Search for notes by fellow students, in your own course and all over the country.
Browse our notes for titles which look like what you need, you can preview any of the notes via a sample of the contents. After you're happy these are the notes you're after simply pop them into your shopping cart.
Document Preview
Extracts from the notes are below, to see the PDF you'll receive please use the links above
MONEY BANKING & FINANCE
Q#1:
WHAT IS BARTER SYSTEM? WHAT ARE
INCONVENIENCES OF BARTER SYSTEM?
Barter system
Barter is a system in which goods or services are directly exchanged with the goods or
services without the use of money
...
Inconveniences / difficulties/ hindrances /barriers / of barter system
Followings are the difficulties that were faced in barter system
...
Lack of coincidence of wants
2
...
Lack of subdivision
4
...
Difficulty in future payments (credit)
6
...
Difficulty in tax collection
8
...
Difficulty in budgeting
1
...
The main defect of barter
is that there is lack of coincidence of wants
...
He will have to
find a person who has surplus wheat as well as he needs rice
...
Lack of common measure of value
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
But the other
person may assign a value to his 1 kg wheat as equal to 3 kg rice
...
Lack of subdivision
In barter system another problem arises when the goods that are exchanged cannot be
subdivided into small parts (units)
Example
If a person has a cow and he wants to exchange it with a goat
...
The problem is what a part of cow is to be given in exchange of goat
...
4
...
It means that one cannot secure his future by storing commodities
...
Difficulty in future payments (credit)
In barter system it is very difficult to lend (
) goods to other people because at the
time of repayment commodities may loss their value so credit transitions are impossible
...
6
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 2
MONEY BANKING & FINANCE
If a person has to transfer 100 goats from Faisalabad to Lahore, It would be very difficult for
him to transfer them
...
Difficulty in tax collection
Another difficulty which arises under barter is that the tax cannot be collected in form of
goods
...
8
...
9
...
Under the barter system it is very difficult to estimate future expenses and incomes
Imperial learning institute
(Near Madina college for boys, sheikhupura road Faisalabad)
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Barter system is suitable only when people have few needs and money system does not exist
in the economy
...
10
...
Lack of common measure of value
12
...
Lack of store of value
14
...
Difficulty in transfer of wealth
16
...
Lack of specialization
18
...
Lack of coincidence of wants
Money has removed this difficulty by serving as a medium of exchange
...
Example
11
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 4
MONEY BANKING & FINANCE
In barter system it was very difficult to measure the value of goods because there was
no standard measure for the valuation of goods but money has provided a standard
measure
...
12
...
In barter system goo
often lose their value after indivisibility
...
Lack of store of value
Money has removed the difficulty of storing wealth
...
14
...
But in money economy debts can be
returned in monetary units so there is no possibility of lose of value
15
...
Difficulty in tax collection
In money economy there is no difficulty in collection of taxes because they are collected in
money form but in barter system it was very difficult to collect and store the tax collections
...
Lack of specialization
Under the barter it is very difficult to attain specialization in their fields, because the people
remain busy in meeting their own needs and they do not focus on effective (
utilization (
Written by; Ahmed
BANKING
)
) of resources
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 5
MONEY BANKING & FINANCE
18
...
Money has made easy to estimate the future incomes and expenses in terms of money
Imperial learning institute
(Near Madina college for boys, sheikhupura road Faisalabad)
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
WHAT ARE THE FUNCTIONS OF MONEY?
OR
DEFINE MONEY
...
WHAT ARE THE ADVANTAGES OF MONEY?
Money has facilitated economy by providing the following functions
1
...
Measure of value
3
...
Budgeting
5
...
Transfer of wealth
7
...
Determination of national income
9
...
Promote to foreign exchange
11
...
Basis of credit creation
1
...
Money is used to make
payments for goods and services
...
2
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 7
MONEY BANKING & FINANCE
Value of different goods and services can be measured in Monterey terms, in the same as we
can measure weight in kg and distance in KM
...
Future payments
Future payments can be easily determined with the help of money
...
4
...
Incomes and expenses
are estimated and recorded in terms of money
5
...
Money has played a vital role in economic growth of a society
...
Transfer of wealth
With the help of money wealth can be transferred easily form one place to another place
...
Store of wealth
Wealth can be stored easily in form of money
...
8
...
It
also helps in determination of Gross Domestic Product of a country
...
Liquidity of wealth
...
Wealth or property can be converted
in liquid from with the help of money
...
Promote to foreign trade
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Foreign investments are made in
terms of money
...
11
...
Demand
and supply are the two major factors of market which work only because of money
...
12
...
So it is not possible for
banks to create credit without the help of money
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 9
MONEY BANKING & FINANCE
Q#4 what are the different kinds of money? Or what are the different stages in the
evolution of money? Or what is the origin and growth of money?
Different forms of money
On the basis of evolution the money is classified in five main types
1
...
Metallic money
3
...
Credit money
5
...
Commodity money
In commodity money, different commodities have been used as money like cattle (
),
Goats, Horses, animal skins, arrows
...
19
...
Lack of common measure of value
21
...
Lack of store of value
23
...
Lack of transferability
2
...
In our country coins of Rs
five, two and one are the metallic money
...
It is playing vital role in the economy
...
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Full bodied money
ii
...
Tender money
i
...
Full bodied
money is also called standard money or natural money
...
Now such money is not used anywhere in the world
...
Token money
In token money the face value of coin is higher than the metallic value
...
In Pakistan full bodied money does not exist only token is
used
...
Tender money
Any currency which is generally acceptable in discharge of debts is called tender money it
can be made of paper or metal
...
Tender money has two types
a
...
Unlimited tender money
a
...
Such as coins of RS 1, 2 and
5
...
Unlimited tender money
Coins of large denominations are called unlimited tender money
...
3
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 11
MONEY BANKING & FINANCE
Paper money consists of notes issued by the state bank of Pakistan
...
Paper money is more convenient than any other
form of currency
...
Bank money
Bank money includes cheques, bills of exchange, and drafts
...
Because varies transactions are settled without the use of
paper money
...
but bank money also have
some defects
...
5
...
Now a day’s most of the transactions take place through
electronic money
...
With the passage of time electronic money may diminish the use of paper
money
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 12
MONEY BANKING & FINANCE
Q#5 what are the qualities of good money?
Good money should have the following qualities
...
Acceptability
2
...
Stability
4
...
Recognizable
6
...
Divisibility
8
...
Economy
10
...
Homogeneity
1
...
General acceptability means
every person must accept it for the settlement of payments
...
2
...
Paper money is easy to transfer from one place to another place because it has
minimum possible weight
...
Stability
Value of money should remain stable
...
4
...
Value of money should not depreciate with time
...
Paper money has quality of storability
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 13
MONEY BANKING & FINANCE
5
...
For example if every note has the same color it will not be easily
recognizable
...
6
...
The material which
cannot be melted is not fit for making coins
...
Divisibility
Divisibly means ability to divide into small units without losing its value
...
In barter system, commodity money was not divisible into small units
...
8
...
Coins do not wear
quickly, so the quality of money remains stable
...
Economical
Good money should be economical
...
If there is heavy cost on issuing money that is not good money
...
Elasticity
Supply of money should be elastic
...
Paper money has the quality of elasticity
11
...
So that there is no ambiguity to the
holder of money
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
It consists of the notes issued by the central
bank
...
Economical
2
...
Easy counting
4
...
Metal savings
6
...
Easy payment
8
...
High value in small bulk
10
...
Recognizable
12
...
Advantage for banks
1
...
Paper
money is cheaper than the metallic money
...
Easy handling
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
It is easy to handle paper money than
coins
...
Easy counting
Paper money is easy to count than the metallic money
...
Paper money takes lesser time than the metallic money
...
Emergency needs
Paper money is friend in peace and war
...
5
...
Metals like
gold and silver can be used for other productive purpose
...
Easy transfer
Transfer of paper money is easy and cheaper than metallic money because it is light weight
and takes less space
7
...
8
...
High value in small bulk
Paper money contains high value in small quantity as compared to the metallic money
...
Stability
Paper money is more stable in value but the value of coins do not remain stable due to wear
and tear
...
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Recognizable
Paper money of every denomination is easily recognizable because of its different size, color
and design
...
Storability
Paper money is easy to store because of more value in light weight
...
13
...
Disadvantages of paper money
1
...
Limited acceptability
3
...
Short life
5
...
Less confidence
1
...
In time of need government may over issue currency
notes
...
2
...
It is acceptable only in the domestic country
and in other countries of the world it is not acceptable
...
Danger of cancellation
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
If government canceled the paper money
then holder of money just has the worthless piece of paper
...
Short life
Paper money is less durable than the metallic money
...
So life of paper money is less than coins
...
Instability of exchange rate
Exchange rate means the rate at which the domestic money is exchanged with the
foreign money
...
The instability
of exchange rate directly affects the foreign trade
...
Less confidence
As value of paper money is less stable and it has no real value in it
...
Imperial learning institute
(Near Madina college for boys, sheikhupura road Faisalabad)
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Fixed fiduciary system
2
...
Modified proportional reserve system / exchange management
4
...
Fixed fiduciary system
According to this principle, central bank can issue notes up to a certain limit by keeping
government securities
...
Advantages
i
...
No danger of inflation
There are no chances of inflation because money can be converted into gold at any time
Disadvantages
i
...
ii
...
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Proportional reserve system
Under this system central bank keeps certain percentage of note issue in form of gold reserve
...
In Pakistan this ratio is 30%
...
Elastic
Under this system central bank can increase the supply of money easily whenever needed
ii
...
Gold can be used for other
productive purposes
...
Emergency needs
This system is very helpful in emergency needs of currency
...
Danger of over issue
There is always danger of over issue of notes
ii
...
Modified proportional reserve system / exchange management
Under this system, central bank keeps certain percentage of note issue in form of gold,
foreign bills of exchange, foreign currency at some other country where gold system is used
...
Advantages
i
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 20
MONEY BANKING & FINANCE
Central bank can increase supply of money easily
...
No lock of Gold
Under this system, a large amount of gold is not locked
...
Disadvantages
i
...
ii
...
Fixed minimum reserve system
Under this system central bank keeps only a fixed amount of gold or silver reserves against
whatever amount of note issue
...
Elastic
This system is highly elastic because central bank can issue a large amount of notes by
keeping small reserve
ii
...
Over issue
In this system, there is a great danger of over issue
...
Currency value
Under this system, central bank may fail to stable the price level
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 21
MONEY BANKING & FINANCE
Q #8
What is inflation? What are the measures to control inflation?
Inflation
Inflation is a process in which there is continuous increase in general price level and there is
continuous decrease in money value
...
The main measures used to control the inflation are;
1
...
Fiscal measures
3
...
Monetary measures
Monetary measures are adopted by the central bank to control the supply of money
...
Bank rate policy
Bank rate or discount rate is the rate at which central bank lend loans to commercial banks
...
ii
...
If
there is inflation in the country the central bank sells the securities which reduce the supply of
money
...
iii
...
So the borrowings from
commercial bank deceases and inflation may be decreased
...
Credit rationing
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
In this way inflation may be controlled
...
Monetary reforms
The government can order commercial banks to exchange old notes by new one
...
Repayment should be made after
achieving the objective
...
Fiscal measures
Fiscal measures are based on the demand management
...
i
...
Resultantly industrialists
increase the level of production which reduces the price level
...
Decrease in government expenditures
In government decreases expenditures on unproductive purposes the inflation is automatically
controlled
iii
...
Other methods
i
...
Population planning
Control on population by adopting different measures of family planning
...
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Political stability
If there is political stability in country, it will encourage investment and increase in
production which may help in controlling prices
iv
...
Shortage of supply is normally due to the smuggling of goods
...
v
...
So that inflation can be controlled
Imperial learning institute
(Near Madina college for boys, sheikhupura road Faisalabad)
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Inflation
and deflation both are harmful for the economy but the deflation is more harmful
...
According to the Philips “deflation is a period during which level of prices declines and the
value of money increases
Causes of deflation
1
...
Sufficient money supply is
necessary to meet the economic need
...
Strict banking policy
Sometimes, restriction on lending is imposed by the central bank to decrease the money
supply
...
3
...
Excess production
If goods are produced more than the demand, then it also becomes the cause of deflation and
prices are decreased
5
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 25
MONEY BANKING & FINANCE
6
...
7
...
Due to increase in imports the
supply is also increased which is the cause of deflation
8
...
9
...
Demand may be
decreased due to the fall in income
...
Decrease in government expenditures
Sometimes the government decreases expenditures due to which demand for goods is also
decreased
...
Increasing cost
Increasing cost of production also becomes the reason for deflation
...
12
...
Businessmen cut their profits to retain in
the market a stage becomes when the profit becomes zero
...
High bank rate
An increase bank rate may also cause deflation
...
Decreases in money supply cause deflation
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 26
MONEY BANKING & FINANCE
14
...
The people may like to
invest their savings in shares due to this their purchasing power is decreased and they can buy
fewer goods
Measure / methods to control deflation
1
...
Central bank should
issue currency notes to meet the economic needs
...
Increase in wages
Increase in wages also helps decreasing deflation
...
3
...
It increases the borrowings from
commercial bank
...
4
...
Control on production helps controlling production
5
...
Loans should be provided to the producers
to increase the production and investment level
...
Demand for goods will be increased and deflation will be decreased
...
Increase in private investments
The government should provide facilities to the industrialists to increase investment in
country
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 27
MONEY BANKING & FINANCE
7
...
Increase in
incomes increases the demand for goods and services which helps controlling inflation
8
...
Increase in exports
encourages producers for more production which helps in decreasing deflationary pressure
...
Increase in investments
Deflation can be controlled through new investments
...
The use of idle money decreases the deflation
10
...
Government may
appoint a price commission who supervises the price level so that the producer is not
discouraged
...
Public works
Government may start public works to eliminate the deflation
...
The demand for the goods and services is increased and there is
increase in production
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 28
MONEY BANKING & FINANCE
Q# 10
Critically examine the fisher’s quantity theory of
money (Or)
Explain and criticize the fisher’s equation of
exchange
...
According Irving fisher, “other things
remaining the same as the quantity of money in circulation increases, the price level also
increases in direct proportion and the value of money decreases and vice versa”
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 29
MONEY BANKING & FINANCE
M’ = 200 Rs
V=3
T = 90 goods
(
P=
) (
)
= 10 Rs per good
If the supply of money is doubled
P=
(
P=
) (
)
= 20 Rs per good
If the supply of money is halved
P=
P=
(
) (
)
= 05 Rs per good
Conclusion
Thus it is clear that if the supply of money is doubled, the price level will also be doubled and
the value of money is one halved
...
Assumptions of theory
1
...
It states that all the factors of
production are fully utilized no resource are idle
2
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 30
MONEY BANKING & FINANCE
3
...
Constant relationship between M and M’
There must be constant relationship between M and credit money M’
5
...
Short period
This theory applied to the changes in price level only in short period
Criticism on theory
1
...
But in reality it
is not possible that the factors in an economy remain unchanged
2
...
The factors have great influence on
each other
...
No proportionate change
This theory assumes that if quantity of money is doubled, the prices are also doubled, this
assumption is wrong
...
Ignores the rate of interest
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
An
increase in the quantity of money is due to the decrease in interest rates
...
Fails to explain trade cycle
This theory is failed to explain the trade cycle
...
During 1929
– 1933 the quantity of money was increased but it fails to increase price level
...
So theory has failed to explain the causes of
trade cycle
6
...
Static theory
The quantity theory of money is a static theory
...
The ups and down in an economy cannot be explained with the help
of this theory
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 32
MONEY BANKING & FINANCE
Q #11
What is trade cycle? What phases of trade cycle?
Trade cycle
Fluctuations (ups and down) in economic activities of a country is called trade cycle
...
The duration of trade cycle may vary
from 5 years to ten years or above
...
Depression / slum / trough
2
...
Boom / peak
4
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 33
MONEY BANKING & FINANCE
1
...
In the period of depression there is fall in
national income, employment, prices, and production
...
During this phase of trade cycle factories are closed and workers become jobless
...
Recovery
Recovery is a stage of economy where demand of goods starts increasing
...
New investments are
made in different productive activities or businesses
...
Features of recovery
There is increase in level of production
Increase in demand
There is decrease in cost of production
Increase in public borrowings
Improvement in level of employment
Rise in Investment opportunities
Improvement in business profit
3
...
After some time
economy moves from recovery to boom, At this stage national income, demand of goods,
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
This is an ideal stage of an
economy
Features of boom
High level of profit
Ideal level of national income
Maximum production
Low cost of production
Rapid increase in demand of goods
Growth in public borrowings
Low rate of unemployment
Ideal investment opportunities
4
...
At this stage
economy moves from boom to recession and investments, employment, production starts
reducing
...
Features of recession
Decrease in production
Fall in employment level
Shrinkage in profit margin
Decrease in public borrowings
Decrease in demand
Decrease in price of product
Cut down in national income
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Internal factors
1
...
This reduces the price level
...
The income of rich start increasing at
higher rate but incomes of poor do not increase as compared to the price level; the result is
that the demand for consumption goods decreases
...
Unsold stock
Trade cycle is the result of inventories ( closing stock)
...
Unsold
stock results in depression
3
...
When the goods are imported, it increases the
supply of goods
...
Liquid assets
Liquid assets are includes coins, paper money, bonds and shares
...
The increase in liquid assets increases the investments, in this
way the stock exchange activities will flourish and economy leads towards prosperity
5
...
Increase in demand encourages the
manufacturers to produce more which leads toward boom
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 36
MONEY BANKING & FINANCE
6
...
During the boom period, this policy is bad because it leads
towards the depression
...
Over – capitalization
The capitalization of profits is desirable for meeting emergency needs
...
It may discourage
investment which causes the depression
...
Trade union
Trade union also becomes the cause of depression
...
The increase in price level decreases the
demand of product
...
Investments
The changes in investment rates affects the trade cycle
...
If investment rate is low it will cause depression
...
War
War is a major factor which affects trade cycle
...
War becomes the reason of
depression
...
Population
Population increases the aggregate demand of products which raises the price level higher
...
Investment and income level falls
...
Migration
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Decreases in population due to
migration, deceases the demand of products
...
The demand of goods
is high and the supply is low
...
Innovations
Innovations brings boom in the economy
...
This may encourage the investments in
new business which brings boom in the economy
...
Invention
Invention means discovery of new methods of productions, new machinery or material
...
This result in boom
15
...
In bad weather conditions there is
low yield of crops
...
16
...
17
...
Exports surplus brings the
prosperity in economy
What are the remedies to control trade cycle?
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Monitory policy
B
...
International measures
A
...
Bank rate
Bank rate means, rate at which central bank discounts the bill of commercial bank
...
Increase and decreases in bank rate control the borrowings
...
Market operation
The central bank can increase or decrease the money supply by open market operation
...
If central bank wants to decrease the supply of money, it starts selling bonds,
treasury bills and other securities
...
3
...
Central bank keeps reserve with
central bank
...
4
...
The
commercial can refuse to grant loans for non productive purposes
...
B
...
Public work
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Government may start
construction and development of various projects
...
6
...
The tax rate can be
increased to reduce the supply of money and if there is shortage of money supply
...
7
...
Government can use the budgetary measures to control trade cycle
8
...
In case of boom
the debt should be repaid
...
9
...
10
...
Government purchases plays an
important role to control the depression
...
International measures
11
...
Producers can fix the quota at international level
...
Buffer stock
Buffer stock can be kept in warehouses
...
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Investment control
The government may increase investment in less developed areas
...
There is a great need for the equal investment in all the sectors of
economy
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Phases
Trade cycle has four phases
i
...
Recession
It is period in which there is a downward trend in business activities
iii
...
Recovery
It is a period in which economic activities start rising up
2
...
Boom follows depression and depression follows
boom
...
The trade cycle is completed in this way
...
Time period
Time period for the completion of trade cycle is not fixed
...
4
...
5
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 42
MONEY BANKING & FINANCE
It means that all the sectors of economy moves in the same direction
...
It is no possible to have boom in one economy and
depression in other sector
6
...
Not of equal length
All the phases of trade cycle are not of equal length for example boom may last for ten years
and depression may last for 4 years
...
8
...
9
...
10
...
11
...
Facilities are available in boom period and
hoarding, smuggling is found in depression period
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 43
MONEY BANKING & FINANCE
Q #14 What is bank? What are the types of banks? (Or) what are the
classifications of bank?
Bank
Bank is a financial institution which borrows savings from general public at lower rate and
lends it to the other people at higher rate of interest
...
Central bank
A bank which supervises the activities of banking in Pakistan is called central bank
...
Main purpose of the central bank is not to
earn profit but it work for the welfare of the society
...
Central bank is also called bank of banks
...
Commercial bank
A bank which accepts deposits from general public and lends them to the other people to earn
profit is called commercial bank
...
it also
provides the services of agency to his clients
...
3
...
In Pakistan, Industrial development bank and other financial institutions
are providing loans to the different industries
...
Agricultural bank
These banks provide short term and long term loans to the farmers so that they can purchase
seeds, fertilizers, tractor and other agricultural equipments
...
Exchange bank
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
In Pakistan commercial bank deals in foreign exchange
...
Savings bank
A bank which collects the savings of the people having low income and pay interest on it is
called saving bank
...
In Pakistan no
such bank exists but saving account can be opened in post office
7
...
Investment banks also grant loan for the purchase of shares and other securities
...
8
...
City bank is performing services of consumer bank in Pakistan
...
Mortgage bank
This provides loan against land and building for short and long period
...
10
...
No bank in Pakistan is
providing facility to the students of school
...
11
...
Their aim is not to earn profit
...
12
...
These banks
provide long term loan loans to large scale companies
...
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Labor bank
These banks are opened by trade unions of laborers
...
14
...
Islamic banks are
working under the profit &loss sharing principle
...
Imperial learning institute
(Near Madina college for boys, sheikhupura road Faisalabad)
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
They are established for the purpose of
earning profit
...
The
difference of rate is the profit of bank
...
Accepting deposits
This is the main function of commercial bank to collect surplus money from the people and
businessman
...
Saving account
Commercial banks offer saving account for the people who have small savings
...
Account holder is not allowed to made frequent
withdrawals
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 47
MONEY BANKING & FINANCE
ii
...
Inertest is not allowed by bank on this account
...
iii
...
High rate of interest is paid on fixed deposit account
...
iv
...
Account holder cannot deposit local currency in
this account
...
Profit and loss account
Those people who do not want to earn interest on their deposit, they can deposit their money
in profit and loss account
...
Advancing loans
Advancing loans is the main function of the commercial bank
...
Bank charges high rate of interest on the amount of loan
...
Loan
Commercial bank offer short medium and long term loans against the securities
...
Cash credit
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
The period of cash credit may consist of days and months
...
Overdraft
Overdraft is a very short term credit facility
...
Bank charges higher interest rate on the amount of overdraft
...
Discounting of bill
Bank provides money to the holder of bill of exchange after deducting charges of discounting
of bill
...
B) Secondary functions
These functions can be divided in agency function and general utility function
1
...
As a agent bank provide following customers to his
customers
...
Collection and payment of cheque
This is important function of commercial bank to collect and make payment of cheques
ii
...
Bank charge his commission for providing such services
...
Financial advisor
Bank gives on demand valuable advices to his customer on various financial matters
iv
...
For example payment of rent, insurance and utility bills etc
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 49
MONEY BANKING & FINANCE
v
...
Bank performs this function on the orders of his customer
...
Deduction of zakat
Bank deducts amounts of zakat from customer’s account on the behalf of government
Such amount is transferred to the general zakat fund
...
General utility function
Bank also provide general utility function to his customers some of them are given below
i
...
bank charges his services charges
...
Foreign exchange
Bank also deals in foreign exchange
...
iii
...
24 hour cash services
In this modern money economy commercial banks provide the facility of 24 hour cash
services
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 50
MONEY BANKING & FINANCE
Q#16
Explain the role of commercial bank in economic
development of country
Or
Explain the importance of commercial bank
...
They are established for the purpose of
earning profit
...
The difference
of rate is the profit of bank
...
Few of
them are given below
1
...
They are offering different
types of deposit accounts with attractive interest rates to increase savings
...
Promoting investments
Commercial banks do not keep the collected money idle with them; they lend it to the
businessmen for investment purpose which increases the production and employment level
3
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 51
MONEY BANKING & FINANCE
4
...
Bank also gives
valuable advices to them
...
Increase in employment
Commercial bank grants loans to different sectors of business, such as Trade, commerce,
agriculture and transport to expand the business activities which increases the level of
employment in country
...
Construction of houses
Bank provides credit facility to their customer for the construction or purchases of house
...
7
...
They create credit from the deposits
...
Capital formation
Capital formation means increase in number of production units
...
Commercial bank can increase the capital
formation by granting loans to the productive sectors
9
...
It has
established exports promotion cells for the guidance and information to the exporters
10
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 52
MONEY BANKING & FINANCE
Economic development is not only based on the development of industry but it also depends
on the agricultural
...
11
...
It has
reduced the unemployment on one hand and increased the transportation facility on the other
hand
...
Financial advices
Commercial bank also gives financial advices to their customers to promote their business,
besides credit facility
13
...
It grants short term loans for
repairing and long term loans for the construction of houses
...
Assistance to government
It also grants loans to the government for the development projects
...
Economic prosperity
Economic growth depends upon the development of banking system
...
16
...
17
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 53
MONEY BANKING & FINANCE
A good banking system increases the production capabilities of the country by growing
capital formation and proper labour division
18
...
Collection of zakat
Commercial deducts amount of zakat from depositor account on the behalf of government
and distribute the same among the deserving people
20
...
This
helps in expansion of production capacity of a country
Imperial learning institute
(Near Madina college for boys, sheikhupura road Faisalabad)
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
(Or) How does the commercial bank create
credit what are its limitations? (Or) “Loans are the children of deposits and
deposits are the children of loans”
...
It is the most important function of the
commercial bank
...
The amount of loan is
not paid directly to the customer
...
The
borrower can withdraw amount by issuing cheque
...
Assumptions
1
...
2
...
3
...
The loan given by the second bank must be deposited into the third bank and so on
4
...
This initial deposit is the basis of
credit creation
...
Many borrowers
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
X
...
X
800
Total
1000
Total
1000
We now assume that the Mr
...
Y by cheque
...
Y
deposited his cheque in his account in Bank B
...
800 as deposit and after
keeping 20% reserve he lends the remaining 80% as loan to Mr
...
The balance sheet of Bank
B after giving loan is as follows
...
z
640
Total
800
Total
800
The process is not yet completed, it will continue further
...
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Withdrawals
Credit creation depends on the deposits
...
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Cash reserve
The commercial bank keeps a large portion of cash as reserve for making the payment of
cheque
...
3
...
Business conditions
People only borrow loans when there are good business conditions
...
5
...
6
...
They have to follow the
policies of central bank
...
Primary deposit
Credit creation depends upon the primary deposit
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 58
MONEY BANKING & FINANCE
Q#18
Explain the relationship between banker and customer
...
W Gilbert says that “A banker is a dealer in capital or, more properly, a dealer in money
...
He borrows from one party
and lends to another
...
A banker also collects and pays drafts, dividend and
bill of exchange
...
Relationship of debtor and creditor
1
...
When an account is
opened, banker becomes the debtor of is customer
...
When the account of customer is out of credit the relationship ends
...
Principal and agent
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
The customer is
principal and banker is agent at the time of collection of cheque and bill of exchange
...
3
...
Banker grants loans to his
customer to meet the cash requirements
4
...
The banker acts as Bailee when he receives goods from customer
5
...
And banker becomes pledgee when he grants loans against security
...
Mortgager and mortgagee
The customer becomes mortgager at that time when he obtains loan against immovable
property and banker becomes mortgagee when he grants loan against immovable property
...
Author and trustee
Banker acts as trustee for a customer who keeps valuable & documents for the safe custody
...
8
...
The banker as referee can submit favorable and
unfavorable reports to other bank
...
Lessor and lessee
When the bank provides finance to his customer on the basis of lease, the relationship
becomes of Lessor and lessee
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 60
MONEY BANKING & FINANCE
10
...
Bank gives valuable advices to
his customer about the financial matters of business
...
Licenser and licensee / banker as a trustee
Banker works as licensor / trustee when he keeps the valuable or document of customer for
the safe custody
...
Banker as beneficiary
When banker receives money from customer and uses it in various sectors for his benefit he
becomes beneficiary
...
Modarab and Amal
When banker provides finance to his customer on the agreement of Modaraba, the
relationship becomes that of Modarab and Amal
...
14
...
15
...
The
customer becomes Pawnor and banker becomes Pawnee
...
Correspondent and respondent
Bank issues traveler cheque, letter of credit and credit cards to customer that can be used in
international market for making payments
...
17
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 61
MONEY BANKING & FINANCE
When the banker promises his customer to compensate for the loss suffered by him, the
banker becomes indemnifier and customer becomes indemnity holder
...
Testator and executor
When a banker is asked to execute the will of his customer after his death, the banker
becomes executor and banker becomes executor
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 62
MONEY BANKING & FINANCE
Q#19
What are the circumstances under which the relationship
between banker and customer comes to an end?
Or
What are the reasons of termination of relationship between
banker and customer?
1
...
Insolvency of customer
When a customer is declared insolvent and he is unable to pay his debts
...
3
...
Credit in account is paid
to the heir of customer
4
...
5
...
Due to breach of contract, other part is
compensated by court
...
Notice by banker
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
7
...
Unsatisfactory operation
A banker may close the account, if the customer is not obeying the rules of operating account
...
Assignment of account
A customer may assign the whole amount in the account to the other party by giving notice to
the banker
...
Loss of confidence
If a customer is not satisfied with the financial position of bank he may close his bank
account to avoid any type of loss
11
...
Change of residence
A customer may terminate his relationship due to change of residence
...
Insufficient balance
When a customer used to draw cheque and does not have credit in his account, banker may
close his account after giving notice
14
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 64
MONEY BANKING & FINANCE
When a customer used to present his cheque after banking hours, banker may close his
account after giving notice
15
...
Thus
relationship between banker and company comes to an end
Imperial learning institute
(Near Madina college for boys, sheikhupura road Faisalabad)
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Rights of customer
1
...
Customer can also withdraw cheque against debit balance if agreement of overdraft
is made
2
...
3
...
Right to Claim for damages
Customer has right to claim for the damages from bank when he dishonors cheque without
any reason
5
...
6
...
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Banking hours
A customer should present cheque during the banking hours
...
Presentation of cheque
It is the duty of customer to submit his cheque within the time
...
Protection of cheque book
It is the duty of customer to keep the cheque book in safe custody so that no one can misuse
it
...
Report about theft
It is the duty of customer to inform banker, when cheque book or a cheque is lost to avoid
misuse
...
Filling of cheque book
It is the duty of customer to fill the cheque with care
...
Right to claim charges
Banker has right to claim charges and commission for the services provided to the customer
...
Right to Charge compound interest
It is the right of bank to charge compound interest on the amount of overdraft according to
the terms and conditions agreed between the parties
...
Right to retain securities
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
If
customer fails to pay the amount of debt, the banker has right to sell the securities
...
Right to adjust debit balance
It is the right of banker to adjust the amount of overdraft as soon as the customer deposit
some cash in his account
Duties of banker
1
...
The cheque must be
drawn properly and presented within the time
2
...
3
...
Such as rent rate and
taxes that are paid after the regular intervals
4
...
Trustee
While acting as trustee, a banker must work according to the terms and conditions of
agreement
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 68
MONEY BANKING & FINANCE
Q#21
Define central bank
...
It controls the activities and
system of other banks
...
It works for the
welfare of society
...
It works as banker of banks
and banker to government
...
Monopoly of note issue
Central bank has the sole authority to issue currency notes
...
In Pakistan, state bank of Pakistan issues currency notes
...
To bring uniformity in currency notes
ii
...
To regulate currency according to the demand
2
...
It gives all those
facilities to government that commercial gives to the public
Following are the functions that are performed by the central bank to facilitate government
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Keeping deposits
Central bank keeps deposits of federal and provincial government
...
Central bank does not pay interest on government deposits
ii
...
Foreign loans
Central bank also makes arrangement to get foreign loans on the behalf of government
iv
...
Transfer of capital
Central bank is also responsible for transferring the funds of government form one place to
another place
...
Banker’s bank
Central bank is the banker of commercial banks and performs the followings functions to
facilitate commercial banks
...
Custodian of cash reserve
Central bank keeps a certain percentage of deposits of commercial bank as cash reserve; the
amount is kept in safe custody
ii
...
All scheduled banks have their
accounts with central bank so the mutual obligation of banks are settled simple by passing
debit and credit entries in their accounts
...
Lender of last resort
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
iv
...
v
...
4
...
Central bank maintains
the silver, gold and foreign currency reserves in country
...
Controlling of credit
It is the duty of central bank to maintain and regulate the supply of money according to the
economic needs
...
If there is inflation in country, central bank aims at contracting the supply of money
...
Exchange rate stability
Central bank fixes the exchange rate of domestic currency in terms of foreign currency
...
Development role
Sometimes the central bank takes the responsibility to enhance economic growth
...
It introduces the export promotion
schemes to increase the volume of exports
...
Miscellaneous functions
i
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 71
MONEY BANKING & FINANCE
The central bank establishes training institutes and also provides modern training of banking
to the staff
...
Saving habits
Central bank makes and plans and adopts the various methods to promote the habits of
savings among the people of country
...
Representative of government
Central bank acts as the representative of government for international institutions, like IMF
and World Bank
...
Membership fee
If the government wants to be the member of international institutions, central banks pays
membership fee on the behalf of government
...
Financial reports
Central bank publishes various reports which give the real picture of economy
(729)
Imperial learning institute
(Near Madina college for boys, sheikhupura road Faisalabad)
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Difference between central bank and commercial bank
Central bank
Commercial bank
1
...
Ownership
share capital of central bank may be owned by The share capital of the commercial bank is owned
the commercial bank and central bank
by the people
3
...
Object
The main object of the central bank is welfare The main object of commercial bank is to earn profit
of society and economic development
5
...
cards and cherubs
6
...
Number of bank
There is only one central bank in every country
8
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 73
MONEY BANKING & FINANCE
Government and commercial bank can open account in commercial bank
their account in central bank
9
...
Transfer of funds
Central bank transfer funds of commercial Commercial bank transfer funds of their customers
banks and government
11
...
Advisor
Financial advices the commercial bank and The commercial bank give advices to their
government on financial matters
13
...
money market
Central bank is the leader of money market
It is the member of money market
15
...
Foreign payments
It makes the foreign payment on the behalf of It makes foreign payments on the behalf of his
government
customer
17
...
Evening Banking
It discounts the bill of customers
...
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Central bank can
increase and decrease the money supply according to the economic needs of country
...
The management of
the flow of money is called monetary policy or credit policy
...
Spencer: monitory policy is the purposeful exercise of the monetary
authority’s power to make expansion or contraction in the money supply
Objectives of monetary policy
Objectives of monetary policy may vary from one country to other country depending upon
the economic needs
...
1
...
It
create more opportunities of employment in less developed countries
2
...
Inflation and deflation can be avoided by controlling price level
...
Increase in investment
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Central bank can aim to
promote both foreign and domestic investments
...
Increase in production
Central bank can increase level of production by granting loans to manufacturers at low
interest rates
...
Exchange stability
Monetary policy aims to maintain the exchange rate at stable level
...
6
...
Excess money supply is one of
the reasons of inflation
...
7
...
Unnecessary contraction of
supply of money is one of reasons of deflation
...
8
...
Central bank
can create stability in capital market with the help of monetary policy
...
Foreign value of currency
Foreign value of currency can be maintained at stable level with the help of monetary policy
which leads towards growth in international trade
...
Control on trade cycle
Trade cycle exists when there are fluctuations in the production, employment and price level
...
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Economic growth
Monetary policy aims to promote rapid growth in national income and per capita income
...
12
...
An artificial demand is cratered
due to which small investor suffers lose
...
Central bank imposes restriction on giving loans
to the speculators
13
...
Imperial learning institute
(Near Madina college for boys, sheikhupura road Faisalabad)
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
A
...
Qualitative methods
A
...
Bank rate policy
The bank rate or the discount rate is the rate of interest at which central bank lends loan to the
commercial bank
...
When the
central bank wants to increase the supply of money it decreases the interest rate which
encourage the borrowings
2
...
When central bank wants expansion in supply of money it buys government
securities
...
Reserve ratio
The portion of the reserves that is to be kept with the central bank is called reserve ratio
...
When the reserve ratio
is decreased the supply of money is increased
...
Credit limit
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Commercial banks are not allowed to grant loan more than the fixed limit
5
...
The
central bank rations the credit of every commercial bank
...
B
...
Margin requirement
Central bank can control credit by changing margin
...
But if margin requirement is decreased people can take
more loans
...
Direct action
Central can take direct action if the commercial banks are not following the monetary policy
...
3
...
It may increase the interest rate or may shorten the period of repayment
...
Publicity
The central bank may convince the borrowers and lenders through publication of annual
reports and weekly statements about the specific policy
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 79
MONEY BANKING & FINANCE
Q#24
What is the difference between cheque, bills of exchange
and promissory note?
Basis
Bills
of Promissory
exchange
1 Definition
Cheque
note
Bills of exchange is an Promissory note is an Cheque is an instrument
instrument
in
writing instrument
in
which which is used to withdraw
which contains order of debtor promises to pay a money from bank
payment by creditor to certain
debtor
In
2 parties
case
amount
to
creditor
of
bill
of In case of promissory In case of cheque there
exchange there are three note there are two parties are
parties, drawer drawee maker and payee
three
parties
depositor, bank and payee
and payee
...
acceptance
no need of acceptance, as
it
is
order
by
the
customer
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 80
an
MONEY BANKING & FINANCE
order
for
making promise for payment
unconditional order for
payment
In
9 liability
case
making payment
of
Bills
of In case of promissory In case of cheque it is the
exchange it is the liability note it is the liability of liability of bank to make
of drawee to make the drawer
payment
make
the payment
payment
Noting Noting charges are paid Noting charges are not Noting charges are not
10
in case of dishonor of paid in case of dishonor paid in case of dishonor
charges
bills of exchange
11
to
of promissory note
of cheque
Printed A bills of exchange can A promissory note can be A cheque is always drawn
be drawn on simple or drawn
form
printed paper
12 Crossing
simple
printed paper
or on printed paper that is
provided by the bank
Bills of exchange cannot Promissory note cannot Cheque can be crossed
be crossed
13 Payee
on
In
case
be crossed
of
bills
of In case of promissory In case of cheque the
exhnage the drawer and note the drawee and the drawer and the payee may
the payee may be same payee
person
14 Default
In
case
may
be
same be same person
person
of
bills
of In
case
of
bills
of In case of cheque the
exchange the drawee is exchange the drawer is bank is responsible to
responsible to make the responsible to make the make payment than the
payment
15 Trust
In
case
exchange
payment
of
bills
the
drawer is responsible
of In case of promissory In case of cheque the
people note people shows less people
shows
more
shows less confidence as confidence as compared confidence as compared
compared to the cheque
to the cheque and bills of to the bills of exchange
exchange
16
payment
Stop Payment
exchange
of
bills
cannot
stopped
Written by; Ahmed
BANKING
and promissory note
of Payment of promissory Payment of cheque can be
be note cannot be stopped
stopped on the orders of
depositor
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 82
is
MONEY BANKING & FINANCE
Q#25
Describe the parties of letter of credit; also explain the
procedure for opening letter of credit
...
Frank henius letter of credit is a written document issued by the buyer’s
bank authorizing the seller to draw in accordance with the certain terms and conditions
...
Importer / Applicant
Applicant is the importer of goods
...
2
...
It is also
called importer’s bank
...
Exporter
The person who exports goods to the importer is called exporter
...
4
...
Sales contract
Importer of one country makes an agreement with exporter of other country to purchase
goods
...
The importer then informs his bank to open letter of
credit
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 83
MONEY BANKING & FINANCE
2
...
3
...
Import license is issued by the
government
...
Application form
Application form is also known as “application and agreement for L
...
It contains all
necessary details about the terms and conditions of sale
...
5
...
It is from 10% to 40% of
the total amount for which the L
...
Importer will have to deposit this amount to the
issuing bank
...
Issuance of L
...
Three copies
are prepared one copy is kept buy the issuing bank for its own record
...
The paying bank keeps the second copy and sends the
third copy to the exporter
...
Information to the seller
The paying bank informs the seller that the letter of credit has been issued
...
The
bank checks the documents and sends them to the issuing bank
...
Payment to the seller
When the paying bank is satisfied with the documents provided by the exporter he makes the
payment to the exporter
...
Collection of documents
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
The issuing bank examines
the documents before giving it to the importer
10
...
11
...
He submits
these documents to the shipping company to receive goods
...
Imperial learning institute
(Near Madina college for boys, sheikhupura road Faisalabad)
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Revocable letter of credit
A letter of credit that can be cancelled by importer or bank at any time due to any reason is
called revocable letter of credit
...
2
...
C
A letter of credit that cannot be cancelled before payment is called irrevocable letter of credit
...
Irrevocable L
...
C
...
Confirmed L
...
C and takes the liability to make payment to the
exporter in case of nonpayment by importer’s bank, it is called confirmed L
...
Unconfirmed L
...
It is called unconfirmed L
...
it is suitable when the financial position of
importer is poor and exporter do not know the issuing bank
...
Documentary L
...
C in which there is condition that the exporter will submit shipping documents for
receiving money, is called documentary L
...
Clean L
...
C in which there is no condition that the exporter will submit shipping documents for
receiving money, is called clean L
...
Fixed L
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 86
MONEY BANKING & FINANCE
A fixed L
...
This L
...
8
...
C
Revolving L
...
9
...
C
The L
...
C
...
Nontransferable L
...
C which cannot be transferred by the exporter to any other person is called
nontransferable L
...
Red clause L
...
C, the exporter’s bank provide loan to the exporter for packing and transportation of
goods before the shipment of goods
...
12
...
C
In this L
...
The statement containing the details
of order is written with the green ink
...
Freely negotiable L
...
14
...
C
Under this L
...
On the basis of first L
...
15
...
C
Under this L
...
The movable and immovable property of exporter is given to banker as security
against loan
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Finance
includes raising of funds through debt or equity finance
...
In sole proprietorship and partnership
less amount of finance is needed
...
Definition
According to B
...
Types of business finance
Business finance can be categorized into the two main heads
1
...
On the basis of source
1
...
Short term finance
Short term finance is obtained for the period of one year or less than one year
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 88
MONEY BANKING & FINANCE
a
...
This loan facility is given to meet the daily cash needs
...
b
...
Borrower can obtain loan against the security
of goods
...
The interest is charged on the amount withdrawn
...
Discounting of bills
Another form of short term loan is the discounting of bill
...
The bank get back the amount of loan on the
maturity of bill
d
...
The goods and services are supplied on the
credit and the amount is collected as per agreement
...
Advances from customers
Sometimes the business gets advance payments from their customers and agents
...
B
...
The following are the sources of medium term finance
...
Commercial banks
Commercial banks are the main source of medium term loan
...
Businessman can use the amount of loan to meet the business
needs
...
Loan from financial institutions
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Debentures
Joint stock companies can obtain loan by issuing debentures
...
4
...
C
...
Long term loan can be for a period longer than ten years
...
Equity shares
The equity share is the most important source of long term finance
...
Amount of shares is paid back only on the winding up of the
company
...
Use of profits
Every company maintains reserve out of its profit that can be used for the development and
expansion of business
...
3
...
Existing share holders are
offered to buy shares in proportion to the shares held
...
Loan from financial institutions
Company can obtain loan from financial institutions like IDBP, NDFC etc
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 90
MONEY BANKING & FINANCE
5
...
A business may get plant equipment,
land
...
Businessman has to pay
the regular installments
...
On the basis of source
On the basis of source, the business finance has two types
1
...
The finance which is provided by the
owner from his personal source is called equity finance
...
2
...
Most of the
business is not in a position to finance all the funds from personal sources, so they can obtain
loan from financial institutions and banks
...
Imperial learning institute
(Near Madina college for boys, sheikhupura road Faisalabad)
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Finance
includes raising of funds through debt or equity finance
...
In sole proprietorship and partnership
less amount of finance is needed
...
Definition
According to B
...
Types of business finance
Business finance can be categorized into the two main heads
3
...
On the basis of source
3
...
Short term finance
Short term finance is obtained for the period of one year or less than one year
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 92
MONEY BANKING & FINANCE
f
...
This loan facility is given to meet the daily cash needs
...
g
...
Borrower can obtain loan against the security
of goods
...
The interest is charged on the amount withdrawn
...
Discounting of bills
Another form of short term loan is the discounting of bill
...
The bank get back the amount of loan on the
maturity of bill
i
...
The goods and services are supplied on the
credit and the amount is collected as per agreement
...
Advances from customers
Sometimes the business gets advance payments from their customers and agents
...
E
...
The following are the sources of medium term finance
...
Commercial banks
Commercial banks are the main source of medium term loan
...
Businessman can use the amount of loan to meet the business
needs
...
Loan from financial institutions
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Debentures
Joint stock companies can obtain loan by issuing debentures
...
8
...
F
...
Long term loan can be for a period longer than ten years
...
Equity shares
The equity share is the most important source of long term finance
...
Amount of shares is paid back only on the winding up of the
company
...
Use of profits
Every company maintains reserve out of its profit that can be used for the development and
expansion of business
...
8
...
Existing share holders are
offered to buy shares in proportion to the shares held
...
Loan from financial institutions
Company can obtain loan from financial institutions like IDBP, NDFC etc
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 94
MONEY BANKING & FINANCE
10
...
A business may get plant equipment,
land
...
Businessman has to pay
the regular installments
...
On the basis of source
On the basis of source, the business finance has two types
3
...
The finance which is provided by the
owner from his personal source is called equity finance
...
4
...
Most of the
business is not in a position to finance all the funds from personal sources, so they can obtain
loan from financial institutions and banks
...
Imperial learning institute
(Near Madina college for boys, sheikhupura road Faisalabad)
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
What are the advantages
and disadvantages of debt and equity finance?
(Or)
What are the sources of business finance? Explain the merits and
demerits
...
Equity / owner finance
B
...
Equity finance
Equity finance is also known as the owner finance
...
It is also known as internal
equity or internal finance
...
Merits of Equity Finance
1
...
Repayment of capital is
made only on the winding up of the business
...
No interest
Equity finance is free from the payment of interest
...
3
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 96
MONEY BANKING & FINANCE
There is no need of repayment as the finance is provided by the owner from his personal
resources
...
High rate of profit
Equity finance provide high rate of profit as there is no fixed interest payment so the rate of
profit is high
...
Minimum losses
There is minimum loss to owners during depression
...
In case of equity finance there is no interst so losses remain low
...
Freedom of control
The owners of business enjoy the freedom of control because one man can claim his right on
the assets of the company
...
Full profit
In case of equity finance, the owners of business enjoy and share full profit of business they
are free from the loan payment and interest payment
...
Low operating cost
In case of equity of finance the operating cost is low as there is no burden of interest
...
Financial base
The equity finance provides a sound financial base to the capital structure of a business by
reducing the financial risk
...
Liquidation of business
In case of liquidation of business, the assets of the business remain with the owners
...
Financial worries
It is a benefit of equity finance that there are no financial worries of borrowing when the
supply of money is short and interest rate is high
...
Attention to business
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Demerits of Equity Finance
1
...
When profit is high, the rate of tax is also
high
...
2
...
They work on the basis of their
experience; they do not start the new and risky business, so there is no innovation
...
No advantage of debt
If a company only invests equity finance it cannot enjoy the benefit of debt finance
...
4
...
Business may feel problem in making payments due to the shortage of capital
5
...
The return on safe investment is normally low
...
No aggressiveness of management
A firm without management shows aggressiveness in managing the business affairs, which
result in low return on investment
...
Over capitalization
If a company issues more equity shares than actually required by it, then it is likely to result
in over capitalization, which may create problem for the company
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 98
MONEY BANKING & FINANCE
Debt Financing
Debt financing is the second main source for the fund rising
...
It is also known as credit financing
...
Merits of debt financing
1
...
Borrowed amount
helps the business to start the production at large scale which results in low cost of
production
...
No interference of creditors
Creditors cannot interfere in the affairs of business
...
3
...
4
...
5
...
The funds are available to meet the
obligations on due date
...
More innovation
Innovation demands huge funds
...
7
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 99
MONEY BANKING & FINANCE
In case of debt financing the interest charged on debt is lower than the rate of return paid to
the shareholders in form of dividend
8
...
Whenever they
want to expand the business they can raise funds by obtaining loan
...
Payment of interest
Businessman has to pay the amount of interest on this type of finance, regardless of the
financial position of the business
...
Business can be sued
If the amount of interest and borrowed amount is not paid at the maturity date, the creditors
may sue the business
...
losses
In case of loss, the business concern even than has to pay the interest
...
Repayment of loan
Repayment of loan is the liability of the business that is to be paid on the due date
...
5
...
It creates dissatisfaction among them
...
Winding up of business
In case of winding up of business, the creditors have the prior claim on the assets of the
business, so the shareholders may suffer loss
...
Attraction of funds
In times of depression, the rate of return on investment is lower than the rate of interest on
loan
...
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Interest free mode of financing
Interest free mode of financing means the financing free from the interest
...
Following are the main types of
interest free mode of financing
A
...
Trade related mode of financing
C
...
Lending mode of financing
1
...
The bank
charges only the service charges from the borrower
...
Interest free loans are generally provided to the small farmers,
small businessmen and salaried persons
...
Qarze – Husna
Under this scheme the loan is provided to the poor people for medical treatment and to the
students who are less than 35 years of age
...
B
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 101
MONEY BANKING & FINANCE
The state bank of Pakistan has approved five trade related mode of financing that are given
below
1
...
The bank purchases the required goods on the request of
the client and sells these goods to him on the price mutually agreed between the bank and the
client
...
2
...
Under this
scheme, the customer sells his property to the bank with a promise to buy back the same
property from bank on future date
...
3
...
The installments are calculated in such a
manner that the actual price plus bank charges are covered during the fixed period
...
Leasing
In this mode of financing, one person (lessee) acquires an asset from the other person
(Lessor) for a fixed agreed period of time
...
The lessee will have to pay fixed amount after regular
intervals
...
5
...
The bank takes a share in the developed property
...
C
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 102
MONEY BANKING & FINANCE
Following are the five types of investment modes of financing
...
Musharika
Musharika is an agreement between the bank and his client to participate in the business as a
temporary partner to share profit and losses of the business during a specified period of time
...
Features of Musharika
The funds of the banks on the basis of Musharika are secured
A certain portion of the profit is paid to the client as management fee
The profit is shared according to the agreed ratio
...
Modaraba
Modaraba is an agreement in which one part invests his funds and the other party with his
knowledge and skills
...
In case of loss
the bank which supplies capital bears full loss
...
Participation term certificate
The participation term certificate was designed to replace debenture financing in the
financing of industrial investment
...
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Equity finance
The bank can participate in equity by purchase of shares of limited companies
...
Features of equity finance
The investors purchase the shares to participate in equity
The profits are distributed as dividend
The banks and financial institutions may become the shareholders
5
...
The
financer becomes the joint owner of the property
...
Features
The bank and customer both contribute their funds
The period of joint ownership is stated in the agreement
The rental value of house is determined on the base of locality and quality of
construction
...
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
In
1974, 13 banks were nationalized under nationalization of banks act 1974
...
According to the Robert Millard; nationalization is the act of converting the privately owned
resources into the one owned by the central government
Advantages of Nationalization
1
...
Before nationalization the credit was
concentrated in few hands
...
2
...
The business of banking has improved due to better management
...
End of monopoly
There was complete control of few industrialists over the banking system
...
With the nationalization of banks
their monopoly come to an end
4
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 105
MONEY BANKING & FINANCE
Before the nationalization the rights of employees were not protected
...
They are promoted on merit basis nationalization
increased the job security and job satisfaction
...
Control over expenses
Nationalization of banks has controlled non- development expenses to a large extent
...
Increase in employment
Nationalization resulted in creation of jobs opportunities for talented and educated people in
the banks
...
7
...
It is due to the rural
branches that the idle funds are being used into the productive sectors
...
Foreign bank branches
The performance of foreign bank branches has also increased; the employees are posted on
the merit basis
...
9
...
Now
the income of the banks is transferred to the government treasury which can be used for the
common interest of the nation
...
Increase in public confidence
Nationalization helped in increasing the public confidence
...
11
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 106
MONEY BANKING & FINANCE
Before the nationalization the corrupt officers and traders were used to keep their black
money in banks
...
12
...
Nationalization enables the state bank of Pakistan to control the activities of commercial
banks
...
Economic development
Nationalization increased the resources of the government
...
14
...
However after nationalization special attention was given to the agricultural credit, which
helped in development of agricultural sector
...
Lack of competition
Healthy competition is necessary for the development and promotion
...
2
...
Credit was
generally misused and in some cases the amount of loan was not returned
...
Favoritism
Nationalization has resulted in favoritism, incompetent and unqualified staff is appointed
...
Political pressure
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
Loans are granted on political pressure rather than on merit basis
...
Low efficiency of employees
Nationalization transferred the bank officials into the government officials
...
6
...
But in actual, the big capitalist have obtained loan by using their powerful
resources
...
Complex procedures
After nationalization the procedure of getting loan became complicated, due to which the
needy people and business community could not get loans and the country remained
underdeveloped in many sectors
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 108
MONEY BANKING & FINANCE
Q #32
What are the causes of nationalization of banks in
Pakistan?
Causes of nationalization of banks
1
...
State bank of Pakistan keeps an eye on the credit creation but it has an indirect link
...
Distribution of loan
Loans were advanced to the rich people and
...
3
...
It was ignoring small but important sectors of economy
...
Loan to relatives
The high ranking bank officials used the bank reserves for their personal benefit
...
5
...
The promotion and increments were
given on the personal liking and disliking and there was no job security
6
...
The loans issued were used for speculation
and black marketing
...
Central bank control
Written by; Ahmed
BANKING
Raza (MBA, ACMA) providing quality education OF ACCOUNTING, MBF, ITB B
...
They did not care
for the rate of margin requirement and other policies of state bank of Pakistan
...
Banking profit
Earning of high profit was the first propriety of every bank
...
The savings of the people were used for the personal interests of banks not
for the national interest
...
Overseas branches
The performance of overseas branches was poor; most of them were even working at loss
...
Wasteful competition
Banks were busy in wasteful competition
...
There was rush of braches in trading centers but no
branches in rural areas
...
Protection of black money
The private banks protected the black money; this resulted in the contraction of funds in few
hands
...
Tax collection was not possible on such
accounts
...
LAW, AUDITING AND
0334 – 5040190, 0313 – 5040191
Page # 110