Money Banking Finance Notes

Money Banking & Finance Notes

Q # 1 discuss various kinds of bank OR What is bank? Explain different kinds of banks.

OUTLINE Introduction  histor! of "ank #efini #efi niti tion on Simple

definition Expert Views Comprehensive Definition T!pes of banks On the basis of Function On the basis of Ownership On the basis of Registration $istor! of bank Money is very important and necessary to satisfy human wants. Man has been needy in every era due to which the collection and supply (receipts and payments) of money has been an essential part of human life. life. Different commodities commodities have been used as money in different ages, like, stones, metals, animals, different eatables and minerals. The concept of money, its sources and uses have been passing through from from the revolutionary revolutionary stages along with the evolution of human culture. Even a good number of people directly started dealing in money e.g. merchants, gold smiths, and money lenders etc. the concept of loan, interest, written documents i.e. cheue a bill of e!change came into time light only because of them "rigin of the word “BANK ” "pinion differs regarding the origin of the word #$%&'. %ccording to some authorities, the word # BANK  is derived from the *talian word # BANCO”, “BANCUS. +hich mean that #a bench upon which *talian money changers used to sit with their cons to transact business. The erman e!perts says about the word #$%&' is originally derived form the word #BACK  which means a -oin stock firm or

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fund. This word was *talianied *talianied into #$anco when ermans ermans were masters of great part of *taly. enerally it is said that #% financial institution institution which deals in money and credit. *t borrows and lends money and credit. *t borrows money and lends money and in this way acts as financial intermediary between the lender and and borrower +e can simply say that #The banker is a man who lends you an umbrella when it rains, and takes it away when the weather is fair. Definitions: /imple definition0 #$anks are 1inancial Departmental Departmental stores Experts Views: 2rof 'inley views0

“A bank is an institution which receies !e"osits an! a!ances loans %ccordin& to $.L.$art

“ A banker banker is one who$ who$ in$ the or!i or !ina nary ry cour course se of his his busi busine ness ss$$ hono honour urs s che% che%ue ues s !raw !rawn n u"on "on him by "ers "erson ons s fro rom m or for whom whom he receies money or current account. %ccordin& to 'rof. (ro)ther #% bank collects money form those who have it spare or who are saving it out of their incomes. *t lends money to those who reuire it. Comprehensive Comprehensive Definition

%ccordin& to "ankin& co*panies+ ordinance ,“Banker means a "erson "erson transacting the business of acce"ting for "ur"ose of len!ing or inesting of money from the "ublic$ re"ayable on !eman! or otherwise with !raw able by che%ue$ !raft$ an! or!er or otherwise.



Kinds of Bn!s/

a'

(n the basis of Functions

b'

(n the basis of (wnershi"

c'

(n the basis of )egistration

!'

(n the basis of *omicile

"#n$tion% C%ssifi$tion:& C%ssifi$tion:& Comme r$i%% Bn!s Bn! s/ 0i1 Commer$i

+he most mo st "o"ular kin! of banks is the commercial bank receies sur"lus money from the "ublic an! len!s to others who nee!s fun!s. +he bank collects che%ues$ Bill of e,change etc for cust custom omer ers s .-ts .-ts tran transf sfer ers s mone money y from from one one "lac "lace e to another. +he "ur"ose of a commercial bank is to earn "rof "rofit it.. +he +he main main comm commer erci cial al bank banks s of aki akist stan an ar are e National Bank$ /abib Bank$ Allie! Bank$ 0nite! Bank$ MB etc. +hese banks "lay a ital role in economic !eelo"ment. Centr% Bn!:&

3entral bank is the most important bank of any country. %lmost all countries of the world now have central bank. The The cent centra rall bank bank is the the lead leader er of all all othe otherr bank banks. s. *t does does not not compete for profit. *t has a right to note issue. *t controls the operations of other banks for monetary and economic stability in coun countr try. y. The The cent centra rall bank bank repr repres esen ents ts the the ovt ovt in *nte *ntern rnat atio iona nall conferences. 'nd#stri% Bn!s:&



The industrial bank is very important for the development of any country. To provide medium and long4term finance to industry is the distinguishing 1eatures of these banks. *ndu *ndust stri rial al bank bankss gene genera rall lly y prov provid idee fina financ ncee for for fi!e fi!ed d capi capita tall reuirem reuirement. ent. They provide provide finance finance for e!pansion e!pansion,, moderni moderniation ation and establishment $ank (*D$2) was set up in 5675. The other institution engaged in providing financial assistance to industries are 2*3*3, &D13, /ME, etc.

A(ri$#%t#r% Bn!s:&

2akistan is an agricultural country and most of our e!ports consist of %gro4based products. /o well organied agriculture sector is necessary for the development of a country. %gricultural banks provide loan for this purpose. %D$2, %griculture credit advisory committee committee and rural credit banks are the few e!amples of #%griculture $anks in 2akistan ”) Svin( Bn!:&

The banks are established for encouraging and collecting savings of people. /aving banks are not banks in the real sens sensee of term term.. They They only only prov provid idee savi saving ng faci facili lity ty.. Thes Thesee bank bankss usually invest their funds in ovt securities. The well4'nown 2ost "ffice savings $anks is an institution of this type. 3ommercial banks are also providing providing the service of saving banks in 2akistan 2akistan) 'nvestment Bn!s:&

The bank is opened to buy and sell shares and other securities. *t also provides loans for purchase of shares and debenture etc. *t keeps new companies by under writing the share, bonds 8 other securities.



%t the the end end of 9une 9une,, 566: 566: /eve /event ntee een n inve invest stme ment nt $ank $anks, s, both both 2akistani and foreign were functioning in 2akistan. *er$hnt Bn!:&

The bank provides services like acceptance of bills of e!change, corporate finance, ;easing, hire4purchase and insurance broking. *t is a whole sale bank and accepts large sums for fi!ed term from individual, companies and financial institutions. $aring, laards are e!amples of Merchant $ank ) Consorti#m Bn!s:&

% 3onsortium bank is owned by other banks. The bank is formed to meet the financial reuirements reuirements of large companies for long period of time. The bank receives the funds from the parent $ank. *t can also arrange syndicate loans. *nternational energy $ank, $ritish Middle East $ank, "rion $ank are the e!amples of consortium $anks. +o#r Bn!:&

The $ank is opened by trade union of labourers. The purpose of this bank is to manage worker funds like pension funds, 2rovident fund etc in a better way. The ;abourers also keep their saving in it. The bank provides loans to the concerns which are under the control of trade union. E.g.
The banks provide banking facilities to the students in schools. The bo!es or bags are supplied to the students who keep their saving in bo!es. %ccounts are opened in the name of students. The bank officers go to the school after regular interval and collect



the amount of their saving. *n <./.% $eloit saving $ank started working school bank in 5==:. *ort(e Bn! :&

These banks provide loans to people against moveable and immovable property. >$13 is doing the working of Mortage $ank. Coopertive Bn!:&

These banks are set up to provide credit facilities to farmers and small producers. The bank is opened by persons of similar occupations living in same areas for providing banking facilities. *n 2akistan the 3o4"perative 3o4"perative bank registered under the 3o4"perative societies %ct 56:? and can be registered with registrar of 3o4"perative societies at provincial headuarters headuarters )

On the Bsis Of Ownership:&

'ublic sector "ank/

2uch banks are owne! by goernment an! works un!er the !irect control of the goe goern rnme ment nt.. +he +he chie chieff e,ec e,ecut uti ie e of such such bank banks s is a""ointe! by fe!eral goernment. NB are e,am"les of "ublic sector banks$ First woman Bank. 'rivate 2ector "ank/ +hese banks are un!er the !ire !irect ct owne owners rshi hi" " of the the "ri "riat ate e or orga gani ni3a 3ati tion on of o o44 ("eratie 2ocieties. +he banks are controlle! by the in!ii!uals or t (rgani3ation$ MB$ AB5 an! 6A2B Bank is the e,am"les. On -he Bsis Of .e(istrtion/ 2cheduled "ank/



+hese are the banks which which are registere! in the list of central bank. +hey are boun! to follow the instruction an! "olicies of central bank. Non 2cheduled "anks/ +hese are the banks which which are not registere! in list an! "olicies$ -nstruction of central Bank. On -he Bsis Of Domi$i%e:&

#o*estic "ank/

+he banks which are registere! an! incor"orate ate! with in the country are calle! !omestic bank. +hese banks "roi!e financial assistance !omestically. -n akistan the banks regulate! un!er akistan Banking com"anies7 or!inance 189: are !omestic banks. ;.g. N.B$ /.B.5$ Askari Bank are e,am"les of *omestic banks. 3orei&n "ank/ +he bank which hae their origin an! hea! offices in foreign country are calle! foreign bank. Foreign banks are the branches of the banks incor"orate! abroa!. +he stan!ar! chartere! Bank 5t!$ National an!
4 5 6 #efin fine (o* o**e *erc rcia iall ban bank. #is #iscus cuss the the functions of co**ercial bank Outline

Introduction  histor! of "ank #efini #efi niti tion on Simple

definition Expert Views



Comprehensive Definition Functions of commercial bank Primar functions functions functions functions

Secondar !genc "tilit

Conclu Conc lusi sion on

% commercial bank is public limited company it is set up under companies ordinance 56=@. The operations of commercial banks are cont contro roll lled ed unde underr bank bankin ing g comp compan anie ies s ordi ordina nanc ncee 567: 567:.. 1ore 1oreig ign n e!change %3T 56@A and state bank of 2akistan %3T 56?7. The bank receives deposits from general public. Different accounts are opened to collect money. The bank keeps some money to honour cheues of customers. % large part of such money is provided to people as loan loans. s. The The bank bank is impo import rtan antt for for gove govern rnme ment nt,, busi busine ness ssma man n and and general public. 3ommercial bank plays very important role in economic development of the country it is often called the >E%BT of financial system of an economy. Definitions: /imple definition0 #$anks are 1inancial Departmental Departmental stores Experts Views:

2rof 'inley views0

“A bank is an institution which receies !e"osits an! a!ances loans %ccordin& to $.L.$art

“ A banker banker is one who$ who$ in$ the or!i or !ina nary ry cour course se of his his busi busine ness ss$$ hono honour urs s che% che%ue ues s



!raw !rawn n u"on "on him by "ers "erson ons s fro rom m or for whom whom he receies money or current account. %ccordin& to 'rof. (ro)ther #% bank collects money form those who have it spare or who are saving it out of their incomes. *t lends money to those who reuire it. Comprehensive Comprehensive Definition

Accor!ing to Banking com"anies7 or!inance 189: “Banker means a "erson "erson transacting the business of acce"ting for "ur"ose of len!ing or inesting of money from the "ublic$ re"ayable on !eman! or otherwise with !raw able by che%ue$ !raft$ an! or!er or otherwise. 3unctions of co**ercial banks /rimr0 "#n$tions 5. %ccepting deposits $ank accept deposits form those who have e!tra money out of their income in their hands, but they cant use it in a profitable way so banks give them opportunity to deposit their money and en-oy profit. a. 3urr 3urren entt %cc %ccou ount nt *n this account the depositor can deposit and withdraw money at any time. &ormally traders, businessmen, are interested to open this account bank pays no interest on this accounts. % cheue book is given to the account holder to with draw his money. b. 2rofit 8 ;oss sharing sharing "B saving account This account is suitable for those people who have small level of savings. *n this account a nominal interest is paid to customer cheue book is given to account holder. c. 1i!ed 1i!ed "B term term deposi deposits ts accoun accountt *n this account a specified amount is deposited in the bank for particular period of time. The longer the



durat uratiion the high higher er woul ould be the inter nteres estt. *n this his acco accoun unt, t, a rece receip iptt is give given n to cust custom omer er,, call called ed fi!e fi!ed d deposit receipt (1DB). :. %dvance loans The bank gives loans in order to earn profit. *n this way it accepts deposits at low rate of interest and advances loan at high rate of interest. The difference becomes profits of the bank. %dvances are given in the following types. a. "ver Draft Draft This is a shot period financing facility. *n this facility the bank sanctions that the customer can withdraw his money over and above the balance lying in the bank. This facility is provided to current account holders. b. Discounting $ills of E!change E!change *ts mean, making payment before the maturity of the bill the payment made the bank before the date of maturity is the loan to the bill holder. c. 3ash credit credit *n this loan facility the bank sanctions a particular amount. The facility is provided against security. d. Time loans  Short term %on in which the time period is less than one year.  *edi#m *edi#m term term %on for period of 5 to C or ? years  +on( term %on for period of more than ? year yearss and and the the enti entire re loan loan are are give given n agai agains nstt proper security. security. Se$ondr0 f#n$tions 5. Transfer of money The banks transfer money form place to place by means of draft collection of cheues telephonic transfer and direct debt debt.. The The bank bankss purc purcha hase se bill billss of e!ch e!chan ange ge to help help thei theirr customer for collection of money.



:. *ssue *ssue of of credi creditt money money The banks issue various types of near money the cheues bank draft credit car, are main instrument which is valid as medium of e!change to settle their obligations. C. *nvestment of funds funds The banks can invest funds in stocks shares and bounds. %s per law commercial banks at least :? of their deposits in securities. @. 1inancing foreign trade trade The bank performs duty of financing foreign trade. The respites and payment on accounts of e!ports and imports is possible through bank. ?. 1oreign e!change e!change dealing dealing The bank deal in foreign e!change they buy and sell currenci currencies es of other other countries. countries. The commerci commercial al banks are dealer of foreign e!change market. 7. /tat /tatus us rep repor ortt The commercial bank act as referee for supply of information abou aboutt its its cust custom omer er,, rela relati ting ng to fina financ ncia iall posi positi tion on of part party y concerned. A(en$0 "#n$tions 5. 3ollec 3ollectio tion n of cheue cheue % commercial bank acts as agent to the customer to collect and make payment on the cheues. The cheues may be local or out station. station. :. 3ollection of income income $anks collect pension, dividend, rent and interest of their cust ustomer omers. s. % cred credit it vouc oucher her is sent sent to cust custo omer for information. C. 2ayment 2ayment of e!penses e!penses The The bank bank make makess paym paymen entt of insu insura ranc ncee prem premiu ium m trad tradee subscription, school fee and similar other e!penses. @. %ct as trustee trustee The bank can act as trust to mange trust property as per will of property owner. The order of court is obtained to act as trustee. (Takes care affairs of its client) ?. Ta! return return



The bank act as agents of customers, those are bound to pay ta! to government. government. 7. >a-- applicatio application n The bank collects >a-- application from general public on behalf of government. government. A. /afe custody custody The The bank bank acce accept ptss valu valuab able less and and othe otherr pape papers rs for for safe safe keeping. % nominal fee is charged from customer. =. akat deductio deduction n The The bank bank auto automa mati tica call lly y dedu deduct ct aka akatt on firs firstt Bam Baman an every year from his customer accounts Uti%it0 f#n$tions 5. ;etter ;etter of credit credit 3omm 3ommer erci cial al bank bankss issu issuee lett letter er of cred credit it in orde orderr to provide financial assistance to the customers dealing in foreign trade. :. *nformat *nformation ion The The bank bankss coll collec ectt and and supp supply ly trad tradee info inform rmat atio ion n to businessman the issue bulletins that provide update information abut companies working abroad. C. ovt loans loans The banks participate in debt management for gove goverrnme nment. nt. The The ban bank can buy buy bond bonds, s, and and other therss securities offered by central bank @. ;ocker ;ockerss facili facility ty $anks $anks provid providee locker lockerss facili facility ty to genera generall public public gold gold ornaments, documents and their valuables can be placed in lockers. ?. /hare /hare applic applicati ation on $ank accepts applications for subscription of shares on $ehalf 3ompany the price of shares is collected with application money. 7. %ccepting bills bills of e!change e!change $anks accept bills of e!change on behalf of customers to meet their financial needs.



Con$%#sion “3ommercial banks play a vital role in promotion economic development by mobiliing the financial resources of the country. %s well as through commercial banks provided multiple multiple services to their customers for the purpose of increasing their business and becoming reliable entity for their customers



FG Cwhat is central Bank= ;,"lain its function in !etail=

(r !iscuss in !etail the function of state Bank of akistan Outline Introduction  histor! of "ank Defini Defi niti tion on Simple definition Expert Views Comprehensive Definition Objectives of central bank Functions of central bank Conclusion Introduction  histor! of central bank

Money an! cre!it "lay a ery im"or m"orta tant nt role ole in mo!e mo!ern rn soci societ ety. y. >e can can !eri !erie e ma,i ma,imu mum m ben benefit fit from from mon money an! an! cre re!i !itt if the their su""ly can be ke"t with in reasonable limits. (the (therw rwis ise e they they will will gie gie rise rise to many many soci social al eil eils. s. Money su""ly takes "lace through commercial banks an! other financial institutions .+hey "rimarily to sere their own interest. +he central banking system was originate! in !ifferent countries !uring the last century. But it was in a ery cru!e form !uring that time. +he mo!ern system of central banking "articularly !eelo"e! in the 1 st half of the "resent century i.e. the :? th century'. +he nee! f the "resent century banking system was strongly felt !uring the financial crisis cause! by First >orl! >ar 181@181'. After the war there was com"lete confusion in curr curren ency cy an! an! e,ch e,chan ange ge marke markets ts.. +her +here e we were re larg large e with !rawls of money from banks. +he bank reseres fell below the nee!e! leel. +here was no institution



which coul! su"erise the working of banks an! also sere as a fiscal agent. -n or!er to sole the monetary "roblems of the countries an! set them on healthy footing$ a conference was hel! at Brussels in 18:?. -t was was !eci !eci!e !e! ! in that that conf confer eren ence ce that that to cont contro roll the the su""ly "ly of mone oney an! cre!it in the econo onomy an! main mainta tain in stab stable le busi busine ness ss con! con!it itio ions ns$$ ea each ch coun countr try y must establish its own central bank. entral bank is the most im"ortant bank of a country. -ts im"ortant has increase! manifol! !uring "ast C? year years. s. -t is the the symb symbol ol of fina financ ncia iall soe soere reig ignt nty y an! an! stab stabiility ity of the the coun ountry. try. -t is hea! of bank bankin ing g an! an! monetary system. +he "rinci"les on which a central bank o"erates are !ifferent from those of commercial bank. -t !oes not work for "rofit. -t acts in the "ublic interest an! earning "rofit is only a secon!ary consi!eration. Evolution  7ro)th +he )iksbank of 2we!en was set u" in 19C9 an! !eclare! as central bank in 199 an! is consi!ere! to be the ol! of the central banks. +he Bank of ;nglan! was establishe! in 198@. +he Bank of France was set u" in 1??. +he national bank of *enmark was o"ene! in 11 an! National bank of Belgium in 1C?. +he )eich7s Bank of


fully owne! an! manage! by the goernment. Again there may be central banks which are Gointly owne! an! manage! by the goernment an! t 2har 2hare ehol!e ol!ers rs.. 0 to *ec *ec 18DE 18DE$$ the the 2tate tate bank ank of akistan was a goernment an! "riate sharehol!ers bank. 0n!er +he Bank Nationali3ation (r!inance 18D@$ +he 2tate Bank of akistan has become "urely goernment owne! institution. +o!ay no central Bank is com"letely free the goernment influence. #efinition of central bank 2i*ple defection “A entral bank is a bank$ which controls cre!it Expert vie)s %ccordin& to #r #e. 9ock/ “ +he gui!ing gui!ing "rinci"le "rinci"le of a central central bank is that it shoul! shoul! act only in the "ublic interest interest for the welfare of the country as a whole an! without regar! to "rofits as a "rimary consi!erationH In )ords of 'rof. $a)tr!:s/ “ A central central bank is that which is len!er of last resort (o*prehensive (o*prehensive definition %ccordin& to R.'.9ent/ “ An institutio institution n which is charg harge e! with with the re res" s"on onsi sibi bili lity ty of man managi aging the the e,"ansion an! contraction of the olume of money in the interest of general "ublic welfare Ob;ective of (entral "ank Following are the "rinci"lesIobGecties "rinci"lesIobGecties of central bankJ4 ,/2afe&uardin& ,/2afe&uardin& 3inancial 2tabilit!/

+he main obGectie of the central bank is to "rotect an!



safe safegu guar ar! ! econ econom omic ical al an! an! fina financ ncia iall stab stabil ilit ity. y. -t is establishe! in or!er to !esign an! im"lement "olicies to aoi aoi! ! !e"r !e"res essi sion on an! an! unwa unwant nte! e! fluc fluctu tuat atio ions ns in economy. :4Workin& In 'ublic Interest/ entral bank works in the best interest of the economy an! "ublic. -t !oes not gie a!ances$ not it allows any interest on !e"osits. -t "erforms its function without any consi!eration of "rofit. E42upervision 2upervision Of "ankin& 2!ste*/ entral bank obGect is to hae su"erision an! effectie control oer commercial banks structure$ central bank set gui! gui!el elin ines es for for comm commer erci cial al bank bank$$ an! an! "ara "arame mete ters rs in which commercial banks are allowe! to "erform their o"eration. @4(ontrol Of (redit 


3unction of central bank

A central bank usually "erforms the following functionJ4


"anker+s "anks

+he control bank acts as banker to commercial bank asJ  -t hol!s cash reseres reseres an! !e"osits !e"osits of commercial commercial banks. *iscou ount ntin ing g of bill bill of e,ch e,chan ange ge of comm commer erci cial al  *isc banks.  ;nabling the commercial banks to create cre!it.  l lea eari ring ng hous house e faci facili lity ty i.e i.e.. the the sett settle leme ment nts s of mutual claims of commercial banks'.  5en!er of last resort 


!rawn from other banks. -n this way eery bank has to receie receie amounts on behalf of its customers customers an! has to make "ayments on behalf of them. But the banks !o not get cash from each other. +hey settle their accounts with the hel" of central bank. ;ery bank has account at central bank$ so fun!s can be transferre! from the account of one bank to other bank. (ontroller of credit +he central bank also regulates an! controls the su""ly of money in the country. -n or!er to manage the su""ly of money it im"lements monetary "olicy. +he im"ortant tools of monetary "olicy are bank rate o"en market o"eration an! arying resere re%uirement. orl! Bank$ -MF'



 -n!ustrial

an! agricultural bank  ublication of annual re"ort  ;stablishment of training institutes (onclusion

entral bank "lay ery im"ortant role in the economy$ the "oli "olici cie es of the cen central tral bank ank ben benefici ficial al for for the the country as well as commercial banks$ with the hel" of it rate of inflation becoming increase after it economic !eelo"ment starte!.





(ENT (E NTR% R%L L "%N9 "%N9 ,.3RO<<%TION +he central bank is forme! un!er an act of "arliament or or!inance 6.O)nership +he share ca"ital of the central bank ank is owne! by the goernment or "eo"le >..

(O<
+ he commercial bank is forme! un!er the com"anies law the shar share e ca"i ca"ittal of the commercial bank is owne! by the "ublic +he management an! em"loy em"loyee ees s are a""oin a""ointe! te! by the boar! of !irectors. +here are many commercial banks in eery country. +he commercial banks hae insi!e insi!e an! as well as outsi!e branches. +he basic aim commercial bank is earn "rofit.

of to

+he commercial bank can issue che%ue$ cre!it car! an! isa car!. +he in!ii!ual$ "artnershi"$ limite! com"anies are the


like )s. C$ 1?$C?$1??$ C??$ 1???$ C??? B.%cc B. %ccoun ountt holde holder r +he goernment an! comm commer erci cial al bank banks s is the the acco accoun unts ts hol! hol!er er of the central bank. -.%dviser +he central bank a!ises the goernment on financial matters.


accounts hol!er of commercial bank +he commercial banks a!ise their customers for inestment of business consultancy


(ENTR%L "%N9 ,C. Nature of accounts +he central bank o"ens the goernment accounts un!er arious hea! of accounts ,,. . Exchan&e control -t is the controller of foreign e,change. ,. Wind up +he central bank can not be close! u" een if working at loss. ,=. 3orei&n pa!*ent -t makes the foreign "ayment "ayment on behalf behalf of the goernment. 19. Transfer -t transfer money from one "lace to


(O<
+he commercial banks o"en current$ saing$ 52$ fi,e! !e"osit accounts. +he commercial bank is the member of money market +he commercial bank crea create tes s cre! cre!it it acco accor! r!in ing g to money aailable. -t is the authori3e! !ealer in foreign e,change un!e un!err the the su"e su"er ris isio ion n of central bank. +he commercial bank can be close! u" if the management !eci!es !ue to loss. -t makes the foreign "aym "ayme ent for for cust custom omer ers s !ue to im"ort of goo!s an! serices. -t transfers the mone oney from "lace to "lace for the "eo"le. -t "roi!es loans ans$ cash cre!it an! oer!raft to the customers.


another for the goernment an! banks ,A. Loans -f arranges loans for the goern goernmen mentt an! "roi!es loans to commercial banks as len!er of last resort. ,B. #iscountin& bills -t !iscount the bills of the commercial banks ,-. orl!

-t !iscount the bills of the customers +hey assist the central bank for achieing monetary stability. +he commercial bank can not issue currency notes +he commercial bank !oes not hae !irect relation with international financial institutions

4 5= defines the ter* banker and custo*er. What is the relationship bet)een the*? %nd



discuss the reason for ter*ination of relationship. Outline #efinition

Banker ustomer

Relationship



+he customer must beL..  /e shoul! not be a minor  /e shoul! be "erson of soun! min!  /e shoul! not hae been !ebarre! from entering into any contract un!er the law Relationship 7eneral Relationship #ebtor and creditor “+he basic relationshi" is that of !ebtor ! ebtor an! cre!itor. -f a customer !e"osits money in the bank he is the cre!itor an! the bank is !ebtor. -f the customer has an oer!raft balance then he is the !ebtor an! bank is the cre!itor

2pecial Relationship 'rincipal and a&ent +he customer is the "rinci"al when !e"osits che%ue$ !rafts$ !ii!en!s for collection with bank. +he bank is an agent when he sells or "urchases securities an! installment of loans etc. "ailer and "ailee >hen a customer han!s oer his aluable to the bank for safe custo!y then the customer becomes the bailer an! the bank is the bailee. An! charges small amount for serices ren!ere! 'led&er and 'led&ee >hen the customer "le!ges moeable "ro"erly with the banker as security for loans$ he becomes "le!ger an! banker as "le!ge. +his relationshi" also knows as "awn "awner er an! an! awn awnee ee.. +he +he "le! "le!ge ge! ! goo! goo! shou shoul! l! be returne! after the !ebt is re"ai! by customer.


>hen the loan is taken against immoable "ro"erty the customer is calle! mortgager an! the banker is mortgagee. "anker is a trustee and Executor +he banker receies receies aluable an! !ocuments of he customer an! kee"s them in safe custo!y. +he banker also e,ecutes the stan!ing instructions of its customers so banker becomes as trustee an! e,ecutor. (onsultant Bank usually un!ertakes financial consultancy for their client. -n such a situation the bank becomes a cons consul ulta tant nt.. >hen >hen a bank bank a!i a!ise ses s his his clie client nt on any any im"ortant im"ortant financial financial matter$ matter$ bank becomes a!isor an! client becomes a!isee. 7uarantor and principal debtor hen the banker "roi!e loan to his customer he become financer an! customer becomes financee. Inde*nifier and inde*nit! holder -n!emnity is a contract when one "arty "romises to sae the other "arty form the loss cause! to him by the con!uct of the "romisor himself or by the con!uct of any other "erson the "erson who "romises to make goo! the loss is calle! in!emnifier an! "romise is calle! in!emnity hol!er. 2o the bank makes a contract of in!emnity with the client$ bank becomes in!emnifier an! client becomes in!emnity hol!er. Reference and referee



>hen hen a bank bank info inform rms s the the stat state e bank bank or any any oth other authority about the financial status of a client$ bank is calle! referee an! client becomes reference Ter*ination of the relationship +he relationshi" between between customer an! bank is terminate! in following con!itions  +ermination by customer interest is not acce"table to him him  +he rate of interest  Bank !oes not gie him facility as offere! by other  Not satisfie! with the serices  /is confi!ence in the bank is shakene!  *ue to change of customer !eath  /e change his "lace of resi!ence Ter*ination b! banker  -f the customer !oes not obey the banking hours.  -ntimation of !eath of customer  *ue to insanity of customer  *ue to insolency of the customer  *ue to court or!er  haracter is not satisfactory

////////////////////////////////////////////////////////////////// //////////////////// 4 5 @ defines banker and custo*er. #iscuss the Ri&ht and #uties of "anker and (usto*er in detail. Outline #efinition

Banker ustomer

Ri&ht and duties of custo*ers Ri&ht and duties of banker



"anker #efinition 7. cro)ther DA banker is a !ealer in !ebt of his own an! other "eo"les .W.7ilbert “A banker is a !ealer !ealer in ca"ital ca"ital or more "ro"erly "ro"erly a !ealer in money. /e is an interme!iate "arty betw betwee een n the the borr borrow ower er an! an! the the len! len!er er.. /e borr borrow ows s from one "arty an! len!s to another (usto*er #efinition "! dr. hart “A customer is one who has an account with the banker or for whom a banker habitually un!errates to act as such "! ustice Lindle! “ustomer is a "erson who has some sort of account either !e"osit or current account or some similar relation with a banker

+he customer must beL..  /e shoul! not be a minor  /e shoul! be "erson of soun! min!  /e shoul! not hae been !ebarre! from entering into any contract un!er the law

Ri&ht and duties of custo*ers Ri&hts of custo*ers ,.Ri&ht ,. Ri&ht to encash a cheFue



-t is the right of the customer that his che%ue is to be encas ncashe he!. !. /e shou shoull! be gie gien n the the amount as "er the balance. 6.Ri&ht 6. Ri&ht to receive docu*ents -t is the right of the customer to receie the "ass book book$$ che% che%ue ue book book$$ an! an! stat statem emen entt of acco accoun untt from the bank. >.Ri&ht >. Ri&ht to sue a&ainst )ron&ful dishonor A customer has the right to sue a bank if the bank !ishonors the che%ue with out an! "ositie reason. .2e . 2ecr crec ec! ! -t is the right of customer that bank can be ke"t his account secret an! not !isclose! to any one. =.Ri&ht =. Ri&ht to interest -t is the right of customer to receie the interest an! bank$ is boun! to "ay$ an! !e"en!s u"on the nature of account. #uties of custo*er ,.Obe! ,. Obe! bankin& bank in& hours hour s A customer must "resent his che%ue for encashment "ayment' an! collection with in banking hours an! !ays. 6.2afe 6. 2afe custod! cust od! of cheFue ch eFue book b ook -t is the !uty of the customer to kee" his che%ue book safe. 2o that it may not be go into the han!s of unauthori3e! "erson. >.'res >. 'resenta entation tion of cheFue cheF ue before befor e expir! -t is the !uty of the customer that he shoul! "res "resen entt the the che% che%ue ue with with in si, si, mont month h of its its issu issue e !ate !ate.. (the (therw rwis ise e no clai claim m woul woul! ! be for for "ayment. .(ase of for&ed cheFue -t is the !uty of the customer that he must inform the bank belieing that his signature is being forge! on a che%ue so that no "ayment shoul! be ma!e.



Ri&ht and duties of banker Ri&ht of banker ,.Ri&ht of interest and char&es +he banker has the right to charge interest on loans. -t also charges commission as for serices "roi!e!. +he serices inclu!e coll collec ecti tion on of che% che%ue ue$$ bill bills s of e,ch e,chan ange ge an! an! !ii!en!s etc. 6.Ri& 6. Ri&ht ht of lien lie n +he bank has a lien on o n the goo!s an! securities of the customer until he re"ays his !ues. +he bank bank can can sell sell such such item items s afte afterr gii giing ng "ro" "ro"er er notice. >.(har&e co*pound interest interest +he banker has right to charge com"oun! interest on oer !raft afts calculate! o !ail aily balance. +here is agreement between banker an! customer about rate an! time "erio!. .%d;ust*ent of balances +he banker has right to a!Gust !ebit balance against cre!it balance. #uties of banker ,.The honour the custo*er+s cheFue -t is the !uty of the banker to honour honour che%ue issue! by the customers. +he che%ue must be !raw !rawn n "ro" "ro"er erly ly an! an! "res "resen ente te! ! durin& )orkin& hours. 6.2ecrec! of custo*ers account account +he bank shoul! maintain the secrecy of the customer account if it is !isclose! the customer may suffer loss. >. 'urchase and sale of securities -t is the !uty of the bank to obey the inst instru ruct ctio ions ns re rega gar! r!in ing g the the "urc "urcha hasi sing ng an! an! selling of securities



.Open . Openin& in& of letter le tter of o f credit cred it 0LG(1 0LG (1 -t is one the !uties of the bank to issue letter letter of cre!it for its customers in the international tra!e.

F.A Discuss role of central bank as controller of credit O. +hat do you mean by monetary policy discuss its ob-ectives and metho methods ds of monet monetary ary policy policy e!plai e!plain n the limita limitatio tions ns of monet monetary ary policy O. E!plain the different methods of credit control.


OU-+'NE Definition /imple definition E!pert views "b-ectives of monetary policy Methods of monetary policy Fualitative methods Fuantitative methods ;imitations of monetary policy 3onclusion


The The cent centra rall bank bank is resp respon onsi sibl blee for for regu regula lati tion on and and cont contro roll of monetary system. $ecause its first priority to increasing in public inte intere rest st,, for for this this cent centra rall bank bank deve develo lope ped d poli polici cies es for for cont contro roll the the supply and credit money in the market, such policy called *onetr0 po%i$0) Definition Simp%e definition Monetary policy refers to the measures which the central bank of a country takes takes in controlling the money money and credit supply in a country, with a view to achieving certain specific economic ob-ectives Expert views A$$ordin( to S)A) *eeni Monetary policy is the regulation of the cost and availability of money and credit in the economy A$$ordin( to 1)2)Ar#dt Monetary policy is that branch of economic policy, which is concerned, with regulation of the supply, the cost and the direction of credit A$$ordin( to 1)3) 4honson *t is a policy of central bank in control the supply of money with the aim of achieving macro economic stability O5e$tive of monetr0 po%i$0 Contro% on inf%tion nd def%tion 3entral bank generates economic stability by controlling inflation and deflation in a country, through monetary policy

E$onomi$ (rowth % good policy of credit control ensures economic growth. The decisions regarding sanction of credit to deferent sectors of the economy greatly affect the rate of economic growth. 'n$rese in investment



/tate bank give the instructions to commercial banks provides loan to productive sectors, with the help of it industry promote and as well as employment also increased 'n$rese in exports +ith the help of monetary policy the commercial bank issued loan to e!porters of the countries. %nd due to this facility country get foreign currency, and economic growth automatically enhanced /ri$e sti%it0 The economic growth depends on stable price level. 1or this central bank fi!ing the credit credit limit for the commercial commercial bank, then supply supply of money is controlled. Due to this effect industries control the price level till it become stable St%e in mone0 mr!et The central bank must keep stable money market. The demand and supply of credit must be ad-usted in the best of interest of the country. *ethod of monetr0 po%i$0  6#ntittive 6#ntittive $ontro%  6#%ittive $ontro% 

6#ntittive 6#ntittive $ontro% 7) Bn! Bn! reserv reservee rte rte po%i$0 po%i$0 $ank reserve rate means the rate that is deposited by commercial bank to central bank ) 'n $se $se of inf%t inf%tion ion +hen there is inflation on the country, then central bank for the purpose of control over the inflation increase the Beserve rate of commercial bank, then supply of money control automatically as well as inflation becoming control. S0mo%i$%%0

$BB /M inflation decrease ) 'n $se $se of def% def%ti tion on


i

*

p


*n case of deflation central bank decreased the reserve rate due to this supply of money increased and price is also increased and at the end deflation decreased S0mo%i$%%0

$BB E$o) 3rowth

/M

i

*

/ro)

8) Open Open mr!e mr!ett oper opertio tion n *ts mean sale and purchase of ovt. securities in the open market by the state bank of 2akistan. *f the inflation condition e!it then central bank sells the govt securities to general public and in case of deflation central bank purchase the govt securities from open market. 9) Cred Credit it %imi %imits ts The central bank controls the credit supply with the help of fi!ing the credit. %fter it supplies of money control as well as inflation also controlled. ) Dis$o#nt rte po%i$0 po%i$0 Discount means when the central bank discounting the bills of e!change of banks. *n case of inflation central bank increase the discount rate and vice versa 8) 6#%ittive $ontro% 7) Cons#mer $redit $ontro% The central bank can increase or decrease number of installments payable under installment sale agreement. /ometimes the grant o credit for consumer goods on installment basis is completely banned by central bank ) 8 mr(in% re;#irements Margin means the difference between the amount of loans and value of security. The minimum margin reuirement on securities may be rela!ed o encourage the borrowing and can be imposed to discourage the borrowing. 9) Dire$t $tion



+hen commercial bank fails to follow credit policy of central bank, direct action may be taken against defaulter bank. $y following action action  Doest not provide the facility of clearing house  *ncrease the reserve ratio of case  Beuse to discount the bills of e!change  Declares the scheduled banks as non4schedule bank and takes the facility back.  *or% pers#sions The central bank can use this method of moral persuasion as leader of commercial bank. *t regularly advises and guides commercial banks to follows a particular policy for loans. +imittions +imittions of monetr0 po%i$0 7) Co&ope Co&opert rtion ion of of n!s n!s *t is very difficult for central bank to control to credit, if commercial banks do not e!tend their full co4operation 8) Conf%i$tin( o5e$tives The greatest difficulty in controlling credit is the simultaneous, achievement of conflicting ob-ectives of price stability, economic economic stability etc. 9) Convention% te$hni;#es *n under developed countries like 2akistan the conventional techniues of credit control namely bank rate policy open market and reserve ratio are not all powerful. ) Existen$e Existen$e of non&mone non&moneti


%s we study in above uestion about policies. $ut all these policies are affective when these are implemented by the ovt. of 2akistan. *nflation stage reuired reuired ? to 5H years to convert in euilibrium position. That is not possible during the daily changing changing in presented and other member of ovt. so these policies only for the reading not for implementing. implementing. IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII IIIIIIII

Q8J /ow !o the commercial banks create create cre!it= cre!it= -n!icate the limitations on the "ower of a bank to create cre!it= OR “5oans are chil!ren to !e"osit an! !e"osits are chil!ren of loans ;,"lain. Outline Introduction n e definition t vie)s

#efinitio 2i*pl Exper %ssu*p

tions 'rocess of credit creation Li*itati ons of credit creation (onclusi on



'ntrod#$tion:&

(redit / +he term cre!it is is an eolution of a 5atin wor! “cre!o which means “- entrust an! i "ut my faith in. +he wor! cre!it has been been !escribe! by <-*; in the following ways. “An e,change which is com"lete after the e,"iry of certain "erio! of time after "ayment. -n sim"le wor!s cre!it means a 5oan. Credit Cretion0 4

The creation of credit or deposit is one of the most important functions of commercial banks. ;ike other corporations banks aim at earning profits. 3redit creation is the multiple e!pansions of banks demand deposits. +hen a bank advances a loan, it does not pay the amount in cash, but it opens a current account in his name and allows him to withdraw the sum by cheue. *n this way the banks create deposit or credit. *t is an open secret that banks advance a ma-or portion of their deposits to the borrowers and keep smaller part of them for payment payment to the customers customers on demand. Definition Simp%e definition #The tendency on the part of commercial banks to e!pend their demand deposits as a multiple of their e!cess cash reserves is known as creation of credit Expert views A$$ordin( to /rof Crowther:&

# The importan importantt work of bank is to provide easy people. $anks are considered as manufacturer of credit. *t means they are not only the dealer of money but in actual meaning they are creator of credit. % single bank can not create credit. *t is the banking system as a whole which can make loans more then their e!cess cash reserves. Ass#mption of $redit $retion pro$ess:&



The process of credit creation is based on certain assumptions which are as under04  There are many banks say %, $ and 3 etc in the banking system.  Each bank has to keep :H of its deposits as reuired reserves. *n other words :H is the reserve rate fi!ed by law.  $usiness conditions remain normal in the country.  3entral bank does not adopt any credit policy.  The loan amount drawn by the customer of one bank is deposited in full in the second bank and that of the second bank into the third bank and so on. /ro$ess of $redit $retion The bank creates credit in four ways4  ;oans.  "verdraft.  Discount $ills of E!change.  2urchase of %ssets. $y over drafting bank creates credit. /econdly, bank purchase the securities and paid them with its own cheue. The holder of these cheues deposits them in the bank. They create deposits which is nothing other than creation of credit. *t is recognied that the process of credit creation cant proceed with out involvement of the whole banking system. A$$ordin( to Smve%son, #The banking system as whole can do what each small bank can not do. *t can e!tend its loans and investment many times. The new reserves of cash created for its even though small bank is lending out only a fraction of its deposits Exp%ntion:& The credit creation process can be e!plained as follow04 The bank receives B/ ?HHH as fresh deposits from a customer. The bank keeps some cash to honors honors cheues of customers. customers. The amount so kept is known as cash receives. /uppose cash receives ratio is :H the bank can be lend =H of deposit to the needy people. The position of first category category bank after credit credit creation is as follow04 follow04



$alance sheet of 5 st bank +ii%ities Deposits

Bs Assets ?HH 3ash :H  H ;oan =H

Bs 5HH H @HH H

?HH H

?HH H

The loan of B/ @HHH may be deposited by the customer with this or other bank. The receiving bank can lend =H of it by keeping :H as cash reserve. *t can be stated in the balance sheet of second bank.

$alance sheet of : nd bank +ii%ities Deposits

Bs Assets @HH 3ash :H  H ;oan =H

Bs =HH C:H H

@HH H

@HH H

The deposits creation position of the third bank is stated below. $alance sheet of C rd bank +ii%ities


Bs

Assets

Bs


Deposits

C:H 3ash :H  H ;oan =H

7@H :?7 H

C:H H

C:H H

The process is not yet complete. *t will continue further. The whole process can be settled in a summary summary form as follow. follow. E!pansion of bank deposits Bn! % $ 3 D E 1  >

Deposits ?HHH @HHH C:HH :?7H :H@= 57C= 4 4 4

Csh reserve 5HHH =HH 7@H ?5: @5H C:= 4 4 4

+ons @HHH C:HH :?7H :H@= 57C= 5C5H 4 4 4

:?HHH

?HHH

:HHHH

The fresh deposit of B/ ?HHH is used to create credit of B/ :?HHHJ if the reserve ratio is 5H then created credit will be B/ ?HHHH. The amount can be calculated by following formula.

Deposits K


5HH 3ash reserve 


+e have discussed the credit creation process through loans. Deposits can also be created by overdraft, discounting of bills and purchase of assets.

Li*itation on the po)er of "ank to create credit/ Following are the limitation of cre!it creationJ4 %*ount of (ash/ +he cre!it creation "ower of bank !e"en!s u"on the "rimary !e"osits with the bank. +he larger cash$ the larger amount of cre!it that can be create! by bank. 'roper 2ecurit!/ An -m"ortant factor that limits the "ower of bank to create cre!it is the aailability of sec securi uritie ties beca becaus use e the bank bank a!a a!anc nce e loan loans s to its customers on the basis of securities or a share$ or a bank$ or a buil!ing or some other ty"es of a "ankin& $abits of the 'eople/ -f "eo"le hae more banking habits banks will create more cre!it and vice versa. Le&al Reserve Ratio/ +he ability ability to create create cre!it cre!it also !e"e !e"en! n!s s u"on u"on the the cash cash re rese ser res es ra rati tio o im"os im"ose! e! my central bank. +he higher this ratio the lower is the "ower to create cre!it. 2horta&e of "orro)ers/ -f there is shortage of borrowers !ue to business. 2lum" or !ue to any reason$ the ability of banks to create cre!it will also be !ecrease!. (learance 3acilit!/ -f banks enGoy clearing house facility by the central bank then they can create more cre!it an! ice ersa. "ehaviour Of Other "anks/ +he "ower of cre!it creation is further limite! by the behaiour of other banks. -f some of the



bank !o not a!ance loans to the e,tent re%uire! of the banking system$ the chain of cre!it e,"ansion will be broken. J4 'olic! Of The (entral "ank J4 +he central banks "olicy regar!ing the e,"ansion an! contraction of cre!it also restricts the cre!it creation by the commercial banks. (ash In (irculation/ (irculation/ -f the loan issue! by the bank may not be !e"osite! in the bank. +he cash may remain in circulation can not be use! by banks for cre!it creation. Econo*ic (li*ate/ Bank can not continue to create cre!it limitlessly. +heir "ower to create cre!it !e"en!s u"on the economic climate in the country. 2u**in& Up/ >e can say that creation of cre!it is an im"ortant function of commercial banks. /oweer the "ower of cre!it creation by the bank is not unlimite!.

Q.8 *efine letter of cre!it= >hat are arious "arties inol inole! e! in letter letter of cre!it cre!it= = >hat >hat is "roce! "roce!ure ure to o"en a letter of cre!it= Out Line -ntro!uction *efinitions arties inole! in letter of cre!it roce!ure of letter of cre!it onclusion Introduction



*n different countries goods are import and e!ports by their businessman, for import import and e!port the reliable reliable source for payment payment for importer is ;etter of 3redit. ;.3 is issued by the buyer bank in the favor of seller bank, Definitions

b! frank $enious “A letter of cre!it is a written instrument$ issue! by the buyer7s bank$ authori3ing the seller to !raw in accor!ance with certain terms an! con!itions "! 'ritchard A letter of cre!it is a commitment on the "art of the buyer7s to "ay or acce"t !raft$ !rawn u"on it$ "roi!e! such !rafts$ !o not e,cee! s"ecifie! amount. 'arties in letter of credit "u!erG I*porterGopener +he "erson who wants to "urchase goo!s an! commo!ities from foreign as well as at whose re%uest letter of cre!it is o"ene! is calle! im"orter. I*porter bankG "u!er bank +he bank$ which o"ens the letter of cre!it at the buyer re%uest is calle! buyer bank ExporterGseller +he "erson who wants to sell the goo!s to foreign country as well as to whose faor letter of cre!it is o"en Exporte Exp orter r bankG b ankG seller selle r bank ba nk +he bank which makes the "ayment to the e,"orter after receiing the letter of cre!it is calle! seller bank. ReFuire*ents of openin& letter of credit 2ales contract 1irst of all there must be a contract between buyerLimporter and sellerLe!porter of sales and purchase, and they agreed all term and conditions as well as mode of payment

I*port License +he banker !eman!s the a""licant about im"ort 5ice 5icens nse$ e$ an! an! in!e in!ent nt of goo! goo!s s to be im"o im"ort rte! e!.. Afte Afterr



chec checki king ng such such !ocu !ocume ment nt allo allow w im"o im"ort rter er to file file on a""lication on "rinte! form. %pplication for* -ts -ts mean means s the the agre agreem emen entt for for irre irreo oca cabl ble e lett letter er of cre!it$ i.e. fille! u" by the banker an! signe! by the -m"orter. As well as it contain all term an! con!itions of the sale agreement. a greement. (o*pletion and scrutin! of the for* 5etter of cre!it is fille! by the banker as "er info inform rmat atio ion n "ro "roi! i!e! e! by the the a""l a""lic ican antt buy buyer er'' the the banker com"lete an! scrutini3es the !ocuments. Openin& letter of credit >hen >hen all all the the info inform rmat atio ion n is com"l com"let ete! e! then then bank banker er o"ene! letter of cre!it on the behalf of im"orter. Infor*ation to exporter bank +he issuing bank informs the seller bank about the issuance the letter of cre!it. An! after it E co"ies are ma!e ma!e by the issue ssuerr ban bank. (ne (ne co" co"y re reta tain in by the the buyer bank$ other : sen! to seller bank$ out of which one co"y sen! to seller by the seller bank. Infor*ation to the seller +he seller bank inform to seller about receiing letter of cre!it form buyer bank$ then seller sen! the goo! to buyer accor!ing to term an! con!ition an! shi""ing !ocuments to seller bank. After checking !ocuments the seller bank sen!s it to buyer bank.


.evo$%e %etter of $redit % letter of credit which can be cancelled by the importer bank at any time without any obligations. %fter this such ;.3 is not acceptable by the e!porter. Confirmed %etter of $redit *n which the e!porter bank gives guarantee to make payment to the e!porter even if the importers bank fails to make the payment. %nd on the other hand importer bank also give the guarantee to importer. /o the seller gets double protection of payment. Un$onfirmed %etter of $redit % letter of credit in which the e!porter bank does not gives and guarantee to e!porter about payment. The bank give payment if the importer the provided the payment to e!porter bank. Do$#mentr0 %etter of $redit *n which the payment is made after receiving following documents  *nvoice  2acking list  *nsurance policy  $ill of lading C%en %etter of $redit % letter of credit in which there is no condition of document attached for the payment. "ixed %etter of $redit *t is a letter of credit in which the credit is available for a fi!ed total amount payable in one or more than one draft. .evo%vin( %etter of $redit *n which the amount of credit can be revolved or renewed on the fulfillment of credit conditions. %nd all the term and conditions can be renewed by the commitment of both parties.



F.&o F.&o.5 .5H H what what is bart barter er syst system em Disc Discus usss the the prob proble lems ms of bart barter er economy. E!plain the evaluation of money, and how money removes the problems of barter system. O#t +ine 'ntrod#$tion Definition 'n$onvenien$es>pro%ems 'n$onvenien$es>pro%ems of rter s0stem 1ow mone0 remove the pro%ems of rter s0stem Con$%#sion 'ntrod#$tion % syst system em of dire direct ct e!ch e!chan ange ge of one one comm commod odit ity y or serv servic icee for for anot anothe herr with withou outt the the use use of mone money y is call called ed bart barter er.. "ne "ne has has to e!change the product which one has in e!cess with those who have other surplus product with themselves. Definitions B0 .)1)/r!er $arter is the direct e!change of goods and services with out the use of money as either a means of payment or a unit of account. B0 S%on Direct e!change of commodity or services for another without use of money B0 3)-homs $arter is a form of trading in which goods are e!changes directly for other goods without the use of money as an intermediary. 'n$onvenien$es of Brter s0stem 7) +$! of do#%e do#%e $oin$iden$e of wnts The basic problem in barter system is double coincidence of wants. *t means that there must be double satisfaction of wants. $oth parties in barter. 1or instance, goods can be e!change effectively if a person is able to spare what the other person wants and at the same time needs what the other can spare. 8) +$! +$! of $omm $ommon on mes# mes#re re *n bar barter syst system em,, ther theree is no comm ommon measu easure rem ment ent for e!changeable goods. 1or instance, if a person have cow and other have goat, and 5 st want to e!change cow after receiving



two goats, and other is not agree from 5st because there is no common measurement of goods. 9) +$! of s#&division %s there are some commodities which cannot be sub divided. ;ike a person have a horse and other want to :H 'g Bice. /o in this situation which part of horse should be given in e!change for :H 'g. of Bice ) +$! +$! of of store store v%#e v%#e *n barter system there is no facility of store value. $ecause ther theree were were some some good goodss that that have have no stor storag agee faci facili lity ty.. ;ike ;ike vegetables, fruits, etc =) +$! of $pit% $pit% formtion formtion The The form format atio ion n of capi capita tall good goodss is nece necess ssar ary y for for furt furthe herr production of goods and services. $arter is the enemy of capital formation. The basis of capital formation is saving. *n the absence of capital formation the economic progress become ero. ?) Diffi$#% Diffi$#%ties ties in tx tx $o%%e $o%%e$tio $tion n *n bart barter er ta! ta! coll collec ecte ted d by reve revenu nuee depa depart rtme ment nt in the the form form commodities. The goods collected form ta! payer will not be stored for a longer period. They will lose their value with the passage of time. @) Diffi$#% Diffi$#%ties ties in trnsfer trnsfer of we%th we%th There is great difficulty in transferring wealth from one place to another under barter. More ever immovable property can not be transferred. transferred. ) No #d(etin( #d(etin(


.emov% of in$onvenient of rter 7) *one0 s  medi#m medi#m of of ex$hn ex$hn(e (e The goods and services are now purchased and sold with the help of money. The difficulty of double coincidence of want has been removed. 8) *one0 s  $ommon $ommon mes#r mes#ree of v%#e v%#e Money is used as a common measure of value, by which we can measure and compare the values of different goods and services. 9) *one0 s  stndrd of f#t#re f#t#re p0ment % modern economy, goods and services are sold and bought on the promise to pay in future. /o it acts as the standard of future payment. ) *one0 s store v%#e v%#e


7) *one0 n nd pro%em of s#&division The problem of sub4division was also solved by the use of money. &ow with the help of money we can purchase each and every kind of goods. Con$%#sion &o doubt money have remove the all the problem of barter system but still in developing countries like 2akistan, china use the barter system.

F &o. 55. +hat is paper money Describe its different forms %lso discuss the advantage and disadvantage of paper money OU- +'NE 'ntrod#$tion of pper mone0 Definitions "orms of pper mone0 Advnt(es nd disdvnt(es of pper mone0 Con$%#sion 'ntrod#$tion: 2aper money means the currency notes issued by central bank of country. *n the present age paper money has got a significant place in place of metallic money. 2aper money is convenient to carry and easy to handle and store. *t is the most advance form of money. *t fulfils nearly all the characteristics of ideal money. *t is believed that different attempts are make or introduce paper money i.e. *n 3hina during 6th century, *ran 5C th century and finally paper money was originated by gold smith of England in early 5A th century. &ow in all develo developed ped and under underdev develo eloped ped countr countries ies of world, world, *nconv *nconvert ertibl iblee paper money is used as medium medium of e!change and standard standard of value. Definitions /rof) /r of) 1nso 1n son n



#2aper money means the paper instruments such as bank notes, cheue, bills and other forms which act as a currency. ACCO.D'N3 -O ") /E.. #2aper money is document representing money such as bank notes, promissory notes, notes, bills of e!change etc. ACCO.D'N3 -O /.O") 3.EENE. #2aper money means documents documents with a value started started on on them but having no value in them. K'NDS O" /A/E. *ONE: 2aper money is classified into following kinds04  Bepresentative paper money.  3onvertible paper money.  *nconvertible paper money.  1iat paper money .E/.ESEN-A-'VE /A/E. *ONE Bepresentative paper money is one which is fully state is in a position to convert all the the notes into gold, *f they are are presented for conversion at the same time. The govt keeps reserves for the confidence of people. *n


"A'"A' - /A/E. /A/ E. *ONE *O NE



1ait money is the form of inconvertible inconvertible money having little or no value in it. 1ait means the order of government. 1ait money is accepted by the people for purchase or e!change of goods, due to government order. 2aper money is fait money. +henever government cancels any notes, the holder will lose the whole value. ADVAN-A3ES O" /A/E. *ONE ECONO*'CA+ 2aper money is normally much easy to issue. The cost of currency as compared to its face value is very low. The central bank has not to keep gold or silver for issuing of the paper notes. UN+'*'-ED +E3A+ -ENDE. 2aper currency is unlimited legal tender money. *.e. any amount of debt can be paid in it. *t can be used to discharge all kinds of business obligations obligations and liabilities. &o one refuse to accept accept in settlement of any debt. +'31- 2'E31 The paper money has less weight then metallic money. *t is easy to handle then metallic money. E+AS-'C'- 2aper money due to its elasticity is very useful for the government. *t can be increased or decreased according to business reuirement. reuirement. EAS COUN-'N3 The paper paper money money is conveni convenient ent to carry carry and trans transfe fer. r. *t can be easily kept in pocket or wallet. D'""'CU+- -O CO/ The design of paper currency is very intricate and special type of ink and paper is used hence it is difficult to copy it. .ECO.D 2ape 2aperr curr curren ency cy is alwa always ys numbe numbere red. d. Each Each one one has has a dist distin inct ct number. /o in case of robbery, bank fraud, the involved person can be traced out when. They use the the embeled money. EAS'+ .ECO3N'AB+E The paper money is easily recogniable. There is no botheration of testing the genuineness of the money material. CONVE.-'B'+'-



2aper currency is easily convertible into other. 3redit instruments such as draft, promissory note and bills etc. USE"U+ 'N E*E.3ENC The paper money money can be used in emergency like like war and floods. floods. The government can meet the e!penses by printing notes in short period. SAV'N3 'N USE O" *E-A+ 2aper currency indirectly leads to the saving in the metallic reserves of the country. Due to the issuance of paper currency there is no need to issue coins in greater value. 1'31 VA+UE 'N S*A++ BU+K 2aper money has the uality that it has value in small uantity or bulk. UN'"O.*'- The paper money stays uniform. The apparent loss of colour or tearing of paper does not affect the value. *t is uniform in colour, sie, design, weight etc. EAS /A*EN-S *t is easier and less e!pensive to make payment in thousand of rupees through paper money. ADVAN-A3ES -O BANK 2aper money is of great advantage to banks. They can keep cash reserves in this form.

'N-E.A 'N- E.A-'ONA+ 'ONA+ -.ADE -.AD E The present state of international trade also owes great to paper currency. Different type of paper money can be conveniently interred changed and used in different parts of world. This has increased the liuidity of worlds economy. /.'NCE *EC1AN'S* "ur market forces of demand and supply works because of price mechanism. 2aper money has greatly help in making price mechanism workable and effective. *ONE-A. *ANA3E*EN-



%s the supply of paper money can be regulated by central bank so, monetary management becomes easy. The volume of circulation of money central bank. Disdvnt(es of pper mone0 +imited $$eptn$e Deme Demeri ritt of pape paperr mone money y is that that it has has a limi limite ted d acce accept ptan ance ce.. *ts *ts acceptance is limited with in the boundaries of home cont ray. *t is not legal tender money in other countries. Dn(er of inf%tion The biggest demerit is that paper money is over issued then it brings inflation in the country which is harmful for purchasing power. +$! of d#ri%it0 &ormally paper money has a short life than metallic money. There are chances of damages to paper. 1ire may burn it. 2aper money loses its good appearance and shape. Sm%% denomintions denomintions 2aper money is not suitable for small monetary denominations such as 5, :, ?, 5H, :?, and ?H paisa. *n this case metallic money gets preference over paper money. B%n$e of p0ment +hen paper money over issued in the market then it cause the inflation, and in which prices will be higher on the other hand value of money decrease and balance of payment becoming unfavorable day to day with the affect of inflation. +ess sti%it0 There is less stability in the value of the paper money as compared to meta metall llic ic mone money. y. /ome /ome time time it is over over issu issued ed and and peop people le lose lose confidence in the value of money and they prefer to keep their savings in terms of gold and silver. +oss d#e to fire nd wter %lthough the paper money is not affected by and apparent wear and tear or loss of colour yet it can be damaged due to fire or water. DAN3E. O" *'S*ANA3E*EN2aper money is useful only when it is efficiently managed. *f the mone moneta tary ry auth author orit ity y is not not vigi vigila lant nt and and does does not not issu issuee the the pape paperr currency as reuired, it often leads to inflation deflation. /.'CE 'NS-AB'+'-



2aper money has given rise to wide scale price fluctuation in diff differ eren entt coun countr trie iess of worl world. d. The The fluc fluctu tuat atio ions ns in e!ch e!chan ange ge rate rate market also produce serious effects on the general price level in the economy. +eak paper money fails to en-oy. The confidence of the people and cause price instability. instability. CONC+US'ON 1rom above discussion we concluded that paper money has also some some defe defect cts. s. *t is bett better er than than meta metals ls and and it is also also help helpfu full for for remo removi ving ng the the econ econom omic ic prob proble lems ms.. *t is a sour source ce of bles blessi sing ng for for mank mankin ind. d. >owe >oweve verr when when it is not not prop proper erly ly mana manage ged d it beco become mess source of perils 8 confidence.

F &o.5: Define money and e!plain the different function of money OU- +'NE Definitions "#n$tions /rimr0 f#n$tions Se$ondr0 f#n$tions Contin(ent f#n$tions Con$%#sion Definitions B0 .)/ Kent #Money is anything which is commonly used and generally accepted as a medium of e!change or as a standard of value B0 *rsh%% #%ll those things which are, at any time and place, generally current witho ithout ut doub doubtt or spec specia iall enu nuiry iry as a means ans of pur purchasi hasing ng commodities and services and of defraying of e!penses B0 3eoffre0 Crowhter #%nything that is generally acceptable as a means of e!change (i.e. as means of settling debts) and at the same time acts as a measure and as a store of value "#n$tions of mone0



/rimr0 f#n$tions *edi#m of ex$hn(e &ow a days money is used as a medium of e!change. +ith the help of money we purchase goods and commodities according to our demand at any time. %nd money also used for the payment of goods and services. +e can simply say money act as medium of e!change between purchaser and and seller. A stndrd of v%#e Money used as standard valueJ we can measure the units in terms of money. "nly specific goods can not measured like love, care, and respect etc, other wise every thing is measured in term of money. 2rice can be settled of good and services with the help of money A store of v%#e To store the perishable commodities for a long period of time is very difficult. &ow a days money has removed this problem. +e can easily store for a long period of time. A stndrd of deferred p0ment Money provides the facility of future payment, but in barter there is no facility of credit. $ecause there is no standard value for payment of credit. $ut money has removed this problem and we can pay future payments. %s well as credit transactions also possible with money. Se$ondr0 f#n$tions "$i%ities prod#$tions +ith the help of Money we can ensure the availability of factor of productions. *f a person wants to start a business then with through money all factor of productions (land, labor, and organiations etc) available easily. Es0 $ons#mptions *n barter system the main problem of consumption goods according to dema demand nd of peop people les, s, beca becaus usee it reu reuir iree doub double le coin coinci cide denc ncee of wants. Money removed this problem, and every can easily purchase commodities according to his demand, /romotes svin(s nd investment *t is easy to save and invest in terms of money. The establishment of big pro-ects absorbing huge investment can be possible only due to the dynamic role of money.



Enhn$e trde $tivtes Mon Money prom promo ote trade ade act activat vates by ser serving ing as a medi edium of e!changing making e!change of goods easy. "$i%ittes "$i%ittes distri#tions distri#tions of rewrds +ith the help of money we easily distribute the rewards. *ts helps us in finding the correct value of goods produced and the contribution of each each fact factor or of prod produc ucti tion on to the the prod produc ucti tion on proc proces ess. s. *t thus thus becomes a base for the disturbing for rewards among the contributing factors. Enhn$e $pit% f#n$tion *n-ecting more and more funds in the form of money can increase capital formation reuired for the development of an economy. Ens#re fir distri#tion of in$ome Mone Money y ensu ensure ress fair fair dist distri ribu buti tion on of inco income me thro throug ugh h prog progre ress ssiv ivee ta!ation system, which can only be implemented in money economy. Es0 orrowin( nd %endin( $orr $orrow owin ing g and and lend lendin ing g acti activi viti ties es have have beco become me easy easy whic which h easy easy which which otherw otherwise ise were were diffi difficul cultt in barter barter econom economy. y. $anks $anks create create credit on the basis of money deposits they receive Contin(ent f#n$tions Distri#tion Distri#tion of ntion% in$ome Money helps us in the fair distribution of national income among factors of production. Credit $retion F $ontr$tion The process of credit creation and contraction by commercial banks depe depend ndss upon upon cash cash rese reserv rve, e, whic which h they they main mainta tain in from from mone money y deposits of the accounts holders. E;#%i


hold it and the holder faces no problem of its depreciation as in case of goods. /o it serves as a liuid asset. A 3#rntor of so%ven$0 % trader always keeps sufficient ready cash to meet the obligations. *f a trader or a company fails to meet the obligation, when fall due, it is said said to be inso insolv lven entt irre irresp spec ecti tive ve of its its asse assett and and liab liabil ilit itie iess statement. /imilarly, /imilarly, banks keep cash reserves to pay their depositors usually at a moment notice. Therefore, we can say that it serves as a guarantor of solvency. Con$%#sion *n barter economy there were so many problems of e!change and transaction according to consumer wants, because their was no any standa standard rd value value of measur measureme ement. nt. $ut money money has remove removed d all the problems and as well as facilities the consumers. $usinessmen can e!change goods and services according to their customers demand. %fter this when consumer is satisfied on the behalf of supplier then economic growth is starting day to days.

F.&o.5C >ow the value of money is determined "B 3ritically e!plain Fuantity Theory of money OU-+'NE 'ntrod#$tion Definitions Ass#mption of 6#ntit0 -heor0 of mone0 E;#tion of Ex$hn(e N#meri$% /resenttion /resenttion 3rphi$% /resenttion /resenttion Criti$ism of -heor0



Con$%#sion 'ntrod#$tion The uantity theory of money was first introduced by Davan at in the 57th century. %fter it David >ume and 9./ Mill had worked on this Theory in 5Ath and 5=th centuries. $ut the Theory is most famous in 56th centuries by *rving 1isher, %merican economist in his book #The The 2urc 2urcha hasi sing ng 2owe 2owerr of Mone oney in 565 5655 with with the help elp of Euation. *n his book he presented the money as value of money that means The The 2urch urchas asiing powe powerr of money oney.. %nd it show showss the the inver verse rela relati tion onsh ship ip betw betwee een n valu valuee of mone money y and and pric pricee leve level. l. &ow &ow we discuss in detail about the Fuantity Theory of Money. Definitions B0 'rvin( "isher #"ther things remaining unchanged as the uantity of money in circ circul ulat atio ion n incr increa ease ses, s, the the pric pricee leve levell also also incr increa ease sess in dire direct ct proportion and the the value of money decreases decreases and vice versa. B0 /rof) -#ssin( #"ther things remaining the same, double the uantity of money, price level will be twice high as beforeJ and the value of money on half. >alf the uantity of money, prices will be one half of what they were beforeJ and the value of money doubles. Ass#mptions of -heor0 "#%% Emp%o0ment The theory is based on the assumption of full employment in the country. /ri$e s  pssive f$tor *t assumes that price is a passive factor. *t means that if means that it is affected by other factors in the euation but does not affect others. Constnt ve%o$it0 of mone0 %ccording to fisher euation the velocity of circulation of money and bank money is constant. No $hn(e in vo%#me of trde The total total volume volumess of transa transacti ction on (good (goodss and servic services es produc produced) ed) remain same and are not affected by change in money supply. Brter -rns$tions



Fuantity theory of money is applicable on the money economy. *t is not applicable on barter system. /roportion% /roportion% re%tion etween *F*7 There is proportional relation between currency money (M) and bank money (M5). No $hn(e in horded mone0 There should be no change in hoarded money. /uppose it increases, the money in circulation will decrease, prices will fall and the value of money will rise.

Euation of 1isher 2rofessor 1isher e!pressed the following euation. /- G*VH*7V7 O. / G *VH*7V7 -

+here0 2T I total demand for money. 2 I eneral 2rice level M Iuantity of legal tender money. M5 Iuantity of bankLcredit money. N I velocity velocity of circulation circulation of legal legal tender money N5 I velocity of circulation of bank money. T I total Transactions &umerical presentation presentation (e!ample) (e!ample) /uppose0 M I 5HH, M5I 5HH, N I C, &ow putting the values values in formula 2I MNOM5N5 T I 5HHKCO5HHK: 5HH I CHHO:HH


N5 I :,

T I 5HH


5HH I ?HH 5HH I Bs.? *n order to prove that variation in money supply produces proportional proportional change in price, now we double the supply of money by keeping other variable constant. 2I :HHKCO:HHK: 5HH I 7HHO@HH 5HH I 5HHH 5HH I Bs 5H The general price level has doubled by doubling supply of money. &ow we half the supply of money and keeping other variables constant. 2I?HKCO?HK: 5HH I 5?HO5HH 5HH I:?H 5HH I Bs.:.?H &ow we can see general price level is half when we half the supply of money.

raphical presentation The uantity theory of money can be e!plained with the help of following diagrams 6#ntit0 theor0 of mone0 IDi(rm 7J

P



2: 2rice level 25

Q M5

M:

Fuantity of money

The above diagram shows the direct and proportionate relationship between the supply of money and the general price level. +hen the supply of money is increased from M5 to M: then it shows the doubled price level also increased proportionately. proportionately.

P

NM5 Nalue of money NM:

(  M1

M:



Quantity of money +he !iagram shows the inerse relationshi" between the %uantity on money an! the alue of money. >hen the %uantity of money is (M1 the alue of money is (M1 (M1$$ when when the the %uan %uanti tity ty of mone money y is incr increa ease se! ! to (M: !ouble!' the alue of money re!uces to (M: one half'.

Criti$ism Cir$#%tion of mone0 *t is very difficult to measure the circulation of the legal money and credit money, therefore velocity of money can not be measured in a country. '(nore demnd for mone0 The theory discusses only of money as the main determinant of price level and the value of money. *t ignores the role of demand for money in determining price level. Therefore it may be called one sided theory. Ass#mption of f#%%0 emp%o0ment *n this theory assumed about the full employment in the country, it is not possible for any country to provided full employment. /roportion% /roportion% $hn(e +hen the price level of goods is changed then on the other hand the uan uanti tity ty of mone money y not not chan change ged d at the the same same prop propor orti tion on.. ;ike ;ike if uantity uantity of money money increase increase by 5H meanwhile meanwhile it is not compulsory compulsory the price level is also increased by 5H, may be it can decreased. Stti$ theor0 The economist says that it is static theory because in every economy up and downs and changed must occurred. $ut in this theory does not mention about the changing. Use%ess ss#mptions



%ll the eu euati ation and and diag iagram are made ade on the the base base of som some assum ssump ptio tions wit withou hout them them theo heory is use useless less,, as wel well as suc such assumption also useless '(nores short .#n ;ord 'eynes says that it ignores the changes in prices in short run period and it considered considered only long run period. period. -rde $0$%e %s in early ages business faced the situation of depression, like in 56CH. Then that time many countries tired to raise general price level by increasing the supply of money. $ut it was not successes able in that time. /o it proved that this theory does not take into account the phases of trade cycle. Con$%#sion The uantity theory of money is not entirely useless. The supply of money does affect the price level. %cknowledging the importance of this theory, miltion 1riedman presented wealth theory of demand for money on its basis.

F. &o.5@. &o.5@. +hat +hat are the 2rincip 2rincipal al and Method Methodss of notes notes issues issues +hich Methods adopts in 2akistan OU- +'NE



/rin$ip% of Notes iss#es Advnt(es nd disdvnt(es of the prin$ip% *ethods of Notes iss#es Advnt(es nd Disdvnt(es of the *ethods -he S0stem #sed in /!istn Con$%#sion /rin$ip% of Notes iss#es $asically there are two principal of notes issues that are adopt in different countries. 7) C#rren C#rren$0 $0 /rin /rin$ip $ip% % *n currency 2rincipal central bank of the country issued notes after taking 5HH Beserve of gold. 3entral bank cannot print notes without the5HH old Beserve of gold. $ecause of this system have some %dvantages0 Advnt(es of $#rren$0 /rin$ip% 7) "#%% sfet sfet0 0 Due to reserve of gold this system provide the fully safety to paper money 8) *ore *ore $onfid $onfiden$ en$ee of peop%e peop%e %cco %ccord rdin ing g to this this prin princi cipa pall pape paperr mone money y got got the the more more confidence of peoples because central banks can convert the money into gold. 9) St St i% i%it it0 0 2aper money has the stable value in currency principal due to 5HH backing reserve of gold. ) No dn( dn(er er of of inf% inf%ti tion on


owever the central bank maintain an adeuate reserve of gold bullion.

Advnt(es of n!in( /rin$ip% 7) E%s E%sti ti$i $it0 t0


Due to normal reserve of gold the central bank issue the notes over demanded of the peoples of country, after it when the uantity of money rise then value of money fall meanwhile inflation will be occur in the economy. 8) +ess $onfiden$e $onfiden$e of peop%e $anking principal not able to got the full confidence of the people after issuing the notes, because there is not 5HH backing of gold reserve. 9) *onet *onetr0 r0 mism mismn( n(eme ement nt There are more chances of monetary mismanagement in banking principal principal as compared to the currency currency principal. The negative role of money may appear on the scene. *ethods of notes iss#es There are three methods of notes issues as following. 5. "ixed fid#$ir0 iss#e This method allows the central bank of country for issuing the fi!ed limit of notes without taking any metallic reserve. The government securities used as backed reserve in this system. *f the issued notes e!cess the limit of fi!ed fiduciary then over limit notes will be fully backing the reserve of gold. This system is more famous, first time <' adopts in 5=@@ and still in <' as well as in &orway and 9apan. Advnt(es of fixed fid#$ir0 iss#es) 7) E%s E%stti$ The beauty in this system is this elasticity. The supply of mone money y can can be chan change ged d by chan changi ging ng the the fidu fiduci ciar ary y limi limitt without disturbing the metallic reserve provision. 8) *ore *ore sfe sfe *n this system all the issued notes are fully safe, because notes are issued according to the limit. *f the over limit notes are issued in the market, then before issuing the notes gold backed as reserve. 9) Contro% Contro% over the inf%tio inf%tion n


7) +ess $onfiden$e $onfiden$e in $#rren$0 +hen +hen curr curren ency cy is over over issu issued ed peop people le lose lose conf confid iden ence ce * currency due to its devaluation 8) Dn(er of over iss#e iss#e *n this system danger of over issue remain occur. $ecause the the cent centra rall bank bank can can chan change ge the the fi!e fi!ed d fidu fiduci ciar ary y limi limit, t, because of this notes are over issued in the market. "n the othe otherr hand hand if uan uanti tity ty of note notess rise risess then then chan chance cess of inflation also occur in the market. /roportion% /roportion% .eserve S0stem *n this method of notes issue the central bank of the country keep a certain certain percentage percentage of gold reserve reserve for issuing the paper money. enerally these percentages vary from :? to @H. %nd the remaining portion of percentage that is cover with gol gold, shou shoulld reser serve back backed ed with ith Tra Trade bil bill and and ovt ovt.. securities. This method was first introduced in ermany in 5=A?, in


Ex$h Ex$hn n(e (e *n *n(e (eme ment nt O. *odi *odifi fied ed /rop /ropor orti tion on% % .ese .eserv rvee S0stem %s its name shows, it is the modified form of proportional reserve system. *n which bank is reuired by law to keep the percentage reuired against the notes issued in the form of gold, foreign bills or cash at some foreign banks where gold standard prevails. Advnt(es 7) E% E%sti sti$ This system also has the beauty of elastici elasticity. ty. 3entral bank can incr increa ease se and and decr decrea ease se the the uan uanti tity ty of note notess acco accord rdin ing g to reuirement of industries and consumers.etc.

8) 3o%d 3o%d not not $omp $omp#%s #%sor0 or0 *n this system old is not necessary for the issuing of notes in the market. "nly foreign bills and cash are enough for printing the notes. Disadvantages 7) Dn(er Dn(er of inf% inf%ti tion on There is more danger of inflation as there are more chances of over issues. 8) *onetr0 *onetr0 mismn( mismn(emen ementt There are more chances of monetary mismanagement. *f the government is less responsible. *ethod ein( fo%%owed in /!istn Till the 567? the note issue in 2akistan under 2roportional Bese Beserv rvee syst system em.. Mean Meanwh whil ilee curr curren entl tly y adop adoptt the the e!ch e!chan ange ge management system.
F &o. 5? defines money +hat are the significance and importance of money OU- +'NE Definition of mone0



Si(nifi$n$e Si(nifi$n$e F importn$e of mone0 Con$%#sion Definition of mone0 A$$ordin( to .)/ Kent #Money is anything which is commonly used and generally accepted as a medium of e!change or as a standard of value A$$ordin( to D)C Co%nder #Money is a fanatical asset that makes the real economy function smoothly by serving as a medium of e!change, a unit of account and a store of wealth A$$ordin( to $o#%orn #Money is a means of valuation and of payment

%s we read in definitions money used as medium of e!change and standard for measuring value for the economy. The economic development, which we see in different sectors like trade, commerce, industry, is possible only due to the presence of money. The modern economists fully recognie the significant economic role of money in the capitalistic and centrally controlled economy. .o%e of mone0 in Cpit%isti$ e$onom0 7) 'n$re 'n$rese se $ons#m $ons#mpt ption ion +ith the help of money the consumption process famous in the market, because with money human being are able to buy and sell goods according to their needs and wants, after the utiliation process human want become satisfied. "n the other other hand hand there there is facili facility ty of consum consumpti ption on accord according ing to human wants in barter system.

8) Es0 Es0 /rod /rod#$ #$ti tion on *n barte arterr econ econo omy the prod produc ucttion of good goodss so much uch difficult, because problem of raw material, hiring labour, and after it selling output of the goods. $ut now with the evolution of the money production process is easy, with money money avail availabi abilit lity y of factor factor of produc productio tion n (land, (land, labour labour,, capita, and organiation) is possible.



%nd finding out the cost of goods in term of money no more problems. 9) "$i%ittes "$i%ittes ex$hn(e -rns$tion -rns$tion *n barter system e!change of goods according to demand of different people so much difficult, due to lack lack of comm common on meas measur urem emen ent. t. $ut $ut now now with with the the help help of money these problems removed. &ow goods are e!changed according to demand of the user with the process of sale and purchase. distri#tio n of ntion% in$ome . @. E;#% distri#tion *n barter economy there is no concept of distribution of national income because people are produced good as per their need and no concept of saving and income etc. now curr curren entl tly y we can can chec check k eua euall lly y shar sharee of four four fact factor or of production i.e. rent of land, wages for labour, interest on capital, and profit on entrepreneur is paid in term of money. =) /#% /#%i$ i$ fin finn$ n$ee Money is an important tool in the field of public financeJ with the help of it people can invest their finance in different sectors, after it human activities increase due to this financer got the benefit in the shape of profit after increasing the level of production according to consumer needs. ?) Deve%oped Bn!in( s0stem +ith the help of money, economy is able to develop the banking sectors. Due to this peoples enhance their saving and got the interest on their saving from the banks. "n the other hand in barter economy there is no concept of saving and investing. Dete rmintion tion of pri$es pr i$es . A. Determin The capitalistic economic system, which is followed by a large number of countries, is based on price mechanism and price mechanism depends on the e!istence of money. The prices of any commodity easily calculate with the help of money. ) Enhn$e svin( nd investment investment +hen different person receive their income from different sectors in the form of money. %fter spending the money on



their basic needs some person save there income for future condition, as well as some of them invest it to their business. %fter it they got the benefits in shape of profits. "n the other hand in barter economy there is no concept of saving and investment. ) Cpit Cpit% % form formtio tion n *t is a process of increasing physical and human capital of a country through best utiliation of resources. +ith the help of money we can increase the uantity of capital, as per industry needs. 7) *onetr0 po po%i$0 The The mone moneta tary ry poli policy cy give givess mome moment ntum um to the the econ econom omic ic activities. *t can only be formulated and implemented in money economy. 6) 7? wht do 0o# men 0 'nf%tion Exp%in the different !inds of inf%tion . OU- +'NE 'ntrod#$tion Definition Kinds of inf%tion Con$%#sion 'ntrod#$tion *t represents the rise in general price level. $asically when the state bank of the country issue issue the over demanded notes notes then it decrease the value of money. Meanwhile raises the general price level in the market. /ome authors define the inflation as follows B0 4)*)Ke0nes #*nflation is a rise in price level after the full employment has been achieved B0 .)/ Kent #*nflation is nothing more than a sharp upward movement in the price level B0 Crowther



#*n the state of *nflation the prices are raising, i.e. the value of money is falling On the sis of $#ses 7) Demnd Demnd p#%% p#%% 'nf% 'nf%ti tion on *n which inflation arises due to increase in demand of goods. "n the other hand supply of the goods not according to demand of cons consum umer erss at the the resu result lt pric pricee leve levell incr increa ease se of e!is e!isti ting ng goods, this situation creates the inflation in the market. 8) Cost Cost p# p#sh sh 'nf% 'nf%ti tion on +hen the cost of production increase and producer raise the price level in the market, its called cost push inflation. During the the manu manufa fact ctur urin ing g proc proces ess, s, incr increa ease se the the cost cost of 1act 1actor or of 2rod 2roduc ucti tion on show show the the high high cost cost of prod produc ucti tion on,, at the the resu result lt producer reduce the supply of goods due to lesser profit ratio, the general price level increased. 9) B#d B#d(et (etr0 r0 'nf%t 'nf%tion ion +hen the ovt. of the country borrows from banks or prints new currency notes cover the budget deficit. %fter it uantity of money increase in the market, which tends the falling the valu valuee of mone money y as well well as incr increa ease se the the pric pricee leve levell in the the market. These situations create the inflation. ) /rofit /rofit ind#$ed ind#$ed inf%tio inf%tion n +hen +hen the monop nopolis olistt ear earns the the more pro profits its on goo goods produced. *t creates the profit induced inflation. *n which basically producer raise the price level as per its wants, at the result price level increase, also becoming inflation. =) "ood "ood inf% inf%t tio ion n +hen the prices of foods items increase sharply, it is as food inflation. 9ust like during the days of Eid, Baman etc ?) 'n$om 'n$omee inf%t inf%tion ion The inflation that occurs from high income level. *ncome may increase due to change in salary or foreign remittance. @) *onet *onetr0 r0 inf% inf%ti tion on This inflation arises due the increase in supply of money with no increase in production is called monetary inflation.



On the sis of rte of inf%tion 7) Creepi Creepin( n( inf% inf%ti tion on *n which when the price level of goods raises at slow rate over a period of time. *t also called mild inflation. The rate of inflation may be upto : 2.%. this types of inflation faced by 9apan,


Other t0pes 7) /rti /rti%% inf inf%t %tio ion n %ccording to 9.M, 'eynes, partial inflation occurs when the price level rises partly due to an increase in the cost of production on goods and partly due to rise in supply of money provided the economy is operating below the level of full employment. 8) "#%% "#%% inf% inf%t tio ion n +hen in economy eneral 2rice level rise due to full employment in the market, because when consumer got the -obs, then they demand more for the purpose of satisfaction, but due to lesser supply of goods price of goods rise and inflation occurs. Con$%#sion

%s we know inflation very harmful condition for consumers of the economy. Especially for the poors, ovt should develop the polices for controlling over inflation with implementation. $ecause it reuired ? to 5H years to removing the inflation from the economy,

6 7@) Define inf%tion, inf%tion, wht re the $#ses $#ses of inf%tion inf%tion 1ow 1ow we $n remove the inf%tion O#t %ine 'ntrod#$tion Definition C#ses of inf%tion *es#rement to $ontro% the inf%tion Con$%#sion 'ntrod#$tion *t represents the rise in general price level. $asically when the state bank of the country issue issue the over demanded notes notes then it decrease



the value of money. Meanwhile raises the general price level in the market. /ome authors define the inflation as follows B0 4)*)Ke0nes #*nflation is a rise in price level after the full employment has been achieved B0 .)/ Kent #*nflation is nothing more than a sharp upward movement in the price level B0 Crowther #*n the state of *nflation the prices are raising, i.e. the value of money is falling C#ses of 'nf%tion Demnd p#%% 'nf%tion *n which inflation arises due to increase in demand of goods. "n the other hand supply of the goods not according to demand of cons consum umer erss at the the resu result lt pric pricee leve levell incr increa ease se of e!is e!isti ting ng goods, this situation creates the inflation in the market. C#ses of Demnd p#%% inf%tion 7) 'n$rese in s#pp%0 of mone0 Bapid increase in supply of money creates the demand pull inflation. Due to it income of people rises, and they demanded more goods but on the other hand supply not according to demand of goods, at the result price level of e!isting goods will rise, after it inflation occur. Defi $it finn$in( finn $in( 8) Defi$it +hen government of the country borrows money from banks or prints more notes to finance the pro-ects. These pro-ects become productive after sometimes but the income of the factor factorss engage engaged d with with these these pro-ec pro-ects ts increa increase se sudden suddenly. ly. This This increase in income causes increase in aggregate demand for goods. %t the result price level of e!isting goods will rising up. 9) "orei(n .emittn$e +hen +hen fore foreig ign n inco incom me of the the peop people le incr increa ease se,, due due to this this purchasing power of the peoples also rising up. $ut supply of goods not according to reuirement of consumers, after it price



level of e!iting goods will increase due to increase in demand of goods. ) .pid in$reses in pop#%tion +hen the rate of population population rises very sharply, sharply, then goods are more more dema demand nded ed in the the mark market et.. $ut $ut supp supply ly of good goodss and and services not is according to demand at the result price level of goods rising up as well as inflation occurs. =) 'n$rese in w(es +hen the wages of the employees increased then the income level of peoples will rise as before they earned. The Then purchasing power of the consumer increased but on supply side side,, its its not not acco accord rdin ing g to dema demand nd and and afte afterr it pric prices es are are shooting up. 1ordin( nd sm#((%in( The artif artifici icial al shorta shortage ge called called hoardi hoarding ng may may resul resultt in risin rising g prices. /imilarly, when the output of our country is smuggled abroad, the prices increase due to domestic shortage of goods. @) 1i(h $ons#mption >igh level of consumption, -ust like, adds fuel to the fire of infl inflat atio ion. n. +hen +hen peop people le incr increa ease se thei theirr cons consum umpt ptio ion n then then producer increase the prices prices of goods, and inflation inflation occurs ) B%$! mone0 *t may earn through smuggling ta! evasion etc. increase the demand for lu!urious goods. %fter it prices of these goods rise, and inflation occurs Non&deve%opment expendit#re 6. Non&deve%opment The larger non4development e!penditures of a country increase the money supply that creates more demand for goods and serv servic ices es.. *t thus thus beco become mess an acti active ve fact factor or to infl inflat atio iona nary ry pressure in a country. Cost p#sh 'nf%tion +hen the cost of production increase and producer raise the price level in the market, its called cost push inflation. During the manufacturing process, increase the cost of 1actor of 2roduction show the high cost of production, at the result producer reduce the ?)



supply of goods due to lesser profit ratio, the general price level increased C#ses of $ost p#sh inf%tion 7) .isin( pri$es of imported (oods (oods +hen +hen the the pric prices es of impo import rted ed good goodss incr increa ease sess then then cost cost of producers goods also rises, and for the purpose earning more profit producer rise the price level and meanwhile inflation occurs. 8) .ise in oi% nd 3s pri$es +hen the government of the country increases the prices of oil and gas for industries etc. then cost of production will rise and after it price also rise and inflation occurs in the market 9) 'n$re 'n$rese se in w(es w(es Due to shortage of skilled and efficient labour in the market, the remaining part raises their wages level. Due to this rise producers will pay more as before. %fter it cost of the producer will rise and inflation occurs. ) 'n$rese in indire$t -xes +hen increase in indirect ta!es (sales ta!, e!cise, duties etc) result in increasing the cost of production of goods after it the manufacturer increased in general price level of the goods. =) .ise in s#ppo s#pport rt pri$es pri$es of (ri$# (ri$#%t#r %t#ree $orps *n order to protect the interests of the farmers, the agriculture countries provide support to agricultural products. *t has cost push inflationary inflationary effect on the economy. ?) Si$! Si$! ind#st ind#stri ri%% #nits #nits There are a lot of industrial units which are closed due to shortage of fund. 1or this reason the output of industry is decreasing and price level rising. *es#rement to $ontro% the inf%tion $asically inflation is very danger factor for the economy. %nd for its controlling not only one Measurement is reuired, so under following some sort of measurement to control the *nflation from the market. 7) /roper $he$! on on monetr0 expnsion expnsion



3urrency notes should issued by central bank of the country according to the reuirement of the peoples and industries. *f over demanded notes are controlled then day to day inflation also controlled from the market. 8) Defi$it finn$in( The The gove govern rnme ment nt of the the coun countr try y shou should ld cont contro roll the the defi defici citt financing in the form of bank borrowing and printing notes of new currency. 9) .ed#$t .ed#$tion ion in -x -x rtes rtes overnment should reform the whole structure of Ta! for the purpose of to attracting the new investors and businessmen etc. after it production level increase, as well as price falling. ) .eviv% .eviv% of si$! ind#stri ind#stries es The revivals of sick industries units, would increase production and reduce inflation =) Comp#% Comp#%sor sor0 0 svi svin( n( The The government of the country may start schemes of compulsory savings to take from each person some portion of his income. 1or the purpose of decreasing saving power of consumers, ?) .ed#$tion .ed#$tion in import import d#tie d#tiess The The redu reduct ctio ion n in impo import rt duti duties es on indu indust stri rial al raw raw mate materi rial al,, machinery and selected consumer item would greatly help in checking smuggling and controlling inflation in the country. /ri$ e $ontro% $on tro% $ommittee $ommi ttee . A. /ri$e 2rice committees must be formulated to control the price level. The weekend markets must be introduced in order to stabilie the price level. ) Cons#mer Cons#mer $o#rts The consumer courts can contribute a lot to control inflation in the country. ) 'n$re 'n$rese se in prod# prod#$ti $tion on The increase in production of goods is helpful to increase the supply in the market. The increased production can regulate the price level. 7) Contro% of investment



The govt. should control the investment for those areas where the output eual to ero. %nd motivate the level of investment where the productivity level rises. 77) Contro% on mrri(e expendit#re The The govt. control on e!cessive spending on marriage ceremonies can greatly help in controlling inflation. 78) Spe$i% <rs The govt. should arrangement for holding 1riday, Tuesday, and /unday baaars in big cities to ensure the availability of fruits, vege vegeta tabl blee and and kitc kitche hen n item itemss at fair fair pric prices es,, will will help helpfu full to control the inflation. Con$%#sion %s above discussed inflation is very difficult to control. $ut being a Muslims we have a strong $elieve on %llah, because %llah can do every thing. *f we spend our life according to *sl *slam then then all all the probl roblem emss are easil asily y remove ove from the economy. Bicher give the akat to poorer, then they can buy basic necessities of life. %nd all above measurement are interlink each other if these are implemented by the govt. then we can say ? to 5H year reuired to remove the inflation from the market.

F.5= Defines the Term Trade cycle. E!plain its characteristics of Trade cycle, e!plain the different 2hases of the Trade cycle. OU- +'NE 'ntrod#$tion Definition "et#res of -rde C0$%e /hses of -rde $0$%e Con$%#sion



'ntrod 'nt rod#$t #$tion ion 0 >istory >istory tells tells us about about the ups and down in $usiness $usiness cycle. cycle. *n which some time good trade of the business that shows the 2rofit period of it, and some time bad trade of the business that shows the loss period of it. /uch good or bad Trade is called the business 3ycle or Trade cycle. +e can say it the 2eriodic fluctuations in economic activities of a country are called business cycle. Definitions B0 /rof) 1er%er0 # $usiness $usiness cycle cycle in the general general sense may be defined as an alternation of period of prosperity and depression of good and bad Trade. B0 1nsen0 #$usiness cycle cycle is the fluctuati fluctuation on in the employme employment0 nt0 output and prices. B0 *)Ke0nes0 #% trade trade cycle is composed composed of period period of good trade trade charac character terie ied d by risin rising g prices prices and low unempl unemploym oyment ent percen percentag tagee alternating with period of bad trade characteried by falling prices and high unemployment percentage. "et#res of -rde C0$%e 7) .e(#% .e(#%r r 'nterv 'nterv%s %s The main features of Trade cycle is regular intervals of its different phases. Every $oom is followed by depression and in turn depression s followed by boom. Every phase takes two to three years to complete. The total time period of a business cycle is usually = to 5: years. 8) S%ow S%ow .e$o .e$ove ver0 r0 The movement of business activity is slow from depression to $oom. 9) .pid .pid down down f%% f%%in in( ( There is rapid down falling of the business activity form boom to depression ) 2or%d 2or%d wide % trade cycle is not the problem of one country. *t is world wide in nature.



=) Simi% Simi%rr pp%i$ pp%i$ti tion on +hen each of one phase is starts then it effect all the industries, like if there is $oom then all industries will reflect the same. "n the other hand if their is depression phase, the same characteristics can be seen in all sectors of the economy. ?) Emp%o0 Emp%o0men mentt %eve% %eve% The employment level falls with the contraction of business activity and rises with the e!pansion of business activities. @) Cpit Cpit (oods The capital goods industries are the first to be depressed and first to be recovered. ) .ise nd nd f%% f%% in e$onom e$onomi$ i$ vri% vri%es es The economic variables i.e. income, output, profit, wages and prices rise in boom and fall fall in depression.

2hases of Trade 3ycle There are four phases of Trade T rade 3ycle as under 5. Depr Depres essi sion on :. Bec Becove overy C. $oom @. Bece Becess ssio ion n

Economic activity

Time



Depression> Contr$tion % peri period od of trad tradee in whic which h busi busine ness ss e!pe e!peri rien ence ced d with with low low profit ratio, as well as suffering loss, with low productivity and sales. *n simple words we can say its a period of $ad trade. *ts characteried as under0 5. ;ow produc productiv tivit ity y :. ;ow nation national al income income C. ;ow per capit capitaa incom incomee @. ;ow purch purchasin asing g power power of people people.. ?. Decrease Decrease in average average demand demand 7. 1all 1all in pric pricee A. ;ow ;ow prof profit it mar margi gin n =. *nsuffic *nsufficient ient rate of invest investment ment 6. 1all 1all in in bank bank credi creditt 5H. >igh ra rate of of in interest 55. >igh unemployment .e$over0 or .eviv% %fter the depression has lasted for sometime, a ray of hope appears on the business horion. $usinessmen start thinking about their businesses. They decide to repair their industrial units and alert the factors of production. Thus is characteried by0 5. "ptimist "ptimistic ic approac approach h of busine businessmen ssmen :. *nit *nitia iati tive ve of inve invest stme ment nt in cons consum umer er and and prod produc ucer er good goodss industries C. 2rofi 2rofitt margin margin re4app re4appear earss @. 2er capital capital incom incomee is increasi increasing ng ?. 2urchasin 2urchasing g power of of people people is improv improving ing 7. 2rice 2ricess show show upward upward trend trend A. Bank Bankss star starte ted d adva advanc ncin ing g loan loanss by lowe loweri ring ng the the rate rate of interest =. Employme Employment nt rate rate is incre increasing asing Boom, /e! % period of good trade is called boom. +e can say it is the end of recovery period. *ts characteried as under0



5. &ew investm investment ent in all all sectors sectors of the the economy. economy. :. Beviva Bevivall in all all indust industrie riess C. >igh level of natio national nal incom income. e. @. >igh >igh per capita capita income income.. ?. >igh propensit propensity y to consume. consume. 7. >igh >igh pric prices es A. ;ow purchasing purchasing power of money money =. >igh purchasin purchasing g power power of people people 6. 3redit 3redit e!pansi e!pansion on by by the the banks banks 5H. >igh profit margin 55. >igh employment rate .e$ession *n this period economy moves from boom to depression. The period of boom does not last forever. *n order to increase production in boom, less efficient factors of production are employed at high cost. Due to increased demand, the production falls short which results in increase in prices. *ts characteried as follow 5. 2essimisti 2essimisticc demand demand starts starts decrea decreasing sing :. %ggregate %ggregate deman demand d starts starts decrea decreasing sing C. &ational &ational incom incomee also starts starts fallin falling g @. 2er capita capita incom incomee is falling falling ?. "ver "ver produc producti tion on takes takes place place 7. *nvestmen *nvestmentt starts starts decreasing decreasing A. 2rices 2rices also also come come down down =. The profit profit margin margin decreases decreases 6.
&o doubt Trade cycle create more fluctuation for the economy. $ut its its compul compulsor soril ily y for busine business. ss. %nd during during its its differ different ent phases some time business en-oying the period of profit, and some time suffering period of loss.



F. 56 Define Define &egoti &egotiabl ablee *nstr *nstrume ument, nt, e!plai e!plain n the differ differenc encee between the $ills of E!change, E!change, 3heue, 2romissory note. Definition #%cc #%ccor ordi ding ng to &ego &egoti tiab able le inst instru rume ment nt %ct, %ct, a nego negoti tiab able le inst instru rume ment nt mean meanss a prom promis isso sory ry note note,, bill bill of e!ch e!chan ange ge or cheue payable either to order or to bearer. bearer.  Bi%%s of Ex$hn(e


Che;#e

/romissor0 note


7) Defi Defini niti tion onss *t is a written instrument containing an unconditional orde order, r, sign signed ed by the the maker, directing certain person to pay a specified sum of money on demand or at a fi!ed or the dete determ rmin inab able le futu future re time, only to or to the bearer of the instrument. 8) Drwee Drwee *t is drawn upon a specified person including a bank. 9) A$$e A$$ept ptn n$e $e *t is always accepted by the Drawee ) 2hen p0%e p0%e *t is payable either on demand or on the e!piry of a fi!ed period or dete determ rmin inab able le futu future re time. =) 3r 3r$ $ee per perio iod d Thre Threee days days of grac gracee are given after maturity date.

*t is an written instrume instrument nt containin containing g an unconditional orde order, r, sign signed ed by the the maker directing to certain bank to pay, on demand a certain sum of money only to or to the order of a person or to the bearer of the instrument.

*t is an written instrument containing unconditional undert undertaki aking, ng, signed signed by the maker to pay a certain sum of money on demand or at a fi!ed or determ determina inable ble future future time only to or to the order of a certain person or to the *t is drawn only upon bearer of instrument. instrument. a bank *t is draw upon a specified person *t does not reuire any acceptance. *t doe does not reui euirre any acceptance. % cheue is always payable on demand. *t is paya payabl blee eith either er on demand or on the e!piry of a fi!ed period or &o grace period is determ determina inable ble future future given. *t is time. imme immedi diat atel ely y paya payabl blee on demand. &o grace period given. *t is *t does not reuire any immediat immediately ely payable payable stamp. on demand.

?) Stmp Stmp *t must must be prop proper erly ly stamped. *t can be crossed.


*t doe does not reui euirre any stamp.


@) Cros Crossi sin( n( *t cannot be crossed. ) St Stop op p0m p0men entt The payment of $ills of e!ch e!chan ange ge cann cannot ot be stopped ) Noti$e of Dishonor *t bill of e!change is disho ishon nour oured , a noti notice ce of dish dishon onou ourr must be given


The payment of a *t cannot be crossed. cheue can be stopped The payment of a +hen a cheue is cheue can be dishon dishonour oured, ed, a notice notice stopped of dishonour is not r euired euired to be given *n case case paym paymen entt of 2L& 2L& is not made, de, a noti notice ce of dish dishon onou ourr is not necessary.


7) /rote$tio n to Drwee The Drawee is not protected if he makes payment under forged endorsement. 77) Notin( nd /rotestin( &oting and sometime sometimess protesti protesting ng is reuired /0%e 5:. to *t can be made payable to the drawer drawer 79) +ii%it0 of Drwer *n case of $LE, the liability of the drawer is secondaryJ he is liable only when the acce cceptor ptor refus efuses es to pay. 7) .esponsi i%it0 The acceptors of $LE are -ointly responsible only. 7=) 2ho Drws *t is drawn by the creditor 7?) Order Or /romise $ill $illss of e!ch e!chan ange ge is order to pay 7@) /rties


The banker is The Drawee protected if he pays a protected. che cheue ue unde underr forg forged ed endorsement.

is

&oting and protesting &oting and are not reuired. protesting are not reuired. *t can be made payable to the maker or *t cannot be made Drawer payable to the maker but to payee or endorsee. *n case of cheue the liability of the drawer *n case of promissory is secondary0 he is note, the liability of liab liable le only only when when the the the maker is primary acceptor refuses to and absolute. pay. The maker may -ointly The maker may as wel well as sever everaally lly -ointly as well as responsible severally responsible *t is written by the *t is wri written ten by the debtor debtor 3heue is order to pay 2rom 2romis isso sory ry note note is promise to pay There are usually three parties involved in 3heue a) Drawer b) Drawee c) payee

There are usually two parties involved in 2L&, a) Maker, b) payee


invo%ved There are usually three parties involved in $LE i.e. a) Drawer b) Drawee c) payee



F. :H Defi Define ne Defl Deflat atio ion n +hat +hat are are its its caus causes es and and Beme Bemedi dies es of Deflation OU- +'NE 'ntrod#$tion Definitions C#ses of Def%tion .emedies of Def%tion

'ntrod#$tion: *t refers a situation in which uantity of money becoming fall as per demand, and value of money rises due to shortage of money, also fall in price of goods. +hen deflation occurs then people dont have money to buy goods and services. There is over over prod produc ucti tion on in the the econ econom omy. y. &ew &ew inve invest stme ment ntss are are not not made. Definition 0 B0 /rof) Crowther #Deflation is that state of the economy where the value of money is rising or prices are falling. B0 4mes /hi%%ips0 #Deflation is a period during which level of prices declines and the value of of money rises. B0 2i%%im 4) B#mo%: # Deflation refers to a sustained decrease in the general price level. C#ses of Def%tion 7) "%% "%% in 6#nt 6#ntit0 it0 of mone mone0 0 The main cause of deflation is shortage in FM in market. $anks are not able to a position to fulfilling the demand of money for the economy. Due to it value of money increase. 8) Over Over /rod /rod#$ #$ti tion on +hen production of goods and service becoming over rise as per demand of the economy, then it create the low price



level of the goods and services, and meanwhile deflation occurred. 9) 1i(h -xes % high high rate rate of inco income me ta!e ta!ess mean meanss the the low low purc purcha hasi sing ng power of general public. The decrease in income due to ta!es forces the people to buy than before high force the people to lower their their demand rate. ) "%% in investment During deflation banks charges high interest due to lesser uantity of money. Then people hesitate to getting loan from the bank, as well as hesitate to investing the money on business due to low profit profit ratio of earning. =) +ess Demn Demnd d of (oods (oods F servi$es servi$es The decrease in demand is cause of deflation. "n the other hand demand decrease in income, wages. The e!cess supply and lesser demand bring the fall in price level and after it deflation will be occurred.

?) /oor /oor stor( stor(ee f$i%i f$i%it0 t0 The The busi busine ness ssme men n may may have have poor poor stor storag agee facu facult ltie ies. s. The The perishable goods can not be kept for long period of time. The sellers have no choice but to sells goods at any rate. The result is that the price level comes down. @) +owe +owerr pr prof ofit it Due to decrease price level of goods the businessmen cut down their profit to retain in the market. %fter it deflation occurred due to over production of goods in the market. ) 1i(h 1i(h reserv reservee rt rtio io The central bank has power to regulate the resave ratio when riser ratio raised The banks are bound to keep cash with them. The lending capacity is lowered in order to lower the money supply in the market. ) 1i(h 1i(h $ost $ost of of (ood (oodss



3ost of production increased due to increased the cost of factors of production. %t the result producer raised the price level of goods and consumer fails to buy the costly goods 7) 7) De$r De$re ese se in pop pop# #%ti %tion on The decrease in population can lower the demand for goods and services. %ll marketing activates are useless when there is no demand. The population is a source of demand for purchase of goods. 77) 1ev0 im imports *mpo *mport rtss in larg largee uan uanti tity ty incr increa ease se supp supply ly of good goodss in country. The e!cess supply puts the pressure on businessmen the rate of profit comes down. Thus e!cess imports are the reason for lowering the business work. .emedies of Def%tion 7) .ise .ise in s#pp s#pp%0 %0 of mone0 mone0 To control the deflation their must be rise in uantity of money with the help of central bank. %nd central bank increases the currency notes for the development of the country. 8) 'n$re 'n$rese se in $re $redit dit +ith the policies of 3entral bank, commercial bank raised the limit of credit for businessmen and industrialist, after it business activates increased and production supplied supplied according to demand of of peoples. 9) +ow +ow rte rte of of n! n! Deflation may be controlled by lowering the bank rate. The central bank lowers the bank rate to provide more funds to commercial banks. The lower bank rate means that there is less money supply in the economy. ) "%% in tx rtes Deflation can be controlled with the low rate of Ta!, because it will bring the the lesser cost of goods, as well as lesser price of goods, then after it deflation will be automatically automatically controlled.



=) /#% /#%i$ i$ wor! wor!ss The The ovt ovt.. can can star startt publ public ic work workss prog progra ramm mmed ed to climate deflation. The amount is transferred from govt. to general public. The demand for goods increases and there is increase in production. ?) New New inve invest stme ment nt The investment can be made to set up new factories and mills. The production and employment increases due to new investment. @) /rod#$ /rod#$ti tion on $ont $ontro% ro% The The cont contro roll over over prod produc ucti tion on can can help help to cont contro roll deflation. The producers can fi! production uota for each producer. The control over supply is necessary to maintain price level. ) 'n$rese in exports The e!porters can play their part for selling e!tra out put in the overseas market. The businessmen can reduce the worries of deflation. ) 'n$re 'n$rese se in w(es w(es The wages of workers can be increased to control the deflation. The govt fi!es the minimum wage rate the increased wages raise the income level of worker they go to market for purchase of goods and services.



F. &o. :5 Define &ationaliation, &ationaliation, e!plain the advantages and disadvantages of &ationaliation. &ationaliation. OU- +'NE 'ntrod#$tion Definition Advnt(es Disdvnt(es 'ntrod#$tion The government headed by .%. $hutto privatied all industrial units and banks. The consumer goods industries, steel industries, cement industries automobile automobile industries and all banks ere taken over by the government. $anks are also nationalied with the effect form 9uly 5, 56A@ under &ationaliation of bank act 56A@. Definition *ts means taking over the management and control of organiation owned by private individuals, called nationaliation. nationaliation. Advnt(es of Ntion%i<tion Ntion%i<tion 7) "ir distri#tion distri#tion of $redit $efore nationaliation the directors of banks were used to avail big loans for the promotion promotion of their business and industries. industries.



The nationaliation of banks remove that wrong practice and made the distributed of credit fair among all indiscriminately. The small businessmen, small industrialist and small farmer could avail for their respective concern. 8) /ri$e /ri$e sti% sti%it it0 0 %nother advantage of nationaliation was that the central bank with the help of nationalied bans could minimie the fluctuations in economies activities. *t would discourage the speculation, hoarding and other anti4social activities. That would stabilie the prices. 9) "inn$in( of of (ri$#%t#re (ri$#%t#re %gricultural sector totally ignored before nationaliation of banks, due to uncertainty uncertainty of production and income income which may lead to default. %fter it govt. provided liberal loans to farmers. That caused increase in production and agriculture income to the farmer. ) Se Serv rvi$ i$ee moti motive ve &ationaliation was advocated advocated on another ground ground that nationalied institutions would provide better services to the customers. The commercial approach was replaced by the spirit of service to people. =) No $on$ent $on$entrti rtion on of n! $redit $redit $efore nationaliation there was concentration of bank credit in few hands. $usiness and industrial monopolies were formed. &ationaliation helped helped in fair distribution distribution of credit and thus eliminated the chances of monopoly formation. ?) .emovin( of wstef#% wstef#% $ompetition $ompetition The burden of huge publicity e!penses was shifted to consumers in the form of raising prices of the products. &ationaliation was supposed supposed to eliminate such competition competition thus providing ultimate relief to the customers.

@) Ao%ition of *%pr$ti$es *%pr$ti$es The banks and other private sector enterprises were nationalied to stop the malpractices like that of unlawful



transactions, evasion of foreign e!change, evasion of ta!es, heavy advances to directors etc. ) 'mprovem 'mprovement ent in effi$ien effi$ien$0 $0 The efficiency of nationalied institutions would improve when they would be operated in the interest on nation. $efore nationaliation, nationaliation, the making of more profit was the only criterion of efficiency. ) Se$#rit0 in in depositors depositors 2eople showed more confidence in a state owned organiation. organiation. Their deposits were safe in nationalied banks. 7) E$onomi$ (rowth The rate of economic growth would increase because the nationalied bank would formulate the credit policy in accordance with the growing needs of different sectors. Disdvnt(es of Ntion%i<tion Ntion%i<tion 7) *%p *%pr r$t $ti$ i$es es The malpractices in nationalied banks were going on. The favoritism still e!it in banks in different forms. 8) "%% "%% in servi$ servi$ee stndr stndrd d The service standard had not improved. *t had rather deteriorated. 9) No st sti%i i%it0 t0 in in pr pri$e i$e &ationaliation of banks banks had done nothing in the the stabiliation of prices because all the reuisites of price stability could not be achieved with nationaliation. nationaliation. ) +ow +ow effi effi$i $ien en$0 $0 The workers are appointed on the basis of their political affiliation rather than their standard of education, capabilities and efficiency. The result was inefficient management and low efficiency was the -ob security in government service. =) 'mmi(rtion of s!i%%ed s!i%%ed persons The able bankers preferred foreign -ob where they given due regard in the form of high remunerating and other benefits. ?) +ess +ess $hn$es $hn$es of prom promot otion ion The chances of promotion in nationalied banks were less. Their promotion depended on the length of service, whereas private banks consider efficiency efficiency for promotion. promotion.



F. &o.:: o.:: Def Define priva rivati tia ati tio onJ e!pl e!plai ain n the adva dvantag ntages es and and disadvantages of privatiation. privatiation. OU- +'NE 'ntrod#$tion Definition Advnt(es of /rivti<tion Disdvnt(es of privti<tion privti<tion *ntroduction *n 2akistan the term privatiation became popular in56AA when the government headed by en. ia4ul4>a decided to hand over the nationalied industrial industrial units to private sector in order to encourage private sector. The private investors investors were not interest in making making investment in 2akistan due to fear of nationaliation. $enair $hutto came in to power in 56==. /he continued the privatiation privatiation policy of the previous government government and gave confidence confidence to private sector by giving them some incentives. &awa sharif came into power in 566H. >e is an industrialist and therefore the accelerated the privatiation privatiation process. *t is said that the pace of privatiation privatiation of &awa government was even even faster then the privatiation privatiation of <.' 2erve Musharraf and /haukat %i also privatied some public sector like 2ak %rab 1ertilier and 2T3; was also privatied. The privatiation privatiation of 2ak steel mill was challenged challenged in /upreme 3ourt. 3ourt. %s a result, court stopped privatiing privatiing /teel Mill. Mill. That is why 3hief 3hief 9ustice *ftikhar %hmed 3h. was punished by then 2resident 2ervai Musharraf for his intervention in their black act. 2rivatiation 2rivatiation of banks



5. M3$ and %$; were were handed handed over to to private private sector sector through through privatiation commission commission to Mansha roup and allied allied Management roup respectively. :. >$; was was priva privati tied ed in :HH@ :HH@ C. <$; shares shares were were offered offered to priva private te sector sector in :HH? :HH? @. /ome percentage percentage of shares of &ational bank of 2akistan is is also sold to private person. ?. *D$2, T$;, T$;, /ME bank are are also planned planned to to be privatie privatied. d. %dvantages of 2rivatiation 5. *ncrea *ncrease se in produc productiv tivity ity :. *ncrea *ncrease se in effic efficien iency cy C. *mprov *mprovem ement ent in uali uality ty @. >ealth >ealthy y compe competi titio tion n ?. *ncrea *ncrease se in in e!po e!ports rts 7. E!tens E!tension ion of marke markett A. *ncrea *ncrease se in emplo employme yment nt =. %doption %doption of moder modern n technol technology ogy 6. Mobiliati Mobiliation on of resources. resources. 5H. 5H. Enco Encour urag agem emen entt to to pri priva vate te sect sector or 55. 55. *ncr *ncrea easse in in outpu utputt 5:. 2rice st stability 5C. *ncrease in in ta ta!es 5@. 5@. %cce %ccele lera rati tion on of econ econom omic ic grow growth th

Disadvantages of privatiation privatiation 5. *ncrea *ncrease se in infl inflati ation on :. %rtif %rtifici icial al shor shortag tagee C. *ncrease *ncrease in smugglin smuggling g of food food items items @. 3ommer 3ommercia ciall approa approach ch ?. 1ocus 1ocus on adve adverti rtisem sement ent 7. E!ploi E!ploitat tation ion of cons consume umers rs A. *ncrea *ncrease se in in pove poverty rty =. 3las 3lasss confl conflic ictt 6. *ncrea *ncrease se in crime crime value valuess



F. &o :C Define Trade cycle, what are causes of Trade cycle >ow we can control the Trade cycle OU- +'NE Definition C#ses of -rde $0$%e 7) 'nte 'ntern rn% % $# $#se sess 8) Exte Extern rn% % $#s $#ses es .emedies to $ontro% the -)C Definitions B0 /rof) 1er%er0 # $usiness $usiness cycle cycle in the general general sense may be defined as an alternation of period of prosperity and depression of good and bad Trade. B0 1nsen0 #$usiness cycle cycle is the fluctuati fluctuation on in the employme employment0 nt0 output and prices. B0 *)Ke0nes0 #% trade trade cycle cycle is compos composed ed of period period of good trade trade characte characterie ried d by rising prices and low unemployment percentage alternating with period of bad trade characteried characteried by falling prices and high unemployment unemployment percentage C#ses of -rde $0$%e 'ntern% $#ses 7) Under Under $ons#m $ons#mpt ption ion There is too much saving during boom which reduces the level of consumption. The price goes on increasing but wages lag behind. The profit of rich increase at higher rates but income of the poor does not increase as compared to price level. The result is that demand for consumption gods decrease. 8) Unso Unso%d %d sto$ sto$! ! Trade cycle occurs due to unsold stock. There is e!cess supply of goods and services but people are unable to buy goods of their own choice. The unsold to buy in depression. 9) 'mpo 'mporrts



The imports increase the supply of goods in the economy. *f the the tota totall stoc stock k of good goodss is more more than than its its dema demand nd ther theree is depression.

) *one *one0 0 s#p s#pp% p%0 0 The change is money and credit supply has a ma-or effect upon the level of economic activity. %n e!pansion money and credit supply. /timulates economic activity and its contraction brings down economic variables over period of time. =) Over Over inves investm tment ent E!ce E!cess ssiv ivee inve invest stme ment nt in capi capita tall good goodss indu indust stri ries es brin brings gs upsw upswin ing g and a fall all in inve nvestm stment brings ings down ownswi swing in economic activity. ?) *r(in% *r(in% effi$ effi$ien$ ien$0 0 of $pit% $pit% 'eyn 'eynes es clai claims ms that that fluc fluctu tuat atio ions ns in marg margin inal al effi effici cien ency cy of capital are the main cause of trade cycles. The e!pansionary phase of the trade cycle commence when the marginal efficiency of capital is higher than the rate of interest an vice versa brings the contraction phase. @) A((re( A((re(t tee mr!et mr!et The business cycle can also be caused by changes in aggregate demand and change in aggregate supply. The contraction phase of the business cycle is caused by decline in aggregate demand and e!pansion phase by increase in aggregate demand. Extern% $#ses 7) 2rs Duri During ng war war the the reso resour urce cess are are used used for for the the prod produc ucti tion on of armaments. %s such the output of capital and consumer goods grea greatl tly y fall falls. s. The The fall fall in outp output ut,, inco income me,, prof profit it etc, etc, caus causes es contraction in economic activity. 8) /op# /op#% %ti tion on The population increases aggregate demand. The investment, employment and income go up. There is tendency towards boom. >igh rate of inflation will make the bankers nerves.



They will take back loan due to which investment level will shrink. 9) S$ien$ S$ien$ee nd te$hn te$hno%o o%o(0 (0 The discovery of new material, machines, and methods helps to produce more at low cost. The invention leads to high level of competition in the economy. There is big investment in the economy. There is tendency towards boom. ) 3overn 3overnme ment nt po%i po%i$es $es ovt ovt.. pol polices ces at hom home an abr abroad oad bri bring chan hanges ges in total otal spending and hence in the level of economic activity. S#rp%#s %#s export ex portss nd for(in( for( in( Ai d ?. S#rp /urplus e!ports and foreign aid raise the level of consumption and investment spending. The output income and employment are boosted. ?) 2e 2et the herr The good and bad weather affect the production in agriculture sector. +hen weather conditions are bad threes low production in agriculture, as well as low production in industrial sector. The demand is the same but output is low so price level goes up.

.emedies to $ontro% the -rde $0$%e *onetr0 po%i$0 7) Bn! Bn! rte rte The central bank can increase bank rate when there is prosperity. The bank rate can can be reduced in case of depression depression the borrowing and lending is make according depression the borrowing and lending lending is made according to bank bank rate. The commercial banks help the central bank to control trade cycle. 8) *r!et opertion The central bank can buy and sell bills and government securities. +hen money supply is less as compared to its demand the central bank buy the securities and vice versa. 1or the purpose of regulate supply.



9) .ese .eserv rvee rt rtio io The central bank can increase or decrease the reserve ratio. The ratio of reserve is decreased during depression and increase in e!pansion. ) Se%e$t Se%e$tive ive $ontro $ontro%% The central bank can provide credit to one sector at low rates and at high rate for another sector. The central bank can check the loans granted by commercial banks, to control trade cycle. "is$% po%i$0 7) /#% /#%i$ i$ wor! wor! The government can start public words program during depression and stop construction of various pro-ects during good trade period. 2ublic works program help to control trade cycle. 8) -xes The state can increase or decrease rates of ta!es. The government can raise more ta!es for 3ontraction of money supply. The ta! rates may be lowered to provide e!cess money supply. supply. 9) B#d B#d(et (et The government can prepare surplus budget during boom period. There is need of deficit deficit budget during deflation. deflation. The government can use budgetary measure along with other methods to control trade cycle. ) /#% /#%i$ i$ de det t The government must take loans during depression to meet various needs. *n case of boom the debt should be repaid. The government can overcome the difficulties of low business activity through public debt. =) 'mpo 'mport rtss The government can allow import of goods, which are needed by public. During depression depression there is no need to import import the items, but when there is boom period the supply of goods can be maintained through through imports. 'nterntion% 'nterntion% mes#res 7) /rod /rod#$ #$ti tion on



The production control measure can be made at international international level. The goods produced in e!cess of demand create from such stock. *n case of e!cess production they hold sups stock. 3ontrol over supply means control over trade cycle. 8) B# B#ff ffer er sto$ sto$! ! $uffer stock can be kept in warehouses. +hen production is low the suppliers can meet the demand from such stock. Encase of e!cess demand production they hold surplus stock. 3ontrol over supply means control over trade cycle.

9) 'nvest 'nvestmen mentt $ontr $ontro% o% The government may allow investment in an area where there is low investment. E!cess investment in any sector may lead towards depression. There is need for balanced investment in all economic sectors.

F. &o. :@ what is an inde! number Discuss its constriction, its uses, also discuss its limitation, and e!plain and construct the simple inde! number and weighted inde! number. OU- +'NE Definition Constr#$tion of index n#mer Constr#$tion of simp%e F wei(hted index n#mer Uses of index n#mer +imittion of index n#mer Definition B0 D)3reenw%d #*nde! numbers a measure of relative changes auguring in a series of values compared with base year B0 A) 1er #%n inde! number is a ratio usually e!pressed as a percentage of prices, uantities uantities or values that relates a given period period with a comparison period Steps for $onstr#$tion of 'ndex N#mer 7) Se%e$t Se%e$tion ion of se se 0er 0er



"ne year is selected in the past as base. The inde! number for the base in 5HH changes in prices is e!pressed in percentage from the base year. 8) Se%e$tion of $ommodes $ommodes % number of commodities are selected. The class of consumers must be decided to select the goods. The selection depends on the purpose for which the inde! number is prepared. 9) *r!et *r!et pri$e pri$e ;#ot ;#otti tions ons The price uotations are obtained from selected market only, the price of each commodity is noted. ) 2e 2ei( i(ht htin in( ( Each commodity is a weight. The weight shows the importance people give to different different commodities =) /er$en /er$ent( t(es es $hn( $hn(es es The percentage change in prices is calculated. ?) C%$#% C%$#%ti tion on of ver ver(e (e The average of individual inde! is calculated. The individual indices are added up and divided by no of weights. This average figure is called inde! number. Constr#$tion of simp%e F wei(hted index n#mer Simp%e interest: %ccording simple simple inde! number all items are eually important for the people. $ut in practical life it is not so. The T he commodities should be given due importance according to their consumption 1ormula B price in current year K 5HH 2rice in base period . "B 25 K 5HH 2H 3ommodi ty % $ 3 D

2rice in 566H (pH) :H kg ?kg 5? m @H kg


$ase 566HI5HH 5HH 5HH 5HH 5HH

2rice in :HHH (p5) :? 5H CH ?H

Belative price (B) 5:? :HH :HH 5:?


E

:HH uintal

& I ?

5. :. C. @. ?.

5HH

@?H

::?

O) P DC

:?L: :?L:HK HK5H 5HH H I5:? I5:? 5HL? 5HL?K5 K5HH HH I :HH :HH CHL5 CHL5?K ?K5H 5HH H I :HH :HH ?HL@ ?HL@HK HK5H 5HH H I 5:? 5:? @?HL @?HL:H :HHK HK5H 5HH H I::? I::?

2rice in :HHH I RBLn I =A?L? I 5A? %s the inde! is 5A? which means that the price level raise A? in :HHH over 566H. 2ei(hted index n#mer &ow are assign high weight weight to commodities commodities of greater importance importance to consumers and lesser weights to commodities of lesser importance. 3ommo +eight 2rices in $ase 2rices 2rice +KB dity (+) 566H year in :HHH relative (pH) 566HI5 (p5) (B) HH % ? :H 5HH :? 5:? 7:? $ @ ? 5HH 5H :HH =HH 3 : 5? 5HH CH :HH @HH D C @H 5HH ?H 5:? CA? E 5H :HH 5HH @?H ::? ::?H R+I: @

R+BI@ @?H

The weighted inde! in :HHHI R+BL R+ I@@?HL:@ I 5=5.: The weighted price inde! number is more accurate than the simple inde! number. The inde! 5=5.: shows that there is =5.: rise prices in :HHH as compared to 566H.



Uses of index n#mer 7) Compriso Comprison n *nde! numbers are very useful for comparing the values of things over two periods. 8) "ore$stin "ore$stin( ( *nde! number is very helpful for forecasting economic and business conditions. 9) /o%i /o%i$0 $0 m! m!in in( ( Many economic polices are formulated with the help of inde! number. ) /ri$e /ri$e inde index x n#m n#mer er *nde! number is used to compare the prices of two periods it serve as a guide for framing monetary and fiscal policy and other policies.

=) Cost of %ivin %ivin( ( index index n#mer n#mer *t is very important in order to know the economic welfare of the people. 3ost of living inde! numbers are very helpful in ad-usting wages and in the settlement of wages dispute. ?) /rod#$ti /rod#$tion on *nde! number are useful for measuring the change in production level the the goods and services on e year are compared compared with the goods and services out put level. The government can decide to import or e!port goods for welfare of people. +imittion +imittion of index n#mers 7) Se%e$t Se%e$tion ion of se se 0er 0er The base year must be accurate otherwise the results achieved will be misleading 8) Se%e$t Se%e$tion ion of $omm $ommodi odit0 t0 The pattern of consumption of all categories of people is not the same. /election of commodities is a difficult -ob. 9) /ri$ /ri$ee ;#ot ;#otti tion on %n inde! number may be for whole sale or retail prices. +hole sale prices are easy to obtain, but they do not show the real cost of living.



) 2ei( 2ei(ht htin in( ( The weight of goods i.e. people give to different commodities in base year may be changed, in current period due to change in taste and income etc. =) Aver Aver (e %n inde! number is an average. %n average can not give a complete picture of the situation.

F. &o. :? Define finance, discuss the various source of business OU- +'NE Definition So#r$e of E;#it0 finn$e So#r$e Det finn$e



7) Short Short term term finn finn$e $e 8) *edi#m *edi#m term term fin finn$e n$e 9) +on( +on( term term finn finn$e $e Definition That business activity which is concerned with the acuisition and conservation of capital funds in meeting the financial needs and overall ob-ectives of the business. B0 !ri< nd d#((en $usiness finance concerns a firms acuisition of funds and the management of these funds for various operations. So#r$e of #siness finn$e 7) E; E;#i #it0 t0 fin finn$ n$ee The financing made by the person who plans the business and makes permanent investment in the form of land, building, machinery etc. is called euity finance So#r$e of e;#it0 finn$e 7) So%e So%e propri proprieto etorsh rship ip The only source of euity financing in sole proprietorship proprietorship is the amount, which an entrepreneur invest in the business in money terms or otherwise i.e. land, building, machinery, etc, 8) /rt /rtne ners rshi hip p 2artners contribution contribution to capital fund is the source of euity financing in partnership. They may contribute money or moneys worth to business. 9) 4oint sto$! $ompn0 The shareholders are the source of euity financing for a company. They contribute to the capital fund of the company by purchasing shares. *t is a permanent source of capital fund and can be increased by further issue of shares. 8) Det finn$in( finn$in( The financing made in a business by the person other than the owner is called debt finance. +e discuss the source of debt financing with reference to the financial needs of a business, +hich may be short term, intermedite or %on( term 7) Short Short te term rm fin finn$ n$in( in(



The financing made by the creditors or periods of one year or less is called short4term financing. So#r$es of short term finn$in( 7) -r -rd dee $redi $redito tors rs The manufactures, wholesalers and other suppliers of goods who give the facility of credit purchase to their customers are called trade creditors. This is not a cash loan but it is a loan in the form of goods and an important source of short term financing 8) Commer Commer$i $i%% n! n! 3ommercial bank provide short term finance to a business enterprise in the form of over drft, dis$o#ntin( i%%s of ex$hn(e, %ons (inst se$#rit0

9) "inn$ "inn$ee $om $ompn pnies ies The finance companies are providing the service of short term financing. These institutions are not common and know to people but have contribution contribution in promoting small small business. 1or e!ample small business finance corporation /ME bank, 'hshhali bank etc. ) C#stomer C#stomerss /ometimes a company receives a part of total payment from the customers by way of advance. *t is also a sort of short term finance =) /%ed(in( the the $$o#nts .e$eiv%e .e$eiv%e /ome business enterprises obtain loan by pledging their accounts receivable with bank. This is the least used method in 2akistan. 'ntermedite 'ntermedite finn$in( To finance a business for a period of more than a year but less than ? years is called intermediate financing financing So#r$es of intermedite intermedite finn$in( 7) Comme Commer$i r$i% % n!s n!s 3ommercial banks provide intermediate term finance to traders and manufactures against security. 8) 'ns#r 'ns#rn$e n$e $ompn $ompnies ies *nsurance companies provide finance to manufactures against the security of assets.



9) 'nd#stri% deve%opment deve%opment n! n! *ndustrial development bank of 2akistan was particularly particularly established in 5675 to provide intermediate and long term financing to establish and e!pand industries ) Sm%% Sm%% #siness #siness finn$e finn$e $orport $orportion ion The corporation is playing a significant role in providing loans to establish small and medium sie businesses and industrial units. Pouth investment promotion society is also working under this corporation to provide loans to the unemployed educated youth. =) /!istn /!istn ind#stri ind#stri% % $redit nd investmen investmentt $orportion $orportion This corporation was set up in 56?A and is ma-or source of debt financing for medium and long term pro-ects. *t also provides loans for working capital ?) 1ire 1ire p#r p#r$h $hs see The manufactures can avail the facility of hire purchase where they scheme generally charges more price for the goods supplies by him and transfer the right of ownership after receiving the final installment. +on( term finn$in( *n order to have a good capital structure and al well planned business long term financing financing is reuired. The period period is generally more than ? years. So#r$es of %on( term finn$in( 7) "or non $ompn0 #siness #siness 5. "wners "wners capital capital and the profit profit retaine retained d in the business business :. ;oan from from friends, friends, relatives relatives employee employeess at fi!ed rate of interest. +hen one has to purchase his competitors business or to set up new branches of office or to sign a favorable contract. C. %dmission %dmission of a new new partner partner in partners partnership hip business business @. 3ommerci 3ommercial al banks and other other financial financial institu institutions tions like like *D$2, 2*3*3, etc 8) "or $ompn $ompn0 0 #sin #siness ess 5. /ale /ale of shar shares es :. *ssue of debent debenture ure certi certificat ficates es C. 3omm 3ommer erci cial al banks banks



@. *D$24ind *D$24industr ustrial ial developme development nt bank of 2akistan 2akistan ?. 2*3*34 2akistan industrial credit and investment investment corporation 7. *324 invest investment ment corpor corporatio ation n of 2akistan 2akistan A. &*T S nationa nationall investm investment ent trust trust =. E2E4 euity euity partic participati ipation on fund fund F. :7. E!plain non4interest bankingL *slamic bankingJ discuss the source of non4interest bankingL *slamic modes of financing O#t %ine 'ntrod#$tion 's%mi$ modes of finn$in( +on finn$in( 0 %endin( -rde re%ted modes of finn$in( 'nvestment re%ted modes of finn$in( 'ntrod#$tion Co#n$i% of 's%mi$ n!in( *n "ctober 56AA the council of *slamic ideology was charges with responsibility of bringing about *slamic economic system to be enforced in the country according to teaching o f >oly Furan and /unnah. The council constituted a panel of economists and bankers which was assigned to prepare a blueprint for non interest banking system. 's%mi$ modes of finn$in( There are 5: *slamic modes of financing. These have been approved by /tate $ank of 2akistan 2akistan from 9uly 56=?. % brief brief description of *slamic instrument of financing as under 7) +ons finn$in finn$in( ( 0 0 %endi %endin( n( 5. *ntere *nterest st free free loans loans :. Fard Fard4e 4e4> 4>as asan anaa 7) 'ntere 'nterest st free free %ons %ons *t is a new concept of lending based *9T*>%D the banks are permitted to lend funds funds free of interest. They are are to cover only the service charges. This modes is beings used to finance e!ports agriculture inputs and provision of funds to salaried persons. 8) 6rd&e&1 6rd&e&1sn sn


e4>asana is given to the students who are less than C? years of age and available for post intermediate students in engineering, medical, agriculture, economic commerce etc. loans given will be in the name of student and secured secured by guarantee of parents parents guardians for repayment of loans a grace period of : year granted after completion of studies. -rde re%ted modes of finn$in( 7) *r! *r! #p The mark up or $%* M<%99%; is a purchase of goods by banks and their sale to clients clients at inappropriate mark mark up in price on deferred payment basis. The mechanism is as follow. 5. The customer customer contact contactss the bank for financin financing g the purchase purchase of goods. :. The bank purcha purchases ses the reuire reuired d goods and sells sells these these to him on a price mutually agreed between the bank and customer. The price is based on the banks cost plus profit margin of the bank C. 2ayment 2ayment can be made made in installm installments ents or lump lump sum over a specified period of time 8) *r! *r! down down *t is a purchase of moveable or immoveable property by the bank with buy back agreement agreement according to this this mode, the customer sells the moveable or immoveable property to the bank with a promise to buy back back the same from the bank on on future date. The payment can be made in installment or lump sum. The difference between the customer price and purchase price is the profit of the the bank, 9) +e +es siin( ;easing also called *9%B% is a medium and long term financing mode. *n the mode the lessee acuired the use of an asset form the lessor. 1or fi!ed period of time. "n payment of specified refund as over a period. The title of property remains with the lessor and asset is given back to the lessor after specified period of time. ) 1ire 1ire p#r p#r$h $hs see The state bank of 2akistan has allowed the commercial banks to provide finance for the purchase of machinery to their clients



in trade and industry on the basis of hire purchase. *n this deal the bank purchases the specified goods at the reuest of customers and hires them to the client on the payment in periodical installment. installment. The bank charges a fair return return form the goods. =) Deve%o Deve%opme pment nt $hr( $hr(es) es) *t is a very useful mode of trade financing. The bank makes advances to customers for the development of land or property. *t then shares in value addition of property. This share is known as development charges. 'nvestment mode finn$in( 7) *US1 *US1A. A.K' K'A A *T */ an agreement between the bank and the client to participate in a business as temporary temporary partner by providing providing agreed amount of funds for sharing profit and losses during a specified period of time. 5. $usiness $usiness is run by the client client but but the bank will will e!amine e!amine the feasibility and profit pro-ection so as to monitor and supervise the business transactions. :. 2rofits 2rofits are are to be shared shared as as agreed. agreed. C. ;osses ;osses will be shared strict strictly ly in the ratio of their their respectiv respectivee investment @. This mode mode is applicable applicable to finance finance working working capital capital needs of a business. 8) *ODA.ABA *ODA.ABA M"D%B%$% means the business in which the subscriber participates with money money and manager with knowledge knowledge and skill. 5. *t is an agreemen agreementt in which one one party party invest funds funds and other other party with managerial managerial efforts. :. Modaraba Modaraba must must be registered registered under under the Modaraba Modaraba ordinance ordinance 56=H C. %s per rule rule the partner partner who puts puts in manageri managerial al skills skills must have at least 5H share Modaraba @. 2rofit 2rofit is shared shared in agree agreed d ratio. ratio. ?. Modaraba Modaraba certif certificat icates es are transfe transferable rable.. 7. *t may be be perpetua perpetuall or for a specif specified ied time. time.



9) /rti$iption /rti$iption term $ertifi$tes $ertifi$tes 2T3 is an instrument of finance issued by company for meeting medium and long term capital needs. % company is authoried to issue the ptcs to schedule banks and financial institutions. 5. 2tcs 2tcs is an investment investment of medium medium and and long term term financing financing :. *t is tran transfe sferab rable le C. 2rofit 2rofit is shard in agreed agreed ratio ratio @. ;osses ;osses are shared shared in the ratio ratio of banks and compa companies nies investment ?. "nly -oint -oint stock stock compan company y can issue issue ptcs ptcs 7. /hort /hort term ptcs ptcs are issued to meet meet working working capital capital needs of a business A. ;ong term term 2T3s 2T3s are issued issued in order to to meet the fi!ed fi!ed capital needs. ) 'nvestment on the sis sis of e;#it0 prti$iption prti$iption Euity participation means sharing of risks and rewards of ownership 5.

Money Banking Finance Notes

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