money banking finance notes

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Money Banking & Finance Notes

Q # 1 discuss various kinds of bank

OR

What is bank? Explain different kinds of

banks.

OUTLINEIntroduction histor! of "ank

#efinitionSimple

definition Expert Views

Comprehensive DefinitionT!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. Different 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 the 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.

cheue 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 *talianied into #$anco when ermans were

masters of great part of *taly.

enerally it is said that #% financial 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 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 storesExperts Views:

2rof 'inley views0 “A bank is an institution which

receies !e"osits an! a!ances loans

%ccordin& to $.L.$art “A banker is one who$ in$ theor!inary course of his business$ honours che%ues!rawn u"on him by "ersons from or for whom hereceies 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 reuire it.Comprehensive Definition

%ccordin& to "ankin& co*panies+ordinance ,- “Banker means a "ersontransacting the business of acce"ting for "ur"ose oflen!ing or inesting 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 Bn!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:&

0i1 Commer$i% Bn!s/ +he most "o"ular kin! of

banks is the commercial bank receies 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

customers .-ts transfers money from one "lace to

another. +he "ur"ose of a commercial bank is to earn

"rofit. +he main commercial banks of akistan areNational Bank$ /abib Bank$ Allie! Bank$ 0nite! Bank$

MB etc. +hese banks "lay a ital role in economic

!eelo"ment.

Centr% Bn!:&

3entral bank is the most important bank of any

country. %lmost all countries of the world now have central bank.The central bank is the leader of all other banks. *t does not

compete for profit. *t has a right to note issue. *t controls the

operations of other banks for monetary and economic stability in

country. The central bank represents the ovt in *nternational

conferences.

'nd#stri% Bn!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.

*ndustrial banks generally provide finance for fi!ed capitalreuirement. They provide finance for e!pansion, moderniation

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% Bn!s:&

2akistan is an agricultural country and most

of our e!ports consist of %gro4based products. /o well organied

agriculture sector is necessary for the development of a country.

%gricultural banks provide loan for this purpose. %D$2,

%griculture credit advisory committee and rural credit banks are thefew e!amples of #%griculture $anks in 2akistan”)

Svin( Bn!:&

The banks are established for encouraging and

collecting savings of people. /aving banks are not banks in the real

sense of term. They only provide saving facility. These banks

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 the service of saving banks in 2akistan)

'nvestment Bn!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 end of 9une, 566: /eventeen investment $anks, both

2akistani and foreign were functioning in 2akistan.

*er$hnt Bn!:&

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, laards are e!amples of Merchant $ank )

Consorti#m Bn!s:&

% 3onsortium bank is owned by other

banks. The bank is formed to meet the financial reuirements 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 Bn!:&

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. <nion $ank, /aving $ank of

3hicago, /tate $ank of 'ansas city)

S$hoo% Bn!:&

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 Bn! :&

These banks provide loans to people against

moveable and immovable property. >$13 is doing the working of

Mortage $ank.

Coopertive Bn!:&

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 bank registered

under the 3o4"perative societies %ct 56:? and can be registered

with registrar of 3o4"perative societies at provincial headuarters)

On the Bsis Of Ownership:&'ublic sector "ank/ 2uch banks are owne! bygoernment an! works un!er the !irect control of thegoernment. +he chief e,ecutie of such banks isa""ointe! by fe!eral goernment. NB are e,am"lesof "ublic sector banks$ First woman Bank.'rivate 2ector "ank/

+hese banks are un!er the!irect ownershi" of the "riate organi3ation of o4("eratie 2ocieties. +he banks are controlle! by thein!ii!uals or t (rgani3ation$ MB$ AB5 an! 6A2BBank is the e,am"les. On -he Bsis Of .e(istrtion/

2cheduled "ank/





+hese are the banks which areregistere! 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 whichare not registere! in list an! "olicies$ -nstruction ofcentral Bank.On -he Bsis Of Domi$i%e:&

#o*estic "ank/ +he banks which are registere!an! incor"orate! with in the country are calle!

!omestic bank. +hese banks "roi!e financialassistance !omestically. -n akistan the banksregulate! un!er akistan Banking com"anies7or!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 hae their origin an!hea! offices in foreign country are calle! foreign bank.

Foreign banks are the branches of the banksincor"orate! abroa!. +he stan!ar! chartere! Bank 5t!$National an! <rin! lays Bank 5t!$ Al4Falah Bank 5t!are e,am"les of foreign banks.

4 5 6 #efine (o**ercial bank. #iscuss thefunctions of co**ercial bank

Outline

Introduction histor! of "ank #efinition

Simpledefinition Expert Views





Comprehensive DefinitionFunctions of commercial bank

Primarfunctions Secondarfunctions !gencfunctions "tilitfunctions Conclusion

% commercial bank is public limited company it is set up under

companies ordinance 56=@. The operations of commercial banks are

controlled under banking companies ordinance 567:. 1oreign

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 cheues of

customers. % large part of such money is provided to people as

loans. The bank is important for government, businessman 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 stores

Experts Views:

2rof 'inley views0 “A bank is an institution which

receies !e"osits an! a!ances loans

%ccordin& to $.L.$art “A banker is one who$ in$ the

or!inary course of his business$ honours che%ues





!rawn u"on him by "ersons from or for whom hereceies 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 reuire it.

Comprehensive Definition

Accor!ing to Banking com"anies7 or!inance189: “Banker means a "ersontransacting the business of acce"ting for "ur"ose oflen!ing or inesting of money from the "ublic$re"ayable on !eman! or otherwise with !raw able byche%ue$ !raft$ an! or!er or otherwise.

3unctions of co**ercial banks

/rimr0 "#n$tions

5. %ccepting deposits

$ank accept deposits form those who have e!tra

money out of their income in their hands, but they cant use it in a

profitable way so banks give them opportunity to deposit their

money and en-oy profit.

a. 3urrent %ccount

*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. % cheue book is given to the account

holder to with draw his money. b. 2rofit 8 ;oss 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 cheue book is given to account

holder.

c. 1i!ed "B term deposits account

*n this account a specified amount is deposited in the

bank for particular period of time. The longer the





duration the higher would be the interest. *n this

account, a receipt is given to customer, called fi!ed

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

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

*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

*n this loan facility the bank sanctions a particularamount. The facility is provided against security.

d. Time loans

Short term %on in which the time period is

less than one year.

*edi#m term %on for period of 5 to C or ?

years

+on( term %on for period of more than ?

years and the entire loan are given against

proper security.

Se$ondr0 f#n$tions

5. Transfer of money

The banks transfer money form place to place by means

of draft collection of cheues telephonic transfer and direct

debt. The banks purchase bills of e!change to help their

customer for collection of money.





:. *ssue of credit money

The banks issue various types of near money the

cheues bank draft credit car, are main instrument which is

valid as medium of e!change to settle their obligations.

C. *nvestment of 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

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 dealingThe bank deal in foreign e!change they buy

and sell currencies of other countries. The commercial banks are

dealer of foreign e!change market.

7. /tatus report

The commercial bank act as referee for supply of information

about its customer, relating to financial position of party

concerned.

A(en$0 "#n$tions5. 3ollection of cheue

% commercial bank acts as agent to the customer to

collect and make payment on the cheues. The cheues may

be local or out station.

:. 3ollection of income

$anks collect pension, dividend, rent and interest of their

customers. % credit voucher is sent to customer for

information.C. 2ayment of e!penses

The bank makes payment of insurance premium trade

subscription, school fee and similar other e!penses.

@. %ct as 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





The bank act as agents of customers, those are bound to

pay ta! to government.

7. >a-- application

The bank collects >a-- application from general public on

behalf of government.

A. /afe custody

The bank accepts valuables and other papers for safe

keeping. % nominal fee is charged from customer.

=. akat deduction

The bank automatically deduct akat on first Baman

every year from his customer accounts

Uti%it0 f#n$tions

5. ;etter of credit3ommercial banks issue letter of credit in order to

provide financial assistance to the customers dealing in

foreign trade.

:. *nformation

The banks collect and supply trade information to

businessman the issue bulletins that provide update

information abut companies working abroad.

C. ovt loans

The banks participate in debt management for

government. The bank can buy bonds, and others

securities offered by central bank

@. ;ockers facility

$anks provide lockers facility to general public gold

ornaments, documents and their valuables can be placed

in lockers.?. /hare application

$ank accepts applications for subscription of shares on

$ehalf 3ompany the price of shares is collected with

application money.

7. %ccepting bills of 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 mobiliing the financial resources of the country. %s

well as through commercial banks provided 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 ofakistanOutlineIntroduction histor! of "ank Definition

Simpledefinition Expert Views ComprehensiveDefinition

Objectives of central bank Functions of central bank

Conclusion

Introduction histor! of central bank

Money an! cre!it "lay a eryim"ortant role in mo!ern society. >e can !eriema,imum benefit from money an! cre!it if theirsu""ly can be ke"t with in reasonable limits.(therwise they will gie rise to many social eils.Money su""ly takes "lace through commercial banksan! other financial institutions .+hey "rimarily to seretheir own interest.

+he central banking system was originate! in !ifferentcountries !uring the last century. But it was in a erycru!e form !uring that time. +he mo!ern system ofcentral banking "articularly !eelo"e! in the 1st half ofthe "resent century i.e. the :?th century'. +he nee! fthe "resent century banking system was strongly felt!uring the financial crisis cause! by First >orl! >ar181@181'.After the war there was com"lete confusion incurrency an! e,change markets. +here were large

with !rawls of money from banks. +he bank reseresfell below the nee!e! leel. +here was no institution





which coul! su"erise the working of banks an! alsosere as a fiscal agent. -n or!er to sole the monetary"roblems of the countries an! set them on healthyfooting$ a conference was hel! at Brussels in 18:?. -twas !eci!e! in that conference that to control thesu""ly of money an! cre!it in the economy an!maintain stable business con!itions$ each countrymust 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?years. -t is the symbol of financial soereignty an!stability of the country. -t is hea! of banking an!monetary system. +he "rinci"les on which a centralbank o"erates are !ifferent from those of commercialbank. -t !oes not work for "rofit. -t acts in the "ublicinterest an! earning "rofit is only a secon!aryconsi!eration.Evolution 7ro)th +he )iksbank of 2we!en wasset u" in 19C9 an! !eclare! as central bank in 199an! is consi!ere! to be the ol! of the central banks.

+he Bank of ;nglan! was establishe! in 198@. +heBank of France was set u" in 1??. +he national bankof *enmark was o"ene! in 11 an! National bank ofBelgium in 1C?. +he )eich7s Bank of <ermany wasma!e in 1DC. -n 0.2.A Fe!eral )esere 2ystem wasset u" in 181@. +he )esere Bank of -n!ia was formalin 18EC an! the 2tate Bank of akistan wasestablishe! on uly 1$ [email protected]&ani8ation of (entral "ank +he organi3ation ofcentral bank !iffers from country to country. 2o it is!ifficult to s"eak of single ty"es as a stan!ar!. +hereare central banks which are owne! an! manage! bythe "riate sharehol!ers$ such as the fe!eral resere

system of the 0.2.A. +here are other central banks$ +he Bank of ;nglan!$ +he Bank of France which are





fully owne! an! manage! by the goernment. Againthere may be central banks which are Gointly owne!an! manage! by the goernment an! t2harehol!ers. 0 to *ec 18DE$ the 2tate bank ofakistan was a goernment an! "riate sharehol!ersbank. 0n!er +he Bank Nationali3ation (r!inance 18D@$

+he 2tate Bank of akistan has become "urelygoernment owne! institution. +o!ay no central Bankis com"letely free the goernment influence.

#efinition of central bank 2i*ple defection “A entral bank is a bank$ whichcontrols cre!itExpert vie)s%ccordin& to #r #e. 9ock/ “+he gui!ing "rinci"le of a centralbank is that it shoul! act only in the "ublic interest forthe welfare of the country as a whole an! withoutregar! to "rofits as a "rimary consi!erationHIn )ords of 'rof. $a)tr!:s/ “A central bank is thatwhich is len!er of last resort(o*prehensive definition%ccordin& to R.'.9ent/ “An institution which ischarge! with the res"onsibility of managing thee,"ansion an! contraction of the olume of money inthe interest of general "ublic welfare

Ob;ective of (entral "ank Following are the "rinci"lesIobGecties ofcentral bankJ4

,/2afe&uardin& 3inancial 2tabilit!/

+he mainobGectie of the central bank is to "rotect an!





safeguar! economical an! financial stability. -t isestablishe! in or!er to !esign an! im"lement "oliciesto aoi! !e"ression an! unwante! fluctuations ineconomy.:4Workin& In 'ublic Interest/

entral bank worksin the best interest of the economy an! "ublic. -t !oesnot gie a!ances$ not it allows any interest on!e"osits. -t "erforms its function without anyconsi!eration of "rofit.E42upervision Of "ankin& 2!ste*/

entral bankobGect is to hae su"erision an! effectie control oercommercial banks structure$ central bank setgui!elines for commercial bank$ an! "arameters inwhich commercial banks are allowe! to "erform theiro"eration.

@4(ontrol Of (redit <one! 2uppl!/ entralbank obGect is to e,ercise effectie control oer cre!itan! currency su""ly in the economy. -t has a solemono"oly oer note issue an! it constantly kee"s aneye on the su""ly of currency in the economy. -t alsowatches the cre!it creation of commercial bank.=/%cco**odation (o**ercial "anks/

-t saescommercial banks from bank runs an! "anics. -t casecommercial banks fin! any !ifficulty in meeting theirliabilitiesK the central bank comes to their hel".94Ensurin& Econo*ic #evelop*ent/ +he obGectsof central bank are by !irect finances towar!sim"ortant sectors of the economy an! ensure that

cre!it re%uirements of such sectors are full file!.





3unction of central bank

A central bank usually "erforms the followingfunctionJ4

<onopol! of Note Issue -n early "erio!s ofbanking !eelo"ment$ all banks use! to issue theirown notes. +his cause! confusion$ fre%uent trouble$oer issue!$ causing high inflation an! economic crisis.At "resent through out the worl!$ central banks haethe sole right of issuing currency notes. -n akistan“2tate Bank of akistan issues the currency notes of

worth fie to )s C???$ C$ 1?$ :?$ C?$ 1??$ C??$ an!1???'. +he main "ro"ose of giing the mono"oly rightof note issue area as un!erJ4

0niformity in the system of note issue.

+he central bank can e,ercise better control oermoney su""ly.

-t increases "ublic confi!ence. +here are two "rinci"les of note issueJ

Banking "rinci"les

urrency "rinci"les

"anker to the 7overn*ent entral bank is the banker to the<oernment. -t means that central bank "roi!essome im"ortant serices for <oernment asJ

ontrol of gol! an! other reseres of <oernment. 6ee"s the <oernment account.

rinci"le a!isor of <ot )egar!ing annualbu!get$ ta,ation system$ international tra!e an!foreign e,change reseres etc'.

+o formulate of len!ing facility For arious"roGects'.

Agent to <ot Atten!ing national an!

international conference on behalf of <ot'.





"anker+s "anks +he control bank acts as banker tocommercial bank asJ

-t hol!s cash reseres an! !e"osits of commercialbanks.

*iscounting of bill of e,change of commercialbanks.

;nabling the commercial banks to create cre!it.

learing house facility i.e. the settlements ofmutual claims of commercial banks'.

5en!er of last resort <ranting of loans to

commercial banks in the !ays of financial crises'. ;stablishment of new banks rior "ermission

necessary'.

+he a!ance "olicy 6ee"ing in min! the influenceof rate of interest'.

;ery commercial bank sen!s a monthlystatement of its assets an! liabilities to centralbank.

Lender of last Resort entral bank is the len!er oflast resort to the commercial banks. -t means thatwheneer the sche!ule! commercial banks are shortof fun!s an! are unable to get hel" from anywhere$ itis the central bank which "roi!es them loans an!brings them out of trouble. A commercial bank getsloans from other banks in normal routine. But when

they !o not get such hel"$ they a""roach the centralbank.(learin& $ouse entral bank also "erforms thefunctions of a clearing house. 2ince central bank hol!sthe cash reseres of other bank$ it easily hel"s tosettle their mutual obligation. ayments by one bankto another are settle! through central bank. *aily$ in

eery bank$ "eo"le !e"osit che%ues which are to be





!rawn from other banks. -n this way eery bank has toreceie amounts on behalf of its customers an! has tomake "ayments on behalf of them. But the banks !onot get cash from each other. +hey settle theiraccounts with the hel" of central bank. ;ery bank hasaccount 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 thesu""ly of money in the country. -n or!er to managethe su""ly of money it im"lements monetary "olicy.

+he im"ortant tools of monetary "olicy are bank rateo"en market o"eration an! arying reserere%uirement.<aintenance of exchan&e rate forei&nexchan&es

+he whole business of foreign e,change control an!financing of international tra!e is !one be the centralbank. An! gie the suggestion to the got. in case ofbalance of "ayment. As well as it control the forginge,change rate because a stable rate is "romote theforging tra!eRole in econo*ic develop*ent

+hrough "olices of central bank of any country is!irectly influence the rate of economic !eelo"ment. -testablishes financial institutions with the hel" of itcountries takes suitable measure to "romote economic!eelo"ment.2upervision

+he central bank can su"erise actiities of bankmanagement. +he bank has "owers to look afterworking of commercial banks. -f commercial banks arenot follows the "olicy of central bank then the centralbank im"ose! fine on banks.Other functions

)e"resentation in international financial institution>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$the "olicies of the central bank beneficial for thecountry as well as commercial banks$ with the hel" ofit rate of inflation becoming increase after it economic

!eelo"ment starte!.





(ENTR%L "%N9,.3RO<<%TION

+he central bank isforme! un!er an actof "arliament oror!inance

6.O)nership +he share ca"ital ofthe central bank isowne! by thegoernment or"eo"le

>.<ana&e*ent +he managementan! em"loyees area""ointe! by thegoernment

.Nu*ber of bank +here is only onecentral bank foreery country.

=."ranches +he central bank hasonly insi!e branches.-t has no foreignbranches

@.%i*

+he aim of centralbank is to maintainmonetary an!economic stabilitytherefore "rofit is notthe aim of the centralbank

A.Issue of *one!

+he central bank canissue currency money

(O<<ER(I%L "%N9 +he commercial bank isforme! un!er thecom"anies law

the share ca"ital of thecommercial bank isowne! by the "ublic

+he management an!em"loyees are a""ointe!by the boar! of !irectors.

+here are manycommercial banks ineery country.

+he commercial bankshae insi!e an! as well asoutsi!e branches.

+he basic aim ofcommercial bank is toearn "rofit.

+he commercial bank canissue che%ue$ cre!it car!an! isa car!.

+he in!ii!ual$

"artnershi"$ limite!com"anies are the





like )s. C$ 1?$C?$1??$C??$ 1???$ C???

B.%ccount holder +he goernment an!commercial banks isthe accounts hol!erof the central bank.

-.%dviser +he central banka!ises thegoernment onfinancial matters.

accounts hol!er ofcommercial bank

+he commercial banksa!ise their customers forinestment of businessconsultancy





(ENTR%L "%N9 ,C. Nature of

accounts +he central banko"ens thegoernmentaccounts un!erarious hea! ofaccounts

,,. <one! *arketentral bank islea!er of moneymarket

,6. (reditcontroller

+he bank controlsthe olume of cre!itthrough ariousmetho!s.

,>. Exchan&econtrol-t is the controller offoreign e,change.

,. Wind up +he central bank cannot be close! u"

een if working atloss.,=. 3orei&n

pa!*ent-t makes the foreign"ayment on behalf ofthe goernment.

19. Transfer

-t transfer moneyfrom one "lace to

(O<<ER(I%L "%N9

+he commercial bankso"en current$ saing$ 52$fi,e! !e"osit accounts.

+he commercial bank isthe member of moneymarket

+he commercial bankcreates cre!it accor!ingto money aailable.

-t is the authori3e! !ealerin foreign e,changeun!er the su"erision ofcentral bank.

+he commercial bank canbe close! u" if themanagement !eci!es !ueto loss. -t makes the foreign"ayment for customers

!ue to im"ort of goo!san! serices.

-t transfers the moneyfrom "lace to "lace forthe "eo"le.

-t "roi!es loans$ cash

cre!it an! oer!raft tothe customers.





another for thegoernment an!banks

,A. Loans-f arranges loans forthe goernment an!"roi!es loans tocommercial banks aslen!er of last resort.

,B. #iscountin&bills-t !iscount the bills ofthe commercialbanks

,-. <onetar!stabilit!-t is res"onsible forthe money traystability of a country.

6C. Ri&ht to issuenotes

+he central bank hasthe sole right to issuecurrency notes

6,. Relations )ithinternationalfinancial

institutions-t hol!s relations withinternationalfinancial intuitionssuch as -MF$ >orl!

-t !iscount the bills of thecustomers

+hey assist the centralbank for achieingmonetary stability.

+he commercial bank cannot issue currency notes

+he commercial bank!oes not hae !irectrelation with internationalfinancial institutions

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





discuss the reason for ter*ination ofrelationship.

Outline #efinition

Banker ustomer Relationship

<eneral relationshi" 2"ecial relationshi"

Ter*inationof relationship

"anker#efinition7. cro)ther DA banker is a !ealer in !ebt of his own an! other"eo"les .W.7ilbert “A banker is a !ealer in ca"ital or more "ro"erlya !ealer in money. /e is an interme!iate "artybetween the borrower an! the len!er. /e borrowsfrom one "arty an! len!s to another

(usto*er#efinition"! dr. hart

“A customer is one who has an account with thebanker or for whom a banker habitually un!errates toact as such"! ustice Lindle!

“ustomer is a "erson who has some sort ofaccount 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 hae been !ebarre! from enteringinto any contract un!er the law

Relationship7eneral Relationship#ebtor and creditor

“+he basic relationshi" is that of !ebtor an!

cre!itor. -f a customer !e"osits money in the bank heis the cre!itor an! the bank is !ebtor. -f the customerhas an oer!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$!rafts$ !ii!en!s for collection with bank. +he bank isan agent when he sells or "urchases securities an!installment of loans etc."ailer and "ailee>hen a customer han!s oer his aluable to the bank

for safe custo!y then the customer becomes the baileran! the bank is the bailee. An! charges small amountfor serices ren!ere!'led&er and 'led&ee>hen the customer "le!ges moeable "ro"erly withthe banker as security for loans$ he becomes "le!geran! banker as "le!ge. +his relationshi" also knows as"awner an! awnee. +he "le!ge! goo! shoul! be

returne! after the !ebt is re"ai! by customer.<ort&a&or and *ort&a&ee





>hen the loan is taken against immoable "ro"ertythe customer is calle! mortgager an! the banker ismortgagee."anker is a trustee and Executor

+he banker receies aluable an! !ocuments of hecustomer an! kee"s them in safe custo!y. +he bankeralso e,ecutes the stan!ing instructions of itscustomers so banker becomes as trustee an!e,ecutor.(onsultantBank usually un!ertakes financial consultancy for theirclient. -n such a situation the bank becomes aconsultant. >hen a bank a!ises his client on anyim"ortant financial matter$ bank becomes a!isor an!client becomes a!isee.7uarantor and principal debtor<uarantor is the "erson who gies the guarantee.rinci"al !ebtor is the "erson for whom the guaranteeis gien. +o!ay7s banking business giing of guaranteeis an or!inary Gob of a bank when a bank giesguarantee$ it becomes guarantor an! client becomes"rinci"al !ebtors.3inancer and 3inancee>hen the banker "roi!e loan to his customer hebecome financer an! customer becomes financee.Inde*nifier and inde*nit! holder-n!emnity is a contract when one "arty "romises tosae the other "arty form the loss cause! to him bythe con!uct of the "romisor himself or by the con!uctof any other "erson the "erson who "romises to makegoo! the loss is calle! in!emnifier an! "romise iscalle! in!emnity hol!er. 2o the bank makes a contractof in!emnity with the client$ bank becomes in!emnifieran! client becomes in!emnity hol!er.Reference and referee





>hen a bank informs the state bank or any otherauthority about the financial status of a client$ bank iscalle! referee an! client becomes reference

Ter*ination of the relationship +he relationshi" between customer an! bank isterminate! in following con!itions

+ermination by customer

+he rate of interest is not acce"table to him

Bank !oes not gie him facility as offere! by other

Not satisfie! with the serices

/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 bankinghours.

-ntimation of !eath of customer

*ue to insanity of customer

*ue to insolency of the customer

*ue to court or!er

haracter is not satisfactory

//////////////////////////////////////////////////////////////////////////////////////

4 5 @ defines banker and custo*er. #iscussthe Ri&ht and #uties of "anker and(usto*er in detail.

Outline #efinition

Banker ustomer

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





"anker#efinition7. cro)ther DA banker is a !ealer in !ebt of his own an! other"eo"les .W.7ilbert “A banker is a !ealer in ca"ital or more "ro"erlya !ealer in money. /e is an interme!iate "artybetween the borrower an! the len!er. /e borrowsfrom one "arty an! len!s to another

(usto*er#efinition"! dr. hart

“A customer is one who has an account with thebanker or for whom a banker habitually un!errates toact as such"! ustice Lindle!

“ustomer is a "erson who has some sort ofaccount either !e"osit or current account or somesimilar relation with a banker

+he customer must beL..

/e shoul! not be a minor

/e shoul! be "erson of soun! min!

/e shoul! not hae been !ebarre! from enteringinto any contract un!er the law

Ri&ht and duties of custo*ers

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





-t is the right of the customer that his che%ue isto be encashe!. /e shoul! be gien theamount as "er the balance.

6.Ri&ht to receive docu*ents-t is the right of the customer to receie the "assbook$ che%ue book$ an! statement of accountfrom the bank.

>.Ri&ht to sue a&ainst )ron&ful dishonorA customer has the right to sue a bank if thebank !ishonors the che%ue with out an! "ositiereason.

.2ecrec!-t is the right of customer that bank can be ke"this account secret an! not !isclose! to any one.

=.Ri&ht to interest-t is the right of customer to receie the interestan! bank$ is boun! to "ay$ an! !e"en!s u"on thenature of account.#uties of custo*er,.Obe! bankin& hours

A customer must "resent his che%ue forencashment "ayment' an! collection with inbanking hours an! !ays.

6.2afe custod! of cheFue book-t is the !uty of the customer to kee" hische%ue book safe. 2o that it may not be go intothe han!s of unauthori3e! "erson.

>.'resentation of cheFue before expir!-t is the !uty of the customer that he shoul!"resent the che%ue with in si, month of itsissue !ate. (therwise no claim woul! be for"ayment.

.(ase of for&ed cheFue-t is the !uty of the customer that he mustinform the bank belieing that his signature is

being forge! on a che%ue so that no "aymentshoul! be ma!e.





Ri&ht and duties of bankerRi&ht of banker,.Ri&ht of interest and char&es

+he banker has the right to charge interest onloans. -t also charges commission as forserices "roi!e!. +he serices inclu!ecollection of che%ue$ bills of e,change an!!ii!en!s etc.

6.Ri&ht of lien +he bank has a lien on the goo!s an! securitiesof the customer until he re"ays his !ues. +hebank can sell such items after giing "ro"ernotice.

>.(har&e co*pound interest +he banker has right to charge com"oun!interest on oer !rafts calculate! o !ailybalance. +here is agreement between bankeran! customer about rate an! time "erio!.

.%d;ust*ent of balances +he banker has right to a!Gust !ebit balanceagainst cre!it balance.

#uties of banker,.The honour the custo*er+s cheFue

-t is the !uty of the banker to honour che%ueissue! by the customers. +he che%ue mustbe !rawn "ro"erly an! "resente! durin&)orkin& hours.

6.2ecrec! of custo*ers account +he bank shoul! maintain the secrecy of thecustomer account if it is !isclose! thecustomer may suffer loss.

>. 'urchase and sale of securities-t is the !uty of the bank to obey the

instructions regar!ing the "urchasing an!selling of securities





.Openin& of letter of credit 0LG(1-t is one the !uties of the bank to issue letterof cre!it for its customers in the internationaltra!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

methods of monetary policy e!plain the limitations of monetary

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 central bank is responsible for regulation and control of

monetary system. $ecause its first priority to increasing in public

interest, for this central bank developed policies for control the

supply and credit money in the market, such policy called *onetr0

po%i$0)

Definition

Simp%e definition

Monetary policy refers to the measures which the central

bank of a country takes in controlling the money and credit supply in

a country, with a view to achieving certain specific economic

ob-ectives

Expert views

A$$ordin( to S)A) *eeni

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

O5e$tive of monetr0 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$rese 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$rese 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 sti%it0

The economic growth depends on stable price level. 1or this central

bank fi!ing the credit limit for the commercial bank, then supply of

money is controlled. Due to this effect industries control the price

level till it become stable

St%e in mone0 mr!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 monetr0 po%i$0

6#ntittive $ontro%

6#%ittive $ontro%

6#ntittive $ontro%

7) Bn! reserve rte po%i$0

$ank reserve rate means the rate that is deposited by

commercial bank to central bank

) 'n $se of inf%tion

+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.

S0mo%i$%%0

$BB /M i * p

inflation decrease

) 'n $se of def%tion





*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

S0mo%i$%%0

$BB /M i * /ro)

E$o) 3rowth

8) Open mr!et opertion

*ts mean sale and purchase of ovt. securities in the open

market by the state bank of 2akistan. *f the inflationcondition 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) Credit %imits

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 rte po%i$0Discount 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#%ittive $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 mr(in% re;#irements

Margin means the difference between the amount of loans

and value of security. The minimum margin reuirement 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

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 guidescommercial banks to follows a particular policy for loans.

+imittions of monetr0 po%i$0

7) Co&opertion of 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$tin( o5e$tives

The greatest difficulty in controlling credit is thesimultaneous, achievement of conflicting ob-ectives of

price stability, economic stability etc.

9) Convention% te$hni;#es

*n under developed countries like 2akistan the

conventional techniues of credit control namely bank

rate policy open market and reserve ratio are not all

powerful.

) Existen$e of non&moneti<ed se$tor

*n underdeveloped counties there e!ists a large non4

monetied and rural subsistence sector. Thus a bi sector

of community is uiet unaffected by the monetary policy

=) Defi$it finn$in(

% large scale of deficit financing by govt may make the

central bank powerless in controlling the credit which

cause inflationary pressure in he country.

Con$%#sion





%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 reuired ? to 5H

years to convert in euilibrium position. That is not

possible during the daily changing in presented and other

member of ovt. so these policies only for the reading

not for implementing.

IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII

IIIIIIII

Q8J /ow !o the commercial banks create cre!it=-n!icate the limitations on the "ower of a bank tocreate cre!it=OR“5oans are chil!ren to !e"osit an! !e"osits arechil!ren of loans ;,"lain.

OutlineIntroduction

#efinition 2i*ple definition Expert vie)s

%ssu*ptions

'rocessof credit creation

Li*itations of credit creation

(onclusion





'ntrod#$tion:&

(redit / +he term cre!it is an eolution of a 5atin wor!

“cre!o which means “- entrust an! i "ut my faith in. +he wor! cre!it has been !escribe! by <-*; in thefollowing ways.“An e,change which is com"lete after the e,"iry ofcertain "erio! of time after "ayment.-n sim"le wor!s cre!it means a 5oan.Credit Cretion0 4

The creation of credit or deposit is one of the most importantfunctions 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 cheue. *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 to the 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 important 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 $retion pro$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 reuired 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 $retionThe 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 cheue. The holder of these

cheues deposits them in the bank. They create deposits which isnothing other than creation of credit.

*t is recognied that the process of credit creation cant proceed with

out involvement of the whole banking system.

A$$ordin( to Smve%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 its even though small bank is lending

out only a fraction of its depositsExp%ntion:&

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 cheues of 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 bank after credit creation is as follow04





$alance sheet of 5st bank

+ii%ities Bs Assets Bs

Deposits ?HH

H

3ash :H

;oan =H

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


Deposits @HH

H

3ash :H

;oan =H

=HH

C:H

H

@HH

H

@HH

H

The deposits creation position of the third bank is stated below.

$alance sheet of Crd bank






Deposits C:H

H

3ash :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 form as follow.E!pansion of bank deposits

Bn! Deposits Csh reserve +ons

%

$

3

D

E1

>

?HHH

@HHH

C:HH

:?7H

:H@=57C=

4

4

4

5HHH

=HH

7@H

?5:

@5HC:=

4

4

4

@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 createcredit/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. +helarger cash$ the larger amount of cre!it that can becreate! by bank.'roper 2ecurit!/ An -m"ortant factor that limits the"ower of bank to create cre!it is the aailability ofsecurities because the bank a!ance loans to itscustomers on the basis of securities or a share$ or abank$ or a buil!ing or some other ty"es of a

"ankin& $abits of the 'eople/ -f "eo"le hae more banking habitsbanks will create more cre!it and vice versa.

Le&al Reserve Ratio/ +he ability to create cre!it also!e"en!s u"on the cash reseres ratio im"ose! mycentral 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 !ueto business. 2lum" or !ue to any reason$ the ability ofbanks to create cre!it will also be !ecrease!.(learance 3acilit!/ -f banks enGoy clearing house facilityby the central bank then they can create more cre!itan! ice ersa."ehaviour Of Other "anks/ +he "ower of cre!it creation is furtherlimite! by the behaiour of other banks. -f some of the





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

Q.8 *efine letter of cre!it= >hat are arious "artiesinole! in letter of cre!it= >hat is "roce!ure too"en a letter of cre!it=

Out Line-ntro!uction*efinitions

arties inole! in letter of cre!itroce!ure of letter of cre!it

onclusion

Introduction





*n different countries goods are import and e!ports by their

businessman, for import and e!port the reliable source for 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 thebuyer7s bank$ authori3ing the seller to !raw inaccor!ance with certain terms an! con!itions"! 'ritchardA letter of cre!it is a commitment on the "art of thebuyer7s to "ay or acce"t !raft$ !rawn u"on it$ "roi!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%uestletter 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 buyerre%uest is calle! buyer bankExporterGseller

+he "erson who wants to sell the goo!s to foreigncountry as well as to whose faor letter of cre!it iso"en Exporter bankG seller bank +he bank which makes the "ayment to the e,"orterafter receiing the letter of cre!it is calle! seller bank.

ReFuire*ents of openin& letter of credit2ales contract1irst 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"ort5icense$ an! in!ent of goo!s to be im"orte!. After





checking such !ocument allow im"orter to file ona""lication on "rinte! form.%pplication for*-ts means the agreement for irreocable letter ofcre!it$ i.e. fille! u" by the banker an! signe! by the-m"orter. As well as it contain all term an! con!itionsof the sale agreement.(o*pletion and scrutin! of the for*5etter of cre!it is fille! by the banker as "erinformation "roi!e! by the a""licant buyer' thebanker com"lete an! scrutini3es the !ocuments.Openin& letter of credit>hen all the information is com"lete! then bankero"ene! letter of cre!it on the behalf of im"orter.Infor*ation to exporter bank

+he issuing bank informs the seller bank about theissuance the letter of cre!it. An! after it E co"ies arema!e by the issuer bank. (ne co"y retain by thebuyer bank$ other : sen! to seller bank$ out of whichone co"y sen! to seller by the seller bank.Infor*ation to the seller

+he seller bank inform to seller about receiing letterof cre!it form buyer bank$ then seller sen! the goo! tobuyer accor!ing to term an! con!ition an! shi""ing!ocuments to seller bank. After checking !ocumentsthe seller bank sen!s it to buyer bank.<ar&in on letter of creditentral bank of akistan !eci!es the "ercentage ofamount to be "ai! to the issuing bank$ by theim"orter. 2uch chargeable amount is calle! margin.'a!*ent to the ExporterThe buyer bank, on receipt of shipping documents, make payment to

seller bank, and seller bank make payment to seller.

-0pes of %etter of $redit

'rrevo$%e %etter of $redit

% letter of credit which cannot be cancelled is called irrevocable

;.3. such type of ;.3 provided fully protection to e!porter.





.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$#mentr0 %etter of $redit

*n which the payment is made after receiving following documents

*nvoice

2acking list

*nsurance policy

$ill of lading

C%en %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.5H what is barter system Discuss the problems of barter

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 of rter s0stem

1ow mone0 remove the pro%ems of rter s0stem

Con$%#sion

'ntrod#$tion

% system of direct e!change of one commodity or service for

another without the use of money is called barter. "ne has to

e!change the product which one has in e!cess with those who haveother 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%on

Direct e!change of commodity or services for another without use of

moneyB0 3)-homs

$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 Brter s0stem

7) +$! of do#%e $oin$iden$e of wnts

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 $ommon mes#re

*n barter system, there is no common measurement for

e!changeable goods. 1or instance, if a person have cow and

other have goat, and 5st 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 store v%#e

*n barter system there is no facility of store value. $ecause

there were some goods that have no storage facility. ;ike

vegetables, fruits, etc

=) +$! of $pit% formtion

The formation of capital goods is necessary for further 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$#%ties in tx $o%%e$tion

*n barter ta! collected by revenue department in the 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$#%ties in trnsfer of we%th

There is great difficulty in transferring wealth from one place

to another under barter. More ever immovable property can not

be transferred.

) No #d(etin(

<nder barter it was not possible to budget e!pense and

incomes. 2eople were unable to forecasting the worth of theirmechanism and merchandise. They therefore can not make any

estimate of their future incomes and revenues.

) No investment no svin(

<nder barter there is no concept of investment and saving.

$ecause we can not e!press our income in any monetary unit.

5H. Difficulty in future payment

*n barter there is no concept of credit. %nd have no facility of

future payment, because lack of monetary unit.





.emov% of in$onvenient of rter

7) *one0 s medi#m of ex$hn(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 mes#re of 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 stndrd of f#t#re p0ment

% 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

<nder barter system goods animals and commodities cannot be

stored for a longer period. &ow a days wealth is stored in the

form of money.

?. *one0 is n instr#ment of m!in( %ons.

2eople save money and deposit to businessmen and

industrialists so savings are transferred to investment.

?) +i;#idit0 to we%thMoney imports liuidity to various forms of wealth such as

land, machinery, stocks, and stores etc, these forms of wealth

can easily be converted into money.

@) Est%ishment of finn$i% instit#tions

The introduction of money has made it possible to establish

financial institutions like the central bank, commercial bank etc

which deal in currency and near money assets such as bills of

e!change, bonds, shares, etc=. -x $o%%e$tion

The collection of ta! was practically impossible in barter

economy money solved this problem. Due to the introduction

of money, the ta! system is working uite successfully.

) Deve%opment of n!in( s0stem

Money is an integral part of baking system. +ithout money the

concept of banking system seems t be meaningless. The barter

system gives no idea of banking.





7) *one0 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 pper mone0

Definitions

"orms of pper mone0Advnt(es nd disdvnt(es of pper 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 andeasy 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 5Cth century and finally paper money was

originated by gold smith of England in early 5A th century. &ow in all

developed and underdeveloped countries of world, *nconvertible

paper money is used as medium of e!change and standard of value.

Definitions /rof) 1nson





#2aper money means the paper instruments such as bank notes,

cheue, 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, bills of e!change etc.

ACCO.D'N3 -O /.O") 3.EENE.

#2aper money means documents with a value started 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 notes into gold, *f they are presented

for conversion at the same time. The govt keeps reserves for

the confidence of people. *n </% before 56C@ the notes were

issued on this principle. The e!ample of this is %merican goldand silver certificates.

CONVE.-'BE+ /A/E. *ONE

*t is such a form of money which can be converted into gold

and metallic reserves, but not all the notes issued by the state

are fully backed by ovt. &o need to keep 5HH gold reserves

as compare to representative paper money.

'NCONVE.-'B+E /A/E. *ONE

*nconvertible paper money cannot be e!change or convertedinto gold. The gold or silver reserves are not kept by the

monitory authority. The money is issued on the written promise

of the government. This paper money can cause over issue of

notes.

"A'- /A/E. *ONE





1ait money is the form of 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 and liabilities. &o one refuse to 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 reuirement.

EAS COUN-'N3

The paper money is convenient to carry and transfer. *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

2aper currency is always numbered. Each one has a distinct

number. /o in case of robbery, bank fraud, the involved person can

be traced out when. They use the embeled money.

EAS'+ .ECO3N'AB+E

The paper money is easily recogniable. 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 can be used in emergency like war and 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,

sie, 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-'ONA+ -.ADE

The present state of international trade also owes great to paper

currency. Different type of paper money can be convenientlyinterred changed and used in different parts of world. This has

increased the liuidity of worlds 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.

Disdvnt(es of pper mone0

+imited $$eptn$e

Demerit of paper money is that it has a limited acceptance. *ts

acceptance is limited with in the boundaries of home cont ray. *t is

not legal tender money in other countries.

Dn(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#ri%it0

&ormally paper money has a short life than metallic money. Thereare chances of damages to paper. 1ire may burn it. 2aper money

loses its good appearance and shape.

Sm%% denomintions

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 p0ment

+hen paper money over issued in the market then it cause theinflation, 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 sti%it0

There is less stability in the value of the paper money as compared to

metallic money. /ome time it is over issued and people 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 wter

%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*EN-

2aper money is useful only when it is efficiently managed. *f the

monetary authority is not vigilant and does not issue the paper

currency as reuired, it often leads to inflation deflation.

/.'CE 'NS-AB'+'-





2aper money has given rise to wide scale price fluctuation in

different countries of world. The fluctuations in e!change 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.

CONC+US'ON

1rom above discussion we concluded that paper money has also

some defects. *t is better than metals and it is also helpful for

removing the economic problems. *t is a source of blessing for

mankind. >owever when it is not properly managed it becomes

source of perils 8 confidence.

F &o.5: Define money and e!plain the different function of

money

OU- +'NE

Definitions

"#n$tions

/rimr0 f#n$tionsSe$ondr0 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

without doubt or special enuiry as a means of purchasing

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





/rimr0 f#n$tions

*edi#m of ex$hn(e

&ow a days 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 seller.

A stndrd 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 days money has removed this problem. +e can

easily store for a long period of time.

A stndrd of deferred p0ment

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 withmoney.

Se$ondr0 f#n$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 organiations etc)

available easily.

Es0 $ons#mptions*n barter system the main problem of consumption goods according

to demand of peoples, because it reuire double coincidence of

wants. Money removed this problem, and every can easily purchase

commodities according to his demand,

/romotes svin(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.





Enhn$e trde $tivtes

Money promote trade activates by serving as a medium of

e!changing making e!change of goods easy.

"$i%ittes distri#tions of rewrds

+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 factor of production to the production process. *t thus

becomes a base for the disturbing for rewards among the

contributing factors.

Enhn$e $pit% f#n$tion

*n-ecting more and more funds in the form of money can increase

capital formation reuired for the development of an economy.Ens#re fir distri#tion of in$ome

Money ensures fair distribution of income through progressive

ta!ation system, which can only be implemented in money economy.

Es0 orrowin( nd %endin(

$orrowing and lending activities have become easy which easy

which otherwise were difficult in barter economy. $anks create

credit on the basis of money deposits they receive

Contin(ent f#n$tionsDistri#tion of ntion% in$ome

Money helps us in the fair distribution of national income among

factors of production.

Credit $retion F $ontr$tion

The process of credit creation and contraction by commercial banks

depends upon cash reserve, which they maintain from money

deposits of the accounts holders.

E;#%i<er of mr(in% #ti%ities nd prod#$tivitiesMoney enables consumers to get ma!imum satisfaction through the

law of eui4marginal utilities. /imilarly the producer can get

ma!imum profit by eualiing the marginal productivities of

different factors of productions.

A %i;#id sset

$ecause of having the uality of general acceptability, the

households and businessmen keep it with themselves to meet the

current domestic and business reuirements. 1urther, it is easy to





hold it and the holder faces no problem of its depreciation as in case

of goods. /o it serves as a liuid asset.

A 3#rntor 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 to be insolvent irrespective of its asset and liabilities

statement. /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

standard value of measurement. $ut money has removed 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$hn(e

N#meri$% /resenttion

3rphi$% /resenttion

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 2urchasing 2ower of Money in 5655 with the help of

Euation.

*n his book he presented the money as value of money that means

The 2urchasing power of money. %nd it shows the inverse

relationship between value of money and price level. &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

circulation increases, the price level also increases in direct

proportion and the value of money 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 theywere 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$e s pssive f$tor

*t assumes that price is a passive factor. *t means that if means that it

is affected by other factors in the euation but does not affect others.Constnt ve%o$it0 of mone0

%ccording to fisher euation the velocity of circulation of money

and bank money is constant.

No $hn(e in vo%#me of trde

The total volumes of transaction (goods and services produced)

remain same and are not affected by change in money supply.

Brter -rns$tions





Fuantity theory of money is applicable on the money economy. *t is

not applicable on barter system.

/roportion% re%tion etween *F*7

There is proportional relation between currency money (M) and bank

money (M5).

No $hn(e in horded 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.

Euation of 1isher

2rofessor 1isher e!pressed the following euation.

/- G*VH*7V7

O.

/ G *VH*7V7

-

+here0

2T I total demand for money.

2 I eneral 2rice levelM Iuantity of legal tender money.

M5 Iuantity of bankLcredit money.

N I velocity of circulation of legal tender money

N5 I velocity of circulation of bank money.

T I total Transactions

&umerical presentation (e!ample)

/uppose0M I 5HH, M5I 5HH, N I C, N5 I :, T I 5HH

&ow putting the values in formula

2I MNOM5N5

T

I 5HHKCO5HHK:

5HH

I CHHO:HH





5HH

I ?HH

5HH

I Bs.?

*n order to prove that variation in money supply produces

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 5HHH5HH

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?HO5HH5HH

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(rm 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.

P

NM5

Nalue of money

NM:

( M1 M:





Quantity of money

+he !iagram shows the inerse relationshi" betweenthe %uantity on money an! the alue of money. >henthe %uantity of money is (M1 the alue of money is(M1$ when the %uantity of money is increase! 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 demnd for mone0

The theory discusses only of money as the main determinant of pricelevel 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% $hn(e

+hen the price level of goods is changed then on the other hand theuantity of money not changed at the same proportion. ;ike if

uantity of money increase by 5H meanwhile it is not compulsory

the price level is also increased by 5H, may be it can decreased.

Stti$ 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 euation and diagram are made on the base of some

assumptions without them theory is useless, as well as such

assumption also useless

'(nores short .#n

;ord 'eynes says that it ignores the changes in prices in short run

period and it considered only long run period.

-rde $0$%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@. +hat are the 2rincipal and Methods of notes issues

+hich Methods adopts in 2akistan

OU- +'NE





/rin$ip% of Notes iss#es

Advnt(es nd disdvnt(es of the prin$ip%

*ethods of Notes iss#es

Advnt(es nd Disdvnt(es of the *ethods

-he S0stem #sed in /!istn

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$0 /rin$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 thissystem have some %dvantages0

Advnt(es of $#rren$0 /rin$ip%

7) "#%% sfet0

Due to reserve of gold this system provide the fully safety

to paper money

8) *ore $onfiden$e of peop%e

%ccording to this principal paper money got the more

confidence of peoples because central banks can convert themoney into gold.

9) Sti%it0

2aper money has the stable value in currency principal due

to 5HH backing reserve of gold.

) No dn(er of inf%tion

<nder this principal gold must reuired for the purpose of

the printing notes. $ecause of this notes are issued according

to the demand of peoples, so there is no chance of overissue, and as well as control on inflation.

Disdvnt(es of $#rren$0 prin$ip%

7) 'ne%sti$

This principal make the supply of money inelastic, we

cannot increase the uantity of money else we have 5HH

gold for reserve.

8) +o$!in( #p (o%d





<nder this system gold become fully lock up and can not

use for other purpose.

9) Not Deve%opment Oriented

1or the development of new industries and business paper

money is reuired, but under this principal for printing of

new notes for industry etc gold must be reuired, if govt

has no gold then banks cannot print notes for development

purpose

8) Bn!in( /rin$ip%

*n banking principal for issuing paper money the central bank

of the country not legally bound to take the gold as reserve.

&otes are issued according to the reuirement of the

businessman and peoples. >owever the central bank maintainan adeuate reserve of gold bullion.

Advnt(es of n!in( /rin$ip%

7) E%sti$it0

<nder this principal the central bank can increase or

decrease the uantity of money as per need of peoples

of the country. $ecause gold is not necessary asreserve. /o the bank en-oys the facility of elasticity.

8) E$onomi$%

%s above mentioned 5HH backing gold is not

reuired, because of this banking principal economical

for the central bank of the country

9) Deve%opment oriented

$anking principal of notes issue is development

oriented, because the central bank increases the uantityof money according to the reuirement of industries and

other development sectors.

) *ost s#it%e in emer(en$0

This principal of note issue helps a country to meet the

emergencies, which may arise during war or any natural

disaster like flood, earthuake etc.

Disdvnt(es of n!in( prin$ip%

7) Chn$es of inf%tion





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 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) *onetr0 mismn(ement

There are more chances of monetary mismanagement in

banking principal as compared to the 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#$ir0 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=@@ andstill in <' as well as in &orway and 9apan.

Advnt(es of fixed fid#$ir0 iss#es)

7) E%sti$

The beauty in this system is this elasticity. The supply of

money can be changed by changing the fiduciary limit

without disturbing the metallic reserve provision.

8) *ore sfe

*n this system all the issued notes are fully safe, becausenotes 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% over the inf%tion

<nder this system a fi!ed limit is issued by the central bank

of the country, so there is less chances of over issue. %nd

also control on the inflation.

Disdvnt(es of fixed fid#$ir0 iss#e





7) +ess $onfiden$e in $#rren$0

+hen currency is over issued people lose confidence *

currency due to its devaluation

8) Dn(er of over iss#e

*n this system danger of over issue remain occur. $ecause

the central bank can change the fi!ed fiduciary limit,

because of this notes are over issued in the market. "n the

other hand if uantity of notes rises then chances of

inflation also occur in the market.

/roportion% .eserve S0stem

*n this method of notes issue the central bank of the country

keep a certain percentage of gold reserve for issuing the paper

money. enerally these percentages vary from :? to @H.%nd the remaining portion of percentage that is cover with

gold, should reserve backed with Trade bill and ovt.

securities. This method was first introduced in ermany in

5=A?, in </% 565@, as well as 2akistan adopt this in 567?.

Advnt(es of /roportion% reserve s0stem

7) 2ide%0 dopted s0stem

This system is widely adopted in different courtiers all over

the world, due to its less uantity of gold as well aselasticity.

8) E%sti$it0

The chief merit of this system is its elasticity. The money

supply can be increased or decreased by changing the

reserve reuirement.

9) Sfe

The notes are issued under this method are safe, because

notes cannot be issued without meeting the gold reservereuirement.

Disadvantages of 2roportional Beserve system

7) Un%e to $ontro% pri$e

This system does not help in controlling sharp fluctuations in

prices which brings inflation in the economy.

8) Une$onomi$ #se of (o%d

*n this system gold is locked up in the bank, and we can not use

the gold for other productive purposes for the economy.





Ex$hn(e *n(ement O. *odified /roportion% .eserve

S0stem

%s its name shows, it is the modified form of proportional reserve

system. *n which bank is reuired by law to keep the percentage

reuired against the notes issued in the form of gold, foreign bills or

cash at some foreign banks where gold standard prevails.

Advnt(es

7) E%sti$

This system also has the beauty of elasticity. 3entral bank can

increase and decrease the uantity of notes according to

reuirement of industries and consumers.etc.

8) 3o%d not $omp#%sor0

*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) Dn(er of inf%tion

There is more danger of inflation as there are more chances of

over issues.8) *onetr0 mismn(ement

There are more chances of monetary mismanagement. *f the

government is less responsible.

*ethod ein( fo%%owed in /!istn

Till the 567? the note issue in 2akistan under 2roportional

Beserve system. Meanwhile currently adopt the e!change

management system. <nder this system the central bank of2akistan keep reserve only CH of gold, silver, or approved

foreign e!change against the notes issue.

F &o. 5? defines money +hat are the significance and importance

of money

OU- +'NE

Definition of mone0





Si(nifi$n$e F importn$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 recognie the significant economic

role of money in the capitalistic and centrally controlled economy.

.o%e of mone0 in Cpit%isti$ e$onom0

7) 'n$rese $ons#mption+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 utiliation process human want become satisfied. "n the

other hand there is facility of consumption according to

human wants in barter system.

8) Es0 /rod#$tion

*n barter economy the production of goods so much

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 availability of factor of production (land, labour,

capita, and organiation) is possible.





%nd finding out the cost of goods in term of money no more

problems.

9) "$i%ittes ex$hn(e -rns$tion

*n barter system e!change of goods according to demand of

different people so much difficult, due to

lack of common measurement. $ut now with the help of

money these problems removed. &ow goods are e!changed

according to demand of the user with the process of sale and

purchase.

@. E;#% distri#tion of ntion% in$ome.

*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. nowcurrently we can check eually share of four factor of

production i.e. rent of land, wages for labour, interest on

capital, and profit on entrepreneur is paid in term of money.

=) /#%i$ finn$e

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 thelevel of production according to consumer needs.

?) Deve%oped Bn!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.

A. Determintion of pri$es.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.

) Enhn$e svin( nd 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.

) Cpit% formtion

*t is a process of increasing physical and human capital of a

country through best utiliation of resources. +ith the help

of money we can increase the uantity of capital, as per

industry needs.

7) *onetr0 po%i$0

The monetary policy gives momentum to the economic

activities. *t can only be formulated and implemented inmoney economy.

6) 7? wht do 0o# men 0 'nf%tion Exp%in the different

!inds of inf%tion.

OU- +'NE

'ntrod#$tion

Definition

Kinds of inf%tionCon$%#sion

'ntrod#$tion

*t represents the rise in general price level. $asically when the state

bank of the country issue the over demanded notes then it decrease

the value of money. Meanwhile raises the general price level in the

market.

/ome authors define the inflation as followsB0 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) Demnd 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 consumers at the result price level increase of e!isting

goods, this situation creates the inflation in the market.

8) Cost p#sh 'nf%tion

+hen the cost of production increase and producer raise the

price level in the market, its 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.

9) B#d(etr0 'nf%tion

+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

value of money as well as increase the price level in the

market. These situations create the inflation.) /rofit ind#$ed inf%tion

+hen the monopolist earns the more profits on 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 inf%tion

+hen the prices of foods items increase sharply, it is as food

inflation. 9ust like during the days of Eid, Baman etc?) 'n$ome inf%tion

The inflation that occurs from high income level. *ncome may

increase due to change in salary or foreign remittance.

@) *onetr0 inf%tion

This inflation arises due the increase in supply of money with

no increase in production is called monetary inflation.





On the sis of rte of inf%tion

7) Creepin( inf%tion

*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, </%, and /ingapore.

8) 2%!in( inf%tion

*n walking as the word represent, price level increase in

continuous form with fast speed as compare to creeping

inflation. The rate of inflation around ? annually.

9) .#nnin( inf%tion

*n which general price level near about = to 5H annually is

called running inflation.@. Trotting inflation

*n trotting inflation price level rise with double digit i.e. :H

annually. /ome authors say about percentage ? to :H

annually. 2akistan faced the trotting inflation during 56AH4=H

and 566H4:HHH.

=) 3%%opin( inf%tion

+hen the rate of inflation across the limit of :H per annum.

Then galloping inflation arrived. Ma!imum limit of gallopinginflation is 5HHH 2.%. during 56=H46C %rgentina faced such

inflation with the rate of @:C.@ p.a.

?) 10per inf%tion

+hen the rate of inflation is more than 5HHH p.a. we can say

its a final stage of inflation. *n 2oland the rate of inflation was

more than 5HHH in 5=6=. ermany also e!perienced with

hyper inflation during 56::4:@.

On the sis of de(ree of $ontro%7) Open inf%tion

+hen inflation get out of control of the ovt. in which all

measurement and polices are failed to control the price level as

well as inflation in the market,

8) S#ppressed inf%tion

*f the overnment can control over the inflation is called

suppress inflation. $ut on the other hand some other problems

are created like hoarding, corruption, and black money.





Other t0pes

7) /rti% inf%tion

%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%tion

+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 poors, ovt should develop

the polices for controlling over inflation with implementation.

$ecause it reuired ? to 5H years to removing the inflation

from the economy,

6 7@) Define inf%tion, wht re the $#ses of inf%tion 1ow we

$n remove the inf%tion

O#t %ine'ntrod#$tion

Definition

C#ses of inf%tion

*es#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 the over demanded 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

Demnd 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 consumers at the result price level increase of e!isting

goods, this situation creates the inflation in the market.

C#ses of Demnd p#%% inf%tion

7) 'n$rese in s#pp%0 of mone0

Bapid increase in supply of money creates the demand pullinflation. 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.

8) Defi$it finn$in(

+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 thefactors engaged with these pro-ects increase suddenly. 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 .emittn$e

+hen foreign income of the people increase, due to this

purchasing power of the peoples also rising up. $ut supply of

goods not according to reuirement of consumers, after it price





level of e!iting goods will increase due to increase in demand

of goods.

) .pid in$reses in pop#%tion

+hen the rate of population rises very sharply, then goods are

more demanded in the market. $ut supply of goods and

services not is according to demand at the result price level of

goods rising up as well as inflation occurs.

=) 'n$rese in w(es

+hen the wages of the employees increased then the income

level of peoples will rise as before they earned. Then

purchasing power of the consumer increased but on supply

side, its not according to demand and after it prices are

shooting up.

?) 1ordin( nd sm#((%in(

The artificial shortage called hoarding may result in rising

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

inflation. +hen people increase their consumption then producer increase the prices of goods, and 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

6. Non&deve%opment expendit#re

The larger non4development e!penditures of a country increase

the money supply that creates more demand for goods andservices. *t thus becomes an active factor to inflationary

pressure in a country.

Cost p#sh 'nf%tion

+hen the cost of production increase and producer raise the

price level in the market, its 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

+hen the prices of imported goods increases then 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 3s 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$rese in 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$rese in indire$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#pport pri$es of (ri$#%t#re $orps

*n order to protect the interests of the farmers, the agriculture

countries provide support to agricultural products. *t has cost

push inflationary effect on the economy.

?) Si$! ind#stri% #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.*es#rement to $ontro% the inf%tion

$asically inflation is very danger factor for the economy.

%nd for its controlling not only one

Measurement is reuired, so under following some sort of

measurement to control the

*nflation from the market.

7) /roper $he$! on monetr0 expnsion





3urrency notes should issued by central bank of the country

according to the reuirement of the peoples and industries. *f

over demanded notes are controlled then day to day inflation

also controlled from the market.

8) Defi$it finn$in(

The government of the country should control the deficit

financing in the form of bank borrowing and printing notes of

new currency.

9) .ed#$tion in -x rtes

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% of si$! ind#stries

The revivals of sick industries units, would increase production

and reduce inflation

=) Comp#%sor0 svin(

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 in import d#tiesThe reduction in import duties on industrial raw material,

machinery and selected consumer item would greatly help in

checking smuggling and controlling inflation in the country.

A. /ri$e $ontro% $ommittee.

2rice committees must be formulated to control the price level.

The weekend markets must be introduced in order to stabilie

the price level.

) Cons#mer $o#rtsThe consumer courts can contribute a lot to control inflation in

the country.

) 'n$rese in prod#$tion

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 eual to ero. %nd motivate the level of investment

where the productivity level rises.

77) Contro% on mrri(e expendit#re

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 baaars in big cities to ensure the availability of fruits,

vegetable and kitchen items at fair prices, will helpful 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

*slam then all the problems are easily remove 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 reuired 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

"et#res of -rde C0$%e

/hses of -rde $0$%e

Con$%#sion





'ntrod#$tion0

>istory tells us about the ups and down in $usiness 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) 1er%er0

#$usiness cycle in the general sense may be

defined as an alternation of period of prosperity and depression of

good and bad Trade.B0 1nsen0

#$usiness cycle is the fluctuation in the employment0

output and prices.

B0 *)Ke0nes0

#% trade cycle is composed of period of good trade

characteried by rising prices and low unemployment percentage

alternating with period of bad trade characteried by falling prices

and high unemployment percentage."et#res of -rde C0$%e

7) .e(#%r 'nterv%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 .e$over0The movement of business activity is slow from depression to

$oom.

9) .pid down f%%in(

There is rapid down falling of the business activity form boom

to depression

) 2or%d wide

% trade cycle is not the problem of one country. *t is world

wide in nature.





=) Simi%r pp%i$tion

+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%o0ment %eve%

The employment level falls with the contraction of business

activity and rises with the e!pansion of business activities.

@) Cpit (oods

The capital goods industries are the first to be depressed and

first to be recovered.

) .ise nd f%% in e$onomi$ vri%es

The economic variables i.e. income, output, profit, wages and

prices rise in boom and fall in depression.

2hases of Trade 3ycle

There are four phases of Trade 3ycle as under

5. Depression

:. Becovery

C. $oom@. Becession

Economic activity

Time





Depression> Contr$tion

% period of trade in which business e!perienced with low

profit ratio, as well as suffering loss, with low productivity and

sales. *n simple words we can say its a period of $ad trade.

*ts characteried as under0

5. ;ow productivity

:. ;ow national income

C. ;ow per capita income

@. ;ow purchasing power of people.

?. Decrease in average demand

7. 1all in price

A. ;ow profit margin

=. *nsufficient rate of investment6. 1all in bank credit

5H. >igh rate of interest

55. >igh unemployment

.e$over0 or .eviv%

%fter the depression has lasted for sometime, a ray of hope

appears on the business horion. $usinessmen start thinking

about their businesses. They decide to repair their industrial

units and alert the factors of production. Thus is characteried by0

5. "ptimistic approach of businessmen

:. *nitiative of investment in consumer and producer goods

industries

C. 2rofit margin re4appears

@. 2er capital income is increasing

?. 2urchasing power of people is improving

7. 2rices show upward trendA. Banks started advancing loans by lowering the rate of

interest

=. Employment rate is increasing

Boom, /e!

% period of good trade is called boom. +e can say it is the end of

recovery period.

*ts characteried as under0





5. &ew investment in all sectors of the economy.

:. Bevival in all industries

C. >igh level of national income.

@. >igh per capita income.

?. >igh propensity to consume.

7. >igh prices

A. ;ow purchasing power of money

=. >igh purchasing power of people

6. 3redit e!pansion by the banks

5H. >igh profit margin

55. >igh employment rate

.e$ession

*n this period economy moves from boom to depression. The periodof 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.

*ts characteried as follow

5. 2essimistic demand starts decreasing

:. %ggregate demand starts decreasing

C. &ational income also starts falling@. 2er capita income is falling

?. "ver production takes place

7. *nvestment starts decreasing

A. 2rices also come down

=. The profit margin decreases

6. <nemployment creates in the economy

5H. $anks feels hesitation in advancing loans

Con$%#sion:

&o doubt Trade cycle create more fluctuation for the economy.

$ut its compulsorily for business. %nd during its different

phases some time business en-oying the period of profit, and

some time suffering period of loss.





F. 56 Define &egotiable *nstrument, e!plain the difference

between the $ills of E!change, 3heue, 2romissory note.

Definition

#%ccording to &egotiable instrument %ct, a negotiable

instrument means a promissory note, bill of e!change or

cheue payable either to order or to bearer.

Bi%%s of Ex$hn(e Che;#e /romissor0 note





7) Definitions

*t is a written

instrument containing

an unconditional

order, signed by the

maker, directing

certain person to pay

a specified sum of

money on demand or

at a fi!ed or the

determinable future

time, only to or to the

bearer of the

instrument.

8) Drwee

*t is drawn upon a

specified person

including a bank.

9) A$$eptn$e

*t is always accepted

by the Drawee) 2hen p0%e

*t is payable either on

demand or on the

e!piry of a fi!ed

period or

determinable future

time.

=) 3r$e periodThree days of grace

are given after

maturity date.

?) Stmp

*t must be properly

stamped.

*t is an written

instrument containing

an unconditional

order, signed by 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 drawn only upon

a bank

*t does not reuire any

acceptance.

% cheue is always

payable on demand.

&o grace period is

given. *t is

immediately payableon demand.

*t does not reuire any

stamp.

*t can be crossed.

*t is an written

instrument

containing

unconditional

undertaking, signed

by the maker to pay a

certain sum of

money on demand or

at a fi!ed or

determinable future

time only to or to the

order of a certain

person or to the

bearer of instrument.

*t is draw upon a

specified person

*t does not reuire

any acceptance.

*t is payable either

on demand or on the

e!piry of a fi!ed

period or

determinable future

time.

&o grace period

given. *t is

immediately payable

on demand.

*t does not reuire

any stamp.





@) Crossin(

*t cannot be crossed.

) Stop p0ment

The payment of $ills

of e!change cannot

be stopped

) Noti$e of

Dishonor

*t bill of e!change is

dishonoured , a

notice of dishonour

must be given

The payment of a

cheue can be stopped

+hen a cheue is

dishonoured, a notice

of dishonour is not

r euired to be given

*t cannot be crossed.

The payment of a

cheue can be

stopped

*n case payment of

2L& is not made, a

notice of dishonour

is not necessary.





7) /rote$tio

n to Drwee

The Drawee is not

protected if he makes

payment under forged

endorsement.

77) Notin(

nd /rotestin(

&oting and

sometimes protesting

is reuired

5:. /0%e

to

*t can be made

payable to the drawer

79) +ii%it0

of Drwer

*n case of $LE, the

liability of the drawer

is secondaryJ he is

liable only when theacceptor refuses to

pay.

7) .esponsi

i%it0

The acceptors of $LE

are -ointly responsible

only.

7=) 2hoDrws

*t is drawn by the

creditor

7?) Order Or

/romise

$ills of e!change is

order to pay

7@) /rties

The banker is

protected if he pays a

cheue under forged

endorsement.

&oting and protesting

are not reuired.

*t can be made payable

to the maker or

Drawer

*n case of cheue the

liability of the drawer

is secondary0 he is

liable only when the

acceptor refuses to

pay.

The maker may -ointly

as well as severally

responsible

*t is written by the

debtor

3heue is order to pay

There are usually three

parties involved in

3heue a) Drawer

b) Drawee c) payee

The Drawee is

protected.

&oting and

protesting are not

reuired.

*t cannot be made

payable to the maker

but to payee or

endorsee.

*n case of promissory

note, the liability of

the maker is primary

and absolute.

The maker may

-ointly as well as

severally responsible

*t is written by the

debtor

2romissory note is promise to pay

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 Define Deflation +hat are its causes and Bemedies 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 ofmoney, also fall in price of goods. +hen deflation occurs then

people dont have money to buy goods and services. There is

over production in the economy. &ew investments are not

made.

Definition0

B0 /rof) Crowther

#Deflation is that state of the economy where

the value of money is rising or prices are falling.B0 4mes /hi%%ips0

#Deflation is a period during which level of

prices declines and the value of money rises.

B0 2i%%im 4) B#mo%:

#Deflation refers to a sustained decrease in

the general price level.

C#ses of Def%tion

7) "%% in 6#ntit0 of mone0

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 /rod#$tion

+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 rate of income ta!es means the low purchasing

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 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 ratio of earning.

=) +ess Demnd of (oods F 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 stor(e f$i%it0The businessmen may have poor storage faculties. 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.

@) +ower profit

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 reserve rtio

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 $ost of (oods





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) De$rese in pop#%tion

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) 1ev0 imports

*mports in large uantity increase supply of goods 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 in s#pp%0 of 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$rese in $redit

+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 according to demand of peoples.

9) +ow rte of n!

Deflation may be controlled by lowering the bank rate.

The central bank lowers the bank rate to provide morefunds to commercial banks. The lower bank rate means

that there is less money supply in the economy.

) "%% in tx rtes

Deflation can be controlled with the low rate of Ta!,

because it will bring the lesser cost of goods, as well as

lesser price of goods, then after it deflation will be

automatically controlled.





=) /#%i$ wor!s

The ovt. can start public works programmed to

climate deflation. The amount is transferred from govt.

to general public. The demand for goods increases and

there is increase in production.

?) New investment

The investment can be made to set up new factories

and mills. The production and employment increases

due to new investment.

@) /rod#$tion $ontro%

The control over production can help to control

deflation. The producers can fi! production uota for

each producer. The control over supply is necessary tomaintain price level.

) 'n$rese 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$rese in w(es

The wages of workers can be increased to control the

deflation. The govt fi!es the minimum wage rate theincreased wages raise the income level of worker they

go to market for purchase of goods and services.





F. &o. :5 Define &ationaliation, e!plain the advantages and

disadvantages of &ationaliation.

OU- +'NE

'ntrod#$tion

Definition

Advnt(esDisdvnt(es

'ntrod#$tion

The government headed by .%. $hutto privatied all industrial units

and banks. The consumer goods industries, steel industries, cement

industries automobile industries and all banks ere taken over by the

government. $anks are also nationalied with the effect form 9uly 5,

56A@ under &ationaliation of bank act [email protected]

*ts means taking over the management and control of organiation

owned by private individuals, called nationaliation.

Advnt(es of Ntion%i<tion

7) "ir distri#tion of $redit

$efore nationaliation the directors of banks were used to avail

big loans for the promotion of their business and industries.





The nationaliation 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 sti%it0

%nother advantage of nationaliation was that the central bank

with the help of nationalied bans could minimie the

fluctuations in economies activities. *t would discourage the

speculation, hoarding and other anti4social activities. That

would stabilie the prices.

9) "inn$in( of (ri$#%t#re

%gricultural sector totally ignored before nationaliation of

banks, due to uncertainty of production and income which maylead to default. %fter it govt. provided liberal loans to farmers.

That caused increase in production and agriculture income to

the farmer.

) Servi$e motive

&ationaliation was advocated on another ground that

nationalied institutions would provide better services to the

customers. The commercial approach was replaced by the spirit

of service to people.=) No $on$entrtion of n! $redit

$efore nationaliation there was concentration of bank credit in

few hands. $usiness and industrial monopolies were formed.

&ationaliation helped in fair distribution of credit and thus

eliminated the chances of monopoly formation.

?) .emovin( of wstef#% $ompetition

The burden of huge publicity e!penses was shifted to

consumers in the form of raising prices of the products. &ationaliation was supposed to eliminate such competition

thus providing ultimate relief to the customers.

@) Ao%ition of *%pr$ti$es

The banks and other private sector enterprises were

nationalied to stop the malpractices like that of unlawful





transactions, evasion of foreign e!change, evasion of ta!es,

heavy advances to directors etc.

) 'mprovement in effi$ien$0

The efficiency of nationalied institutions would improve when

they would be operated in the interest on nation. $efore

nationaliation, the making of more profit was the only

criterion of efficiency.

) Se$#rit0 in depositors

2eople showed more confidence in a state owned organiation.

Their deposits were safe in nationalied banks.

7) E$onomi$ (rowth

The rate of economic growth would increase because the

nationalied bank would formulate the credit policy inaccordance with the growing needs of different sectors.

Disdvnt(es of Ntion%i<tion

7) *%pr$ti$es

The malpractices in nationalied banks were going on. The

favoritism still e!it in banks in different forms.

8) "%% in servi$e stndrd

The service standard had not improved. *t had rather

deteriorated.9) No sti%it0 in pri$e

&ationaliation of banks had done nothing in the stabiliation

of prices because all the reuisites of price stability could not

be achieved with nationaliation.

) +ow effi$ien$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 lowefficiency was the -ob security in government service.

=) 'mmi(rtion of 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 $hn$es of promotion

The chances of promotion in nationalied banks were less.

Their promotion depended on the length of service, whereas

private banks consider efficiency for promotion.





F. &o.:: Define privatiationJ e!plain the advantages and

disadvantages of privatiation.

OU- +'NE

'ntrod#$tion

Definition

Advnt(es of /rivti<tion

Disdvnt(es of privti<tion

*ntroduction

*n 2akistan the term privatiation became popular in56AA when the

government headed by en. ia4ul4>a decided to hand over the

nationalied industrial units to private sector in order to encourage private sector. The private investors were not interest in making

investment in 2akistan due to fear of nationaliation.

$enair $hutto came in to power in 56==. /he continued the

privatiation policy of the previous government and gave 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 privatiation process. *t is said that the pace of

privatiation of &awa government was even faster then the privatiation of <.'

2erve Musharraf and /haukat %i also privatied some public

sector like 2ak %rab 1ertilier and 2T3; was also privatied. The

privatiation of 2ak steel mill was challenged in /upreme 3ourt. %s

a result, court stopped privatiing /teel Mill. That is why 3hief

9ustice *ftikhar %hmed 3h. was punished by then 2resident 2ervai

Musharraf for his intervention in their black act.

2rivatiation of banks





5. M3$ and %$; were handed over to private sector through

privatiation commission to Mansha roup and allied

Management roup respectively.

:. >$; was privatied in :HH@

C. <$; shares were offered to private sector in :HH?

@. /ome percentage of shares of &ational bank of 2akistan is also

sold to private person.

?. *D$2, T$;, /ME bank are also planned to be privatied.

%dvantages of 2rivatiation

5. *ncrease in productivity

:. *ncrease in efficiency

C. *mprovement in uality@. >ealthy competition

?. *ncrease in e!ports

7. E!tension of market

A. *ncrease in employment

=. %doption of modern technology

6. Mobiliation of resources.

5H. Encouragement to private sector

55. *ncrease in output5:. 2rice stability

5C. *ncrease in ta!es

5@. %cceleration of economic growth

Disadvantages of privatiation

5. *ncrease in inflation:. %rtificial shortage

C. *ncrease in smuggling of food items

@. 3ommercial approach

?. 1ocus on advertisement

7. E!ploitation of consumers

A. *ncrease in poverty

=. 3lass conflict

6. *ncrease in crime values





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 -rde $0$%e

7) 'ntern% $#ses

8) Extern% $#ses

.emedies to $ontro% the -)C

Definitions

B0 /rof) 1er%er0

#$usiness cycle in the general sense may be

defined as an alternation of period of prosperity and depression ofgood and bad Trade.

B0 1nsen0

#$usiness cycle is the fluctuation in the employment0

output and prices.

B0 *)Ke0nes0

#% trade cycle is composed of period of good trade characteried

by rising prices and low unemployment percentage alternating with

period of bad trade characteried by falling prices and highunemployment percentage

C#ses of -rde $0$%e

'ntern% $#ses

7) Under $ons#mption

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. Theresult is that demand for consumption gods decrease.

8) Unso%d 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) 'mports





The imports increase the supply of goods in the economy. *f

the total stock of goods is more than its demand there is

depression.

) *one0 s#pp%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 investment

E!cessive investment in capital goods industries bringsupswing and a fall in investment brings downswing in

economic activity.

?) *r(in% effi$ien$0 of $pit%

'eynes claims that fluctuations in marginal efficiency 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(te mr!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) 2rs

During war the resources are used for the production ofarmaments. %s such the output of capital and consumer goods

greatly falls. The fall in output, income, profit etc, causes

contraction in economic activity.

8) /op#%tion

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$ien$e nd te$hno%o(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.

) 3overnment po%i$es

ovt. polices at home an abroad bring changes in total

spending and hence in the level of economic activity.

?. S#rp%#s exports nd for(in( Aid

/urplus e!ports and foreign aid raise the level of consumption

and investment spending. The output income and employmentare boosted.

?) 2ether

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 -rde $0$%e

*onetr0 po%i$0

7) Bn! rte

The central bank can increase bank rate when there is

prosperity. The bank rate can be reduced in case of depressionthe borrowing and lending is make according depression the

borrowing and lending is made according to bank rate. The

commercial banks help the central bank to control trade cycle.

8) *r!et opertion

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) .eserve rtio

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$tive $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$ 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 tradecycle.

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.

9) B#d(et

The government can prepare surplus budget during boom period. There is need of deficit budget during deflation. The

government can use budgetary measure along with other

methods to control trade cycle.

) /#%i$ det

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.=) 'mports

The government can allow import of goods, which are needed

by public. During depression there is no need to import the

items, but when there is boom period the supply of goods can

be maintained through imports.

'nterntion% mes#res

7) /rod#$tion





The production control measure can be made at 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#ffer 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) 'nvestment $ontro%

The government may allow investment in an area where thereis 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- +'NEDefinition

Constr#$tion of index n#mer

Constr#$tion of simp%e F wei(hted index n#mer

Uses of index n#mer

+imittion of index n#mer

Definition

B0 D)3reenw%d

#*nde! numbers a measure of relative changes auguring in a series ofvalues compared with base year

B0 A) 1er

#%n inde! number is a ratio usually e!pressed as a percentage of

prices, uantities or values that relates a given period with a

comparison period

Steps for $onstr#$tion of 'ndex N#mer

7) Se%e$tion of se 0er





"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

% 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 pri$e ;#ottions

The price uotations are obtained from selected market only,

the price of each commodity is noted.

) 2ei(htin(

Each commodity is a weight. The weight shows the importance

people give to different commodities=) /er$ent(es $hn(es

The percentage change in prices is calculated.

?) C%$#%tion of ver(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#mer

Simp%e interest: %ccording simple inde! number all items are eually

important for the people. $ut in practical life it is not so. The

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

2rice in

566H (pH)

$ase

566HI5HH

2rice in

:HHH (p5)

Belative

price (B)

%

$

3

D

:H kg

?kg

5? m

@H kg

5HH

5HH

5HH

5HH

:?

5H

CH

?H

5:?

:HH

:HH

5:?





E

& I ?

:HH uintal 5HH @?H ::?

O) P DC

5. :?L:HK5HH I5:?

:. 5HL?K5HH I :HH

C. CHL5?K5HH I :HH

@. ?HL@HK5HH I 5:?

?. @?HL:HHK5HH 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#mer

&ow are assign high weight to commodities of greater importance to

consumers and lesser weights to commodities of lesser importance.

3ommo

dity

+eight

(+)

2rices in

566H(pH)

$ase

year566HI5

HH

2rices

in :HHH(p5)

2rice

relative(B)

+KB

%

$

3

D

E

?

@

:

C

5H

R+I:

@

:H

?

5?

@H

:HH

5HH

5HH

5HH

5HH

5HH

:?

5H

CH

?H

@?H

5:?

:HH

:HH

5:?

::?

7:?

=HH

@HH

CA?

::?H

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#mer

7) Comprison

*nde! numbers are very useful for comparing the values of

things over two periods.

8) "ore$stin(

*nde! number is very helpful for forecasting economic and

business conditions.

9) /o%i$0 m!in(

Many economic polices are formulated with the help of inde!

number.

) /ri$e index n#mer

*nde! number is used to compare the prices of two periods it

serve as a guide for framing monetary and fiscal policy andother policies.

=) Cost of %ivin( index n#mer

*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#$tion*nde! number are useful for measuring the change in

production level the goods and services on e year are compared

with the goods and services out put level. The government can

decide to import or e!port goods for welfare of people.

+imittion of index n#mers

7) Se%e$tion of se 0er

The base year must be accurate otherwise the resultsachieved will be misleading

8) Se%e$tion of $ommodit0

The pattern of consumption of all categories of people is not

the same. /election of commodities is a difficult -ob.

9) /ri$e ;#ottion

%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(htin(

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(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$e of E;#it0 finn$e

So#r$e Det finn$e





7) Short term finn$e

8) *edi#m term finn$e

9) +on( term finn$e

Definition

That business activity which is concerned with the acuisition 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 firms acuisition of funds and the

management of these funds for various operations.

So#r$e of #siness finn$e

7) E;#it0 finn$e

The financing made by the person who plans the business andmakes permanent investment in the form of land, building,

machinery etc. is called euity finance

So#r$e of e;#it0 finn$e

7) So%e proprietorship

The only source of euity financing in sole proprietorship is

the amount, which an entrepreneur invest in the business in

money terms or otherwise i.e. land, building, machinery, etc,

8) /rtnership2artners contribution to capital fund is the source of euity

financing in partnership. They may contribute money or

moneys worth to business.

9) 4oint sto$! $ompn0

The shareholders are the source of euity 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) Det finn$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, intermedite or %on( term

7) Short term finn$in(





The financing made by the creditors or periods of one year or

less is called short4term financing.

So#r$es of short term finn$in(

7) -rde $reditors

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$i% n!

3ommercial bank provide short term finance to a business

enterprise in the form of over drft, dis$o#ntin( i%%s of

ex$hn(e, %ons (inst se$#rit0

9) "inn$e $ompnies

The finance companies are providing the service of short term

financing. These institutions are not common and know to people

but have contribution in promoting small business. 1or e!ample

small business finance corporation /ME bank, 'hshhali bank etc.

) C#stomers/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 $$o#nts .e$eiv%e

/ome business enterprises obtain loan by pledging their accounts

receivable with bank. This is the least used method in 2akistan.

'ntermedite finn$in(

To finance a business for a period of more than a year but lessthan ? years is called intermediate financing

So#r$es of intermedite finn$in(

7) Commer$i% n!s

3ommercial banks provide intermediate term finance to traders

and manufactures against security.

8) 'ns#rn$e $ompnies

*nsurance companies provide finance to manufactures against

the security of assets.





9) 'nd#stri% deve%opment n!

*ndustrial development bank of 2akistan was particularly

established in 5675 to provide intermediate and long term

financing to establish and e!pand industries

) Sm%% #siness finn$e $orportion

The corporation is playing a significant role in providing loans

to establish small and medium sie businesses and industrial

units. Pouth investment promotion society is also working

under this corporation to provide loans to the unemployed

educated youth.

=) /!istn ind#stri% $redit nd investment $orportion

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 providesloans for working capital

?) 1ire p#r$hse

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 finn$in(

*n order to have a good capital structure and al well planned business long term financing is reuired. The period is generally

more than ? years.

So#r$es of %on( term finn$in(

7) "or non $ompn0 #siness

5. "wners capital and the profit retained in the business

:. ;oan from friends, relatives employees at fi!ed rate of

interest. +hen one has to purchase his competitors business

or to set up new branches of office or to sign a favorablecontract.

C. %dmission of a new partner in partnership business

@. 3ommercial banks and other financial institutions like

*D$2, 2*3*3, etc

8) "or $ompn0 #siness

5. /ale of shares

:. *ssue of debenture certificates

C. 3ommercial banks





@. *D$24industrial development bank of 2akistan

?. 2*3*34 2akistan industrial credit and investment corporation

7. *324 investment corporation of 2akistan

A. &*T S national investment trust

=. E2E4 euity participation 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 finn$in(

+on finn$in( 0 %endin(

-rde re%ted modes of finn$in(

'nvestment re%ted modes of finn$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 finn$in(

There are 5: *slamic modes of financing. These have been approved

by /tate $ank of 2akistan from 9uly 56=?. % brief description of

*slamic instrument of financing as under

7) +ons finn$in( 0 %endin(

5. *nterest free loans

:. Fard4e4>asana

7) 'nterest free %ons*t is a new concept of lending based *9T*>%D the banks are

permitted to lend funds free of interest. They 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) 6rd&e&1sn

<nder this scheme, interest free loans are granted to students

who do not sufficient funds to continue their education. Fard4





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 by guarantee of parents

guardians for repayment of loans a grace period of : year

granted after completion of studies.

-rde re%ted modes of finn$in(

7) *r! #p

The mark up or $%* M<%99%; is a purchase of goods by

banks and their sale to clients at inappropriate mark up in price

on deferred payment basis. The mechanism is as follow.

5. The customer contacts the bank for financing the purchase

of goods.:. The bank purchases the reuired goods and sells 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 can be made in installments or lump sum over a

specified period of time

8) *r! down

*t is a purchase of moveable or immoveable property by the bank with buy back agreement according to this mode, the

customer sells the moveable or immoveable property to the

bank with a promise to buy back the same from the bank 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 bank,

9) +esin(

;easing also called *9%B% is a medium and long termfinancing mode. *n the mode the lessee acuired 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 p#r$hse

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 reuest of

customers and hires them to the client on the payment in

periodical installment. The bank charges a fair return form the

goods.

=) Deve%opment $hr(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 finn$in(

7) *US1A.K'A

*T */ an agreement between the bank and the client to participate in a business as temporary partner by providing

agreed amount of funds for sharing profit and losses during a

specified period of time.

5. $usiness is run by the client but the bank will e!amine the

feasibility and profit pro-ection so as to monitor and

supervise the business transactions.

:. 2rofits are to be shared as agreed.

C. ;osses will be shared strictly in the ratio of their respectiveinvestment

@. This mode is applicable to finance working capital needs of

a business.

8) *ODA.ABA

M"D%B%$% means the business in which the subscriber

participates with money and manager with knowledge and

skill.

5. *t is an agreement in which one party invest funds and other party with managerial efforts.

:. Modaraba must be registered under the Modaraba ordinance

56=H

C. %s per rule the partner who puts in managerial skills must

have at least 5H share Modaraba

@. 2rofit is shared in agreed ratio.

?. Modaraba certificates are transferable.

7. *t may be perpetual or for a specified time.





9) /rti$iption term $ertifi$tes

2T3 is an instrument of finance issued by company for

meeting medium and long term capital needs. % company is

authoried to issue the ptcs to schedule banks and financial

institutions.

5. 2tcs is an investment of medium and long term financing

:. *t is transferable

C. 2rofit is shard in agreed ratio

@. ;osses are shared in the ratio of banks and companies

investment

?. "nly -oint stock company can issue ptcs

7. /hort term ptcs are issued to meet working capital needs of

a businessA. ;ong term 2T3s are issued in order to meet the fi!ed

capital needs.

) 'nvestment on the sis of e;#it0 prti$iption

Euity participation means sharing of risks and rewards of

ownership

5. <nder this scheme the financer (bank) purchases the shares

of the company at market price or at an agreed price.:. 2rofit will be shared in the form of interim or annual

dividend

C. ;oss will be borne in the form for reduction in the market

price of shares purchased.

= 'nvestment on the sis of rent shrin(

money banking finance notes

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