L.C. the importer requests his bank to open a L.C in favors of the exporter. The bank issues a L.C to the exporter as a requested. This L.C is a promise or guarantee by the bank to honour the bill drawn by the exporter promised the conditions of the L.C are fulfilled.

Paged has define a L.C in the following words:

“A L.C is an undertaking by a bank to meet the draft drawn to it by the beneficiary of the credit in accordance with the conditions laid down there in”.

The importance and advantages of L.C.

Advantages to the importer:

a. Satisfying the exporter:

An import of goods from abroad will have to satisfy the exporter that he will be paid for. The L.C enables the importer to satisfy the exporter that he will receive the price of the goods dispatched to the importer.

b. No risk about sales contract:

The importer doesn’t take any risk about the sale contract. He many are sure that the terms of the sale contract as mentioned in the L.C will be fully fulfilled, because of the opening as will be as in term diary bank are responsible for this.

c. Facility of payment:

The importer has not to pay the price of goods purchased until he receives the document of the goods by means of which he can tape the delivery of the goods.

Advantages to the exporter:

a. Security for payment:

A confirmed L.C provides maximum security to the exporter for the payment of the sale price. In view of the guarantee of the opening as well as confirming bank, he can be sure of receiving the price of his goods.

b. Immediate payment:

The exporter presents the documents to the issuing bank after the shipment of goods. The exporter bill is immediately paid by the issuing bank.

c. Pre-shipment finance:

Sometimes the exporter can get pre-shipment finance for the packing. Movement and even the purchase of the merchandise.

d. No concern after payment:

After receiving the payment draft from the issuing bank, the exporters have no further concern with the transaction.

Advantages to the banker:

a. Source of income:

The financing of imports and exports through issuing L.C is an important source of income of the banks. The issuing and confirming of L.C drawn under term for which bank charges reasonable amount.

b. Ownership of the goods:

Until the payment of the amount is due, the ownership of the goods remains with the bank.

what are the kinds of Letter of credit?

Kinds of letter of credit

1. Revocable L.C:

A revocable L.C is that which can be cancelled or modified or amended by the opener (opening bank) without the consent of his beneficiary (exporter).

2. Irrevocable L.C

An irrecoverable L.C can be cancelled or amended or modified by the opening bank only with the consent of parties involved.

3. Confirmed Irrevocable L.C:

It cannot be amended or cancelled even if there is consent among the parties involved.

4. Red Clause L.C.

This L.C authorizes the exporter’s bank to grant an advance to seller for packing, handling or purchase of goods.

5.Green Clause L.C:

This is an improvement over the red clause letter of credit. In addition to the facilities permissible under red clause L.C. it allows also the storage facilities.

6. Sight L.C:

On shipment of goods to the buyer, the sellers receive the bill of lading then complete the documents; seller gives these documents to the advising bank the advising banks see that whether these documents are in order. If these documents are in order then payment is made to the seller.

7. usance L.C

If in the above case the payment is made after some days or months then such type of L.C is called usance L.C.

Non funded L.C.

In case of non-funded L.C the buyer’s funds are involved in making the payment to the seller. Since the bank funds are not involved it is termed as non-funded L.C.

The issuing bank creates a contingent liability. In this respect which is dependent upon the buyer’s default.

Funded L.C.

In case of funded letter of credit the issuing bank makes the payment to the seller out of its own sources. Therefore it cannot create a contingent liability.

Clean L.C.

If there are no conditions to the bill and issuing bank makes payment upto the limit of credit is called the clean L.C.

Documentary L.C.

The draft drawn under this L.C. is accompanied by different documents relating to the merchandise.

Transferable L.C.

It is used where original beneficiary (exporter) is not a manufacturer.

Exporter is middle man.

L.C. is transferable to second beneficiary.

Exporter receives commission in this case.

Transferable is transferable in one time.

What do you understand by the term letter of credit? OR Name the parties involved in letter of credit? OR Briefly discuss the operation of L.C?

INTRODUCTION:

Commodities are traded through importer and exporter. Both the parties may be unknown to each other. When an importer is not well known to an exporter, but the transaction is being conducted directly between importer and exporter, and then uses the services of the bank through a letter of credit.

A letter of credit is a mean of making payment for the import of goods. It is issued by buyer bank in favour of the seller. The terms and conditions of the sales are also stated in it. Letter of credit is also known as “documentary credit”.

DEFINITION

Simple Definition:

“It is a written undertaking given by a bank to the seller at the request and on the instructions of the buyer to pay at sight or at a determinable future date up to a stated sum of money within a prescribed time and against stipulated document”.

According to Frank:

“A letter of credit is a written instrument issued by the buyer’s bank authorizing the seller to draw in according with certain terms and conditions”.

According to Pritchard:

“A letter of credit is a commitment on the part of the buyer’s bank to pay or accept drafts drawn upon it provided such drafts do not exceed specified amount”.

Parties Involved in a Letter of Credit:

There are 4 parties involved in a letter of credit. These are as follows:

Importer Or Buyer Or Opener:

The person who purchases the goods from other country and at whose request the letter of credit is opened is called the opener or the buyer.

Exporter or Seller or Beneficiary:

He is the person in whose favour; the latter of credit is opened.

Opening or Issuing Bank:

It is the bank which issues the latter of credit. It is the importers bank.

Paying bank or Negotiating Bank:

The bank which makes the payment to the exporter after receiving the letter of credit is called paying or negotiating bank. It is the exporter’s bank.

PROCEDURE OF OPENING THE LETTER OF CREDIT

Mutual Contract:

First of all importer and exporter enters into a mutual agreement. The importer who is in need of something approaches an appropriate exporter by way of cable, mail or internet. Both the parties come to an agreement.

Performa invoice:

Exporter then prepares an importer document known as Performa invoice. In Performa invoice all details about the contract regarding name of product, its type, quality brand, name, colour etc are all stated specially. This Performa invoice is sent to importer by the exporter.

Preparation of Documents:

Now the importer will prepare all the contract documents. The importer will get Performa and will provide all the particulars of contract in the Performa. The documents required in Pakistan are:

Valid importer license.
The insurance cover note.
An indent or Performa.

Contract with the Bank:

The importer will contract with bank and will provide all the documents regarding the agreement and will request for the letter of credit.

Application Form:

The bank will provide an application form if it found that document is correct. The importer will submit the application form with necessary details discussed between the importer and exporter like shipment insurance and total value of goods.

Undertaking from importer:

The importers bank obtains an undertaking from the application that he will purchase the documents at mark-up price prescribed by the SBP.

Margin Requirements:

State Bank of Pakistan decides the percentages of amount to be paid to the issuing bank by the importer. This amount is called margin requirements.

Issuance of L.C.

The bank issuance the LC. After the completion of all the form. The bank prepares its four copies and those are distributed among the four parties.

Dispatch of letter of credit:

After the completion of copies of letter of credit the bank sends the duplicate copy and original copy to the exporters bank and request for sending the original copy to the exporter and to retain the duplicate copy in his own file.

Obtaining the Documents of Shipment:

The exporter makes the arrangement for the shipment of the goods to the importer after the goods he got the receipt from the shipping company. This receipt is called bill of lading.

Submission of bill and documents:

The exporter submit the shipping documents in his bank. The bank checks the document and sends to the importers bank.

Term of payment and negotiation:

The negotiation bank will examine the documents carefully if the documents are in order and the terms & conditions of the L.C. have been fulfilled, so far as the exporter concerned.

Dispatch of forwarding note to opening bank:

The negotiating bank will negotiate the draft (bill) to the opening bank. Now the documents will be forward to the opening bank in Pakistan.

Clearance of Goods:

Now the importer has in his possession the bill of lading means of which he can get the goods clear through the clearing agent.

Part Four Finance

9. Define finance. Discuss importance and functions of finance categories of finance.

(See book)

10. What are the various sources of business funds?

The sources of the business funds can be classified into three group:

1. Short term finance.

2. Long term finance.

3. Medium term finance.

1. Short term finance:

When the owner has not enough money to meet current expenses like payment to creditors salaries. Rent and measure etc. He can borrow the amount from others. The revenue may be receipt after some time. But the expenses are paid on daily basis. Therefore, the sources of short term finance are used meet the business obligation.

Sources:

Commercial bank:

The banks provide O/D facility for few months. It is used to pay the current liabilities. The commercial bank also provides “cash credit” and loan for the business.

Finance corporations:

The finance corporations help the business by rendering short term funds. There are small scale organizations as compared to the commercial banks.

Trading bills:

The export and import trading bills can negotiated and discounted to provide funds in advance of actual due date of the settlement by some business people.

Customer advances:

The customer can supply short term funds. The customer can makes full payment or particle for goods before receiving the delivery of goods.

2. Long term finance:

Long term finance is usually for permanent basis. The owners provide funds on payment basis and the creditors through long term funds.

Sources:

Capital:

The amount contributed by the owner is used in the business. The large amount is provided in the shape of capital. Additional amount can also be provided by the owner.

Retained profit:

The profit retain in the business can built up funds of the business. The retain profit income can be used in business or may be to earn further.

Issue of right shares:

A public company can increase its capital by issue of right shares. The right shares are offered to the shareholders in proportionate to their present holding often at a price which is a less than the current price in the stock exchange.

Debentures:

The debentures are long term loan against of the assets of the company. The rate of interest is fixed. The time period of repayment of debenture is also fixed.

Ploughing back of profit:

Ploughing back of profit means the use of profit of the business for its development. Ploughing back of profit is a useful source of getting extra capital for building and expansion of the business. In ploughing back of profit, there is no problem of taking loans and no burden of interest on the business.

3. Medium term finance:

Medium term finance is defined as money raised for a period from one to five years. It is required for the repair and modernization of the machinery.

Sources:

Commercial banks:

Commercial banks are now the important source of providing medium term loans. Loans are generally given against some securities of assets, the loan is credited to account of borrowers. He can withdraw the whole amount on instalment basis.

Debentures:

A company may raise a part of medium term capital by issuing debentures. It is an instrument issue by the company acknowledgement debt under its common seal. The terms and conditions of loan are written on the documents.

Loans from specification institutions:

Medium term finance are also provided to the business concerned of specialized credit institutions like (PLCLC, IDBP, ADBP) etc.

11. discuss the characteristics of owners, creditors and customers positions.

Creditor and owner’s position with regard to risk, income and control in the business?

The owners make permanent investment of fund in the business. The creditors on the other hands, advance loan in the business for short, medium, and long term in the form of money, property. First of all, we will discuss about the position of owner as regard risk, income and control in the business.

Owner position with regard to Risk, Income, Control

Owner position with regard to Risk:

The position of owner in the business is very risky. In the sole proprietorship, the individual owns the business and assume all risk and receive 100% profit. In case of loss the liability of owner is unlimited .the same position of partnership in partnership business. As the owner in sole proprietorship as well as in the partnership have unlimited liability. They, therefore assume too much financial risk. If at any time the business debts exceed business assets, they not only loose entire investment in the business. In case of joint stock Company the liability of owners are limited to the extent of value shares only. So there is a loss the owner losses a part or full value of his original investment.

Owner position with regard to Income:

The sole proprietorship allows the owner to receive the amount which is left after meeting all the business expenses.

In case of partnership, the profit and loss are divided according to the capital contribution or as per agreement of the partnership.

In case of joint stock Company the investors receive the dividends which are declared by the board of directors.

Owner position with regard to Control:

In the sole proprietor ship the individual operate the business himself for his own personal interest. We may transfer some control to an employee for performing a particular duty.

In partnership the function of business are divided by mutual agreement among the partners. One partner of the firm may take the responsibility of production ,the another may be take in charging of meeting of product, the third of maintaining the books of accounts.

In case the joint stock company the shareholders are the owners. A large numbers of shareholders are interest in dividend and rise in the value of share. The shareholder transfers the control to the elected board of directors, which plans and implements the policies in the business.

Creditor position with regard to Risk, Income, Control

Creditor position with regard to Risk:

In a sole proprietorship. If the firm is dissolved, the individual has to bear the losses in full. All the assets of individual are available to satisfy the claim of the creditor of the business. In case of partnership, if the creditor is not able to recover the debts from the assets of business, than he can choose to sue all the partners in business to recover his debt from their personal properties. In case of joint stock Company the creditor have a prior clam on the assets of the business. In the creditors among themselves, there is a ranking of claims.

Creditor position with regard to Income:

As regards income of the creditors, it doesn’t fluctuate with the earring of the business. The rate of interest to the creditors is limited per agreement to the amount loaned to the business. The rate of interest to the creditor as compared to the rate on the owner’s capital is usually low. However the income of the creditor is more certain than that of the owners.

Creditor position with regard to Control:

As a matter of legal right, the creditors can’t claim any share in the management of the business in all three forms of business organization.

12. Discuss the modes of Islamic financing

Write detail note on different modes of Islamic financing?

Following are the different modes of Islamic financing which have been introduced in Pakistan.

Musharika:

Musharika is an agreement of business between two parties on the concept of profit and loss sharing, who contribute their funds, skills for its contribution. In Musharika, bank provides funds to the businessman on the agreed profit sharing on the completion of the profit.

Features:

a. The agreement is governed by Musharika investment agreement with in the frame work prescribed by the state bank of Pakistan.

b. The management is controlled by the partners; bank only supervises the performance of the profit.

c. Sharing of profit or loss is calculated according to the funds initially invested or agreed ratio of profit.

d. The funds of the bank on the basis of Musharika are secured.

e. Bank shares only with those parties having good reputation and credit standing. The parties must have a good management and sound experience in the required field of investment.

Mudariba:

Mudariba is a form of partnership of two parties in which one participates. Its capital and the other his knowledge or skill about business. Some persons have spare funds but lack of required skills for its investment. On the other hand some people may possess good skill regarding the business. In this system which based on the ISLAMIC principles, the profit and loss is shared with the agreed ratio at the end of the year.

The Mudariba Company will be registered under the company ordinance. It’s paid up capital shouldn’t less than the 7.5 million. The Mudariba Company may be of two types that are:

Multipurpose and specific purpose.

Features:

a. Banks and financial institutions are not allowed to established a Mudariba company.

b. Mudariba Company may be in private sector or public sector.

c. It should be registered with the registrar of Joint Stock Company.

d. The promoters should be of good integrity and also possess required skill and knowledge.

Participation term certificate:

Participation term certificates are transferable instrument issued by a company for meeting the long term requirement of capital under ISLAMIC banking. According to the company ordinance. It can issue these certificates for raising its funds.

Feature:

a. Participation term certificate are transferable.

b. The certificates are issued by the J.S. companies.

c. These are issued for meeting medium and long term finances.

d. Profit is shared in agreed ratio.

e. The certificate holders have an option to participate in all meeting of the company.

f. A portion of these certificates can be converted into shares under certain conditions.

g. Losses are shared in the ratio of their investments.

Islamic financing:

Leasing:

“Leasing is an agreement, in which the owner (lessor) give an asset to the borrower for the specific period of time, for the purchase of rent”.

The ownership of an asset will remain with the owner (lessor), only the right of use is given to the borrower for specific period of time.

ISLAMIC IDEOLOGY COONEL approved the method of leasing for getting the medium and long term finance.

Features for lessee:

 Unblocking the capital in purchase of new asset for business.

Features for lessor:

 Ownership will remain with the owner.

 Tax exemption to the owner.

 Quick turn over of finance.

Rent sharing:

Rent sharing system provides finance generally for the purchase and construction of houses. The finance also becomes the partner in the house. The loan is repaid along with the share of rent during a given period of time. In Pakistan house building finance corporation (HBFC) is performing function of rent sharing system.

Features:

a. The corporation or bank both contributes the funds for the construction of houses.

b. The funds are provided according to the legal agreement.

c. The funds are provided for a specific period at also for construction of a particular house.

d. The amount advance is repayable in instalments along with the share of rent according to the schedule.

e. Rent assessment is made on the quality of the construction and the locality of house.

f. The owners have an option to refund the total amount any time and can be settle the amount before the due period.

g. The rental value is revised after three years.

13. Define the following : IDBP, ADBP, PICIC, SME, ADB, IMF, WORLD BANK, PARIS CLUB

(Follow the book )

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