6.1.

Types of the customers

In order to be a customer of the bank there must be an account opened in the
name or names of the persons who have entered into a legal contract with a
bank. A person who merely uses a bank, say to change coins for notes each
day, or a person who on one occasion only cashes a travelers cheque is not
by legal definition a customer.

Banking deals with people and their money. The people who use banks are
called customers, a term which is different from client; this term is used
to define the people who use the services of the lawyers or accountants. In
order to carry out business, a banker obviously needs customers; these can
be defined as persons who have a current account or some similar
relationship with the bank.

The account does not need to have been opened for any stated length of
time, but to be a customer a person must have entered a contract in his
name.

It was laid down that continuous dealing was not the key factor, but that the
customer relationship starts when the application to open an account has
been accepted, or when money has been taken on the understanding that
cheques will be honored. Duration of the account is not a consideration.
However, even where no contract has been completed to open an account,
bankers still have take care when dealing with the public. For example, the
manager who has given investment advice to a potential customer was held
to owe the same contractual duty of care that a customer would be entitled
to
31
.

31
Don Wright &Wally Valentine, Business of Banking & Financial Services, Northcote
House, 1992
The banker-customer
relationship

In Romania, there is usually a contract between the bank and its customer,
where the bank undertakes to receive money and to collect bills for its
customers account.

A customer is someone who:
has a current account or other relationship;
has entered a contract to open accounts and no particular time period is
involved.
According to the National Bank of Romanias Norm concerning know-your-
customer standards, a bank customer is:
a. Any individual, legal entity or entity without juridical
personality that maintains an account with a bank through
which transactions concerning funds receiving or distribution
are carried out/ cash transactions;
b. Any individual, legal entity or entity without legal
personality on whose behalf an account is maintained;
c. Any individual, legal entity or entity without juridical
personality connected with a financial transaction in which
the bank is involved and who generate a significant
reputation risk or a risk of another nature to the bank.
There is no a clear definition of the banker in either the statute or case law,
although the use of the word bankor banker in various pieces of
legislation. The Bill of Exchange Act 1882 in the United Kingdom define a
bank as a body of persons whether corporate or not who carry on the
business of banking. The Agricultural Credits Act 1928 states a bank can
be any firm, incorporated company carrying forward business which is
approved by the Ministry of Finance.
According to the Bill of Exchange Act 1882, a banker is someone, who
credits money and cheques, debits accounts and keeps account. From this
definition we may say that the banker is the person working in a bank who
carry on the business of the bank.

The banking business means the business of receiving money, on current
savings deposits or other similar account, money which is repayable on
demand by order, cheque, draft and money which will be invested by way of
advances to customer or otherwise.

6.2. The banker-customer relationship
In order that the bankers and the customers can carry out their business they
need to be able to transact business within a legal contractual relationship.
The usual relationship between a banker and a customer are as follows:
- debtor and creditor;
- bailor and baillee;
- principal and agent;
- mortgagor and mortgagee.

1. Debtor and creditor
This is the basic banker/customer relationship. It arises out of the fact that
the bank holds money, which belongs to the customer. The money has to be
repaid at some time and therefore the banker is the debtor and the customer
is the creditor. When, however, the customer borrows the money from the
bank position is reversed and the customer is the debtor and the banker is
the creditor
32
.

In this case there is an agreement that the customer should repay the debt
either by regular installments or by a given date.

2. Principal and agent
An agent is someone employed to work for a principal and to make
contracts on his behalf. A principal is that person who informs the agent
what he wants him to do on his behalf. A bank, when dealing with its
customer direct, has a debtor/creditor relationship. But where a third party is
involved the relationship becomes one of principal/agent. For example,
when the bank collects a cheque drawn by a third party, or when the
customer draws a cheque payable to someone else, the bank becomes an
agent. Other examples are when the bank arranges insurance, buys stocks
and shares, sends money and so on - all on behalf of the customer.

3. Bailor and bailee
One of the banks services is to receive valuables and documents to hold on
behalf of its customers. When the bank holds these valuables in safe custody
he has to take reasonable care of the property and has a bailor/bailee
relationship with that customer. A bailor is the depositor of the property.
This deposit is made on the understanding that the goods will be returned by
the bailee, or dealt with in accordance with the bailors instructions.
A bailee receives the property and must look after it in a careful/professional
manner.

4. Mortgagor and mortgagee

32
The debtor/creditor relationship was established long ago in the case of Foley v. Hill
(1848).
With the advent of banks entering into the domestic property market, there
now exists a mortgagor and mortgagee relationship, since a bank will take
the deeds of a house when granting such an advance to a customer, or will
take a morgage (charge) over securities when granting an advance. When
security is charged to the bank the customer is the mortgagor (i.e. the person
who gives the morgage) and the bank is the mortgagee (i.e. the person or
body that receives the mortgage).

Rights and duties
From the various banker/customer relationships arise a number of legal
rights and duties which underlie the practical operation of banking.

A right is the performance of actions within accepted standards or moral or
legal behavior. A bank has the right to:
- charge a reasonable commission for its services and interest on loans and
overdrafts;
- be indemnified for losses incurred when acting for a customer;
- repayment on demand of any overdrawn balance;
- to exercise a lien
33
over the customers securities in the banks
possession. For example, bills or cheques deposited for collection or
promissory notes can be retained against the debt. This does not include
deposits within safe custody;
- use the customers money in any way provided it honours the customers
cheques;
- expect the customer to use resonable care in drawing cheques.
A duty is a task or action that a person is bound to perform for moral or
legal reasons.
The banker has the duty:
1. to honour the customers cheques provided;
- they are properly drawn;
- a credit balance or approved overdraft exists;
- there is no legal bar to payment;
- the bank has no knowledge of death, bankruptcy proceedings, or
mental incapacity regarding the customer;
- there is no notice of a winding- up procedure or receiving order being
made.


33
In the United Kingdom, a lien is the right to keep possession of the goods as payment in
lieu of the debt.
2. to abide by any express mandate from the customer such as a standing
order; the bank is required to pay a standing order if there is sufficient
balance in the account.
3. not to disclose its customers affairs unless:
- compelled to do so by law
34
;
- there is a duty to the public to do so, for example if the customer was
trading with the enemy or there was a danger to the state;
- it is the interest of the bank such as when issuing a writ to demand
repayment of a loan;
- the customer has expressly consented.
Secrecy is a key duty for all the bank staff and they must be careful not to
divulge information on customers business even when done innocently.
Bank staff must not therefore:
- talk amongst themselves about customers business outside the bank;
- talk to fiends and relations about customers and their financial
position;
- give customers information over the counter in such a way that it can
be overheard by other customers.
4. to give reasonable notice of closure of an account in order to enable the
customer to make alternative arrangements and that the bank may avoid
having to return cheques that have already been issued.
5. to provide a statement of account within a reasonable time and to
provide details of the balance on request.

The banker should keep an accurate record of the customers account. The
customer, however, does not have an obligation to check the bank
statements or advise the bank of errors, though he can, subsequently,
challenge their accuracy.

This means the banker needs to be careful to avoid errors when recording
transactions on an account.
6. to receive the customers money and cheques for collection and credit
the amounts to the customers account.
7. to repay money on demand:
-at the customers written request;
-during banking hours;
-at the parent branch or another agreed branch.

34
For example, disclosure can come about when a court order is served on the bank and ask
for a return of interest paid to customers.
8. to advise the customer immediately if/when the forgery of a customers
signature is brought to the banks attention.
9. to exercise proper care and skill, especially with regard to the payment
and collection or cheques.
The duties of the customer:
1. the customer must maintain an adequate balance to meet cheques
presented for payment;
2. he must take care when drawing cheques and other mandates, so as
to make them difficult to alter;
3. he must keep the cheque book safe and advice the bank should it be
lost.
Usually, the legal obligations of the contracting parties are set up in the
common agreement according to their nature. For example, in case of a
agreement for a bank deposit (in a Romanian bank), the trustee (bank)
committed himself to:
- open for a depositor a separate account for every deposit that makes;
- receive the money as a deposit and to hand the providing acts of the
deposit;
- keep the secret about the deposit and not to provide proving information
about this only if the depositor agrees with that and only in special cases
provided by law;
- release the deposit if the depositor asks for that and to guarantee the
deposit.
- pay the interest to the depositor.

6.3. Types of accounts
Usually the legal obligations of the parties and their rights depend on- in
strict sense -the type of the account opened by the customer and - in a large
sense- the type of the service offered by the bank.

Current account
Perhaps the most important and the most popular account held by a
customer of a bank is the current account. From this account steams the
various services that the bank can make available to a customer. Indeed, in
order to have a usual relationship between a bank and a customer it is vital
that an account is held. The current account is often called the cheque
account, because the money is withdrawn by the use of cheques. The
current account is an account from which a customer may withdraw his
funds on demand by drawing a cheque, or by advising a bank to debit his
account at regular intervals by means of a standing order instruction, or by
authorizing a bank to accept debits on a monthly, quarterly, half- yearly or
yearly basis. When the account is opened, the customer is given a cheque
book and paying- in book, free of charge, and he will use these in all his
transactions with the bank.

The most important basi service given to any customer with a current
account is the dispatch of the statement. This indicates the balance due to
the customer or, if he has overdrawn, the balance due to the bank. It will
also show the debit and credit entries and the balance on the account at the
end of each working day. A person may order a statement as often as
necessary, either on demand or at regular intervals.

Budget account
These accounts are specifically used for paying bills such as for household
expenses, telephone, gas, electricity, taxes, insurance etc. by monthly
transfers or cheque drawings.

The customer calculates his total domestic expenditure and other
expenditure that is incurred on regular basis. The banks adds to this sum its
charges, the total is divided by twelve and the account is opened by a
transfer from the current account to this cash flow account. The same
amount is transferred each month by standing order. The customer is given a
cheque book on his account and he will then be able to pay his bills as when
they fall due. Obviously, there will be periods when the account is in credit
and other periods when the account is overdrawn, but at the end of twelve
moths, providing the calculations are correct and there has been no sudden
increase or decrease in any item of expenditure, the balance on the account
should be nil. The exercise is then recommenced for the following year.

Deposit account
Customers with large amounts at their disposal may consider that a fixed-
term deposit account is more attractive to their needs: a sum of money can
be put on deposit account for a period of one month upwards and so it will
attract a better rate of interest. The interest given will depend on the amount
invested and the length of time that the funds remain on deposit account.
The greater the amount and the longer the time, the better will be the rate of
interest.
Although deposit account holders are customers of the bank, the normal
services of the account are not available with the deposit account. For
example, a cheque book is not issued, nor is cheque card or cash dispenser
card. Standing orders or direct debits are not given.

Loan account
Borrowing funds from a bank by obtaining a loan has its attractions to both
the business customer and the private person. On the agreement with a bank
to borrow a given sum of money, a loan account is debited with a similar
amount. The loan may be for consumer durable, holidays, or any other
acceptable reason. The businessman may require a business loan either to
improve or extend fixed assets or to purchase additional stocks in order to
expand his business.

Personal account
Any adult (which for banking means 18 years over) can operate an account
in his/her own name with the minimum of formality.

Company account/Business account
Public limited or private limited companies constitute the most important
customer of the banks as they need banking services for their trade activities
and business operations, such as payment to suppliers, guarantees to
international partners, safe custody etc. In this respect they run various
accounts available to corporations, namely current and savings account,
foreign exchange account etc. Business accounts can be opened by sole
traders and partnerships.

Account for unincorporated entity
The unincorporated entities are associations, clubs or societies having
separate identity in law, which can open accounts by mandate.

Joint account
Joint account is usually opened by husband and wife, although is not
uncommon for other people to open such accounts. Any number of people
can join together to open such an account, although in practice the number is
usually two or three.
To open a joint account, all parties must sign a form known as a mandate.
This will establish who is to sign cheques and withdrawals (e.g. all to sign,
both to sign, anyone to sign, or either to sign) or who can sign for the
release of documentation in safe custody.
Another important part of this mandate is that the parties agree to joint and
several liabilities for any overdraft on the account. The importance of this
clause for banks is that if an overdraft was granted on a joint account, and it
is not repaid, the bank can take legal action against all parties to the account.
For example, suppose there is a joint account of Mr. X and Mr. Y, with an
overdraft of USD 5 000. The bank could take action against: Mr. X, Mr. Y,
Mr. X and Mr. Y. This means that if Mr. Y could not repay his share (USD
5000), but Mr. X could, then the full debt can be recovered from him.

Other important benefits of joint and several accounts are:
- the ability to use private account credit balances of one customer against
the debit balance of the joint account. This is clearly of benefit to the
bank;
- on the death of one party the other(s) still have access to a source of
money. This is of particular benefit to a wife on the death of her
husband.
One obvious problem for the bank when managing a joint account is if the
parties to the account fall out. This is probably most common with husband
and wife joint accounts, although care must be taken with all accounts when
any such dispute comes to the notice of the bank.

If the original mandate was for either party to sign then there is a danger that
all the funds could be withdrawn by one of them. Whilst the bank would not
be legally liable in such an event this would create bad customer relations
which could be detrimental to the banks present and future business. To
avoid such a situation, the bank-on finding out about such a dispute-should
advise parties that it will not act upon one signature, and that for all future
transactions both parties must sign.

Foreign exchange account
These accounts are specific to the commercial customers of the banks as the
transactions in foreign currency are expanding due to the globalization of
economies and deregulation in funds transfers between countries.

6.4. Opening an account
Banks deal with different types of customers. They can be included in three
large categories:
-natural persons (individuals)
-legal persons (legal entities)
-unincorporated entities (no juridical personality).

The bank must always identify the person or persons wishing to open an
account. A bank must exercise caution before an account is opened for any
person. The bank can be sued for conversion, that is, the deprivation of
the property of a rightful owner to another person. A bank collects cheques
and other instruments every day and can very easily fall into this trap if it
does not take reasonable precautions.

Banks need to obtain all information necessary to establish the identity of
each new customer and the purpose and intended nature of the banking
businesses that the bank should render to the respective customer. The
extent and nature of the information shall depend on the type of the
prospective applicant individual, corporate and the expected nature and
size of the transactions that shall be carried out by the intermediary of the
bank.

According to Romanian legislation, in the case of customer- natural persons,
banks shall require and obtain the minimum information, as follows:
- name and surname and, if the case, the pseudonym;
- permanent residential address;
- date and place of birth;
- the individual numerical code or, if the case, another analogous single
identification element;
- name of employer or nature of self-employment/business;
- source of funds;
- specimen signature.

Banks shall establish a systematic procedure in order to check the new
customers identity and of the persons acting on their behalf, and shall not
establish a banking relationship until the identity of a new customer is
satisfactorily verified.

Banks shall verify the information against the original documents of identity
issued by an official authority (identity cards, passports), documents, which
are most difficult to obtain illicitly, are not easily forged, or which cannot be
easily obtained within false identities. Banks shall verify customers against
an official document that shall include a photograph of the holder or a
description of that person and his/her signature.

The identification of customers, legal entities or entities without juridical
personality is made by obtaining, from a public register, from the customer
or from both sources, registration documents that constitute the basic
documents for their registration, including an updated financial statement of
the register, or in the case of the absence of a registration requirement, the
identification shall be accomplished on the basis of the incorporation
documents, including the business license and/or the audit statement.

Banks shall not open and manage anonymous accounts, for which the
identity of the holder is not known and recorded accordingly.

In the case of savings and deposit accounts, banks shall verify the identity of
any person that saves or withdraws amounts of money to/from an account
exceeding the equivalent of Euro 10.000.

Another important aspect of the identification process is the verification of
legal capacity of prospective customer (if he is minor) and his integrity (if
he is a proper person to be entrusted with a cheque book).

According to the Romanian legislation, banks shall develop customer
acceptance policies and procedures establishing at least the customer types
that it intend to encourage, the banking products and services types that it
can provide to each category of customers, in accordance with the risk
associated to different categories of customers.

Whenever the bank considers that there is a suspicious element concerning
the identity of the beneficiary or of any transaction may require additional
information or refuse to enter into relationship with the respective customer.

The identity of the customer can be considered suspicious in the following
situations:
- when the customer empowers a person with whom it has no closed
business relationships, to carry out transactions through his
account;
- when the value of the funds or assets in a transaction ordered by a
customer is not in the same proportion with his financial statement
that is known by the bank;
- when the bank too notices other unusual situations during the
process of carrying out of its business relationships with a
customer.
Banks should not only establish the identity of their customers, but should
also monitor account activity to determine those transactions that do not
conform with the normal or expected transactions for that customer or type
of account.
The suspicious transactions can be:
- transactions that are not consistent with the normal patterns, for
example unusual frequency of the withdrawals or deposits related
to an account;
- transactions too complex, of high value, concerning deposits and
withdrawals of large amount of money;
- external transfers which are not consistent with the statutory
activity of the customer.

Closing an account
There are two parties who can close an account. The first is the customer.
All he needs to do is to withdraw his funds whenever he feels to do so.
Clearly, when a banker is informed that this situation is about to rise, he
must ensure that there are no outstanding cheques and must obtain the return
of any unused cheque or cards that have been issued. Standing orders and
direct debits must be cancelled. Finally, the bank must take its commission,
and interest if is payable, then give the customer his funds in cash, bankers
draft or by transfer to another bank or branch.

Usually, the bank cannot close the account of an undesirable customer
without giving him reasonable notice. Whenever a person misuses or abuses
the banker-customer relationship, there is no reason why the bank cannot
withdraw his cheque book or card, and refuse to issue a new cheque book.

6.5. Money Laundering through financial and banking institutions

Money laundering or funds recycling is defined as the process through
which the proceeds from criminal activities are transported, transferred,
converted or mixed with legally raised funds in order to obscure their true
origin and nature.

The purpose of money laundering is to make the funds derived from illicit
activities appear as legitimate. Money laundering is a vital component of
any activity related to an offence, especially drugs traffic and smuggling.

Recycling profits earned from drug trading implies, usually the international
trade movement of funds, because the payments must be made to the
cultivators in the countries where the drugs originate as well as the
payments of those who transport and sell them.

Irrespective of the degree of complexity, the laundering process is
accomplished in 3 main stages: placement, layering and integration.

Placement means the physical disposal of the majority of profits in cash. As
large amount of money, resulting from criminal offences and owned by
offenders may draw attention, they are placed in traditional
(commercial banks, insurance companies, savings institutions etc) and non-
traditional financial institutions (investment funds, casinos, companies), in
commercial activities or they may be taken out of the country and placed in
other countries. In this stage, the amounts of money are placed with one of
the above- mentioned institutions, but, at the same time, they may be used to
purchase goods against payment in cash (cars, stocks, jewels, properties).
Another method of placement is represented by illegal foreign currency
exports, namely taking money out of the country, depositing and using it
abroad.

Layering designates the stage in which illicit funds are separated from their
source by designing and performing complex transactions, conceived so that
they may not be traced out. Thus, the cash derived from illegal businesses is
converted into money instruments, such as: travelers cheques, letter of
credits, payment orders, cheques, bonds and stocks. Transforming cash into
money instruments allows illicit profits to be more easily transported-
transferred outside the country, without being traced. In the same stage, the
goods that have been purchased against cash (except the placed ones) may
be resold within the country or abroad, and the assets resulted from reselling
are turned into money instruments. The most important and widely used
method of layering is represented by electronic transfer or wire transfer of
funds, which means moving them to another institution.

Integration is the stage in which the funds derived from offensive activities
are given the likehood of legitimacy and legally. The integration schemes
used by money launderers place funds in the economy under the likehood of
legal business. In this stage, the distinction between illicit and licit profits
blurs and becomes extremely difficult to be made.

Among the methods used in the integration stage, we can mention
purchasing real estate by a bogus firm and then immediately selling it,
fictious loans (the firm which made profits from illegal businesses self-
finances itself), use of forged bills by the import-export companies in order
to over-estimate the amounts registered in documents
35
.







35
Lucian C. Ionescu, English for Banking, Ed. Economica, Institutul Bancar Roman, 1999.








































Study-case: Money laundering in Romania

It is very difficult to state how well the National Office for the Prevention and
Fighting against Money Laundering (NOPFML) could cover the issue of illegal
financial activities and the real amount of money laundered in Romania over the past
there years. On the one hand, it could be assessed that Euro 1,5 billion laundered over
the three years is quite low taking into account the scope of Romanian underground
economy, estimated to 18 to 40% of the Gross Domestic Product as per various
sources. On the other hand it could be stressed that on the contrary the amount
envisaged by the NOPFML is too high since not all the suspected operations
represented financial crimes that could make part and parcel of this category. As
usual, maybe the truth is somewhere in between. It is certain anyway that the progress
of NOPFML is self-evident and it has been noticed by similar European
organizations. Recently a twining program has been agreed upon in the value of 500
000 Euro and the partners are similar organizations in Italy and Austria; the program
aims at strengthening the appropriate Romanian institution in preventing and fighting
money laundering. The real experience and the partnership led to the drawing up of
the project of the new law on preventing and fighting the money laundering. Another
feature of this partnership is a guide and a manual for the staff involved in this field
and these two instruments are both for the banking sector as well as other entities
such as investment companies, auditors, public notaries, lawyers etc.
The new law (which is under parliamentary debates) amends drastically the Law
No.21/1999. First of all, the scope of laundering money has been changed. The
former law listed only a limited number of frauds, which now has been reviewed and
extended. The new law stipulates that all authorities involved in financial control and
prudential supervision will keep in touch with the NOPFML and inform it
accordingly whenever the legal provisions are not observed.
It is very difficult to detect all the suspicious transactions as the Romanian economy
is still using excessive amount of cash. The suggestion of international experts is to
stipulate by law a limit to any cash amount involved in financial transactions (not
only for legal but also natural persons). This would have a beneficial impact on the
Romanian financial market and banking system.
Another helping hand to this NOPFML would be an interinstitutional on-line system
that would link all the involved entities in offering pertinent information. This entails
also the training of the staff working in the financial banking system, as well as in
other field that may be related to money laundering.
Summary

A customer is someone who:
- has a current account or other relationship
- has entered a contract to open accounts and no particular time period
is involved.

The banker-customer relationship
- debtor and creditor;
- bailor and baillee;
- principal and agent;
- mortgagor and mortgagee.

Types of customers:
- natural persons (individuals)
- legal persons (legal entities)
- unincorporated entities (no juridical personality).

Types of accounts:
- budget account
- deposit account
- loan account
- giro account
- current account
- joint account
- personal account
- company account
etc.







Check out questions
1 How would you define a customer of a bank?

2. How long does an account have to be opened for someone to become
a customer?

3. Can you be defined as a customer without having an account?

4. Name three main banker/customer relationships.

5. When does the relationship become one of the principal/agent?

6. What are the bailor and bailee, and when does their relationship
come about?

7. State three duties and three rights of the banker.

8. What is meant by lien?

9. Under what circumstances can a bank disclose its customers affairs?

10. The basic relationship between a banker and a customer is that of:
a. master and servant
b. debtor and creditor
c. donor and trustee
d. principal and agent.

11 A customer who leaves valuables in a box for safekeeping with his
bank is :
a. a bailor
b. a factor
c. a mortagagor
d. a bailee.

12 Joint and several liability means that:
a. only one person can be sued for the debts
b. all partners are collectively liable
c. each person is personally and collectively liable for the debts.

13 In which of the following cases is the banker an agent for its
customer:
a. when he cashes a cheque for him over the counter
b. when he credits his account with a cheque drawn on another
bank
c. when he credits his account with a cheque drawn on another
bank.


14 When a statement is dispatched to a customer, a banker should:
a. check the details on the account
b. not bother to check the details
c. it does not really matter either way.

15 The duty of the customer to the banker is to:
a. maintain an adequate balance and draw cheques carefully
b. comply without question with all the requests of a bank
c. keep the bank advised about all his personal affaires.

16 A customer leaves items in safe custody with a bank. The bank
and customer are named respectively:
a. bailor; bailee
b. agent; principal
c. bailee; bailor
d. principal; agent.

References

1. Don Wright & Wally Valentine, Business of Banking & Financial
services, Northcote House Publishers Ltd. 1992.

2. F. E. Perry, The Elements of Banking, Routledge & The Chartered
Institute of Bankers London, 1996.

3. N. Dardac, Teodora Vascu, Moneda-Credit, Ed. ASE, 2002

4. Lucian C. Ionescu, English for Banking, Ed. Economica, Institutul
Bancar Roman, 1999.

5. Piata Financiara magazine, 2000-2002











Glossary Terms

A

Actuary
Someone trained in the calculation of risk and premiums for assurance
purpose.

Access Policy and Access Limits
Policies that govern the use of IMF resources by its members, including
access limits set in terms of members quotas. The access policy, including
annual and cumulative limits, under the credit trances and the Extended
Fund Facility (EFF) is reviewed each year. Access under other facilities also
is reviewed periodically. Access under the Supplemental Reserve Facility
(SRF) and the Contingent Credit Line (CCL) are not subject to limits in
relation to quotas.

Adequate safeguards
Under the Articles of Agreement, the IMF is to make its general resources
temporarily, available to members under adequate safeguards. The IMF
considers the principal safeguard of repayment to be strong economic
adjustment programs but has also adopted specific measures to protect
against misuse of IMF resources by ensuring that members have in place
adequate accounting, reporting and auditing systems and provide the IMF
timely, accurate and comprehensive information (see also Safeguard
Assessment and Non-complying Purchase).

Advance
Loan (bank loan).

Adjustment Program
A detailed economic program, usually supported by use of IMF resources,
that is based on an analysis of the economic problems of the member
country and specifies the policies being implemented or that will be
implemented by the country in monetary, fiscal, external, and structural
areas, as necessary, to achieve economic stabilization and set the basis for
self-sustained economic growth.

Administered Accounts
Accounts established for financial and technical services, which are
consistent with the purpose of the IMF, including the administration of
resources contributed by individual members to provide assistance to other
members. All operations and transactions involving the Administered
Accounts are separate from those of the IMFs other accounts.

Annuity
1) A constant annual payment. 2) A guaranteed series of payments in the
future purchased immediately for a lump sum. Annuities are described as
certain where payment is specified for a fixed number of years. A life
annuity payment continues until the death of a person for whom it was
purchased. Annuities may be immediate, where payment commences on
purchase, or deferred, where payment starts at a future specified date.

Appreciation
Increase in the value of an asset; the antonym of depreciation. Appreciation
may occur trough rising prices as a result of inflation, increased scarcity or
increases in earning power.

Arbitrage
The exploitation of differences between the prices of financial assets or
currency or a commodity within or between markets by buying where prices
are low and selling where they are higher.

Arbitration
The process, which in parties to a dispute allows a third party, which has no
other direct involvement, to suggest or impose a solution. Each party will be
more inclined to go to arbitration the better they think their chances is of
winning and the higher the cost of resolving the dispute by other means.

Arrangement
A decision by IMF that gives a member the assurance that the institution
stands ready to provide foreign exchange or SRD in accordance with the
terms of the decision during a specified period of time. An IMF arrangement
which is not legal contract is approved by the Executive Board in
support of an economic program under which the member undertakes a set
of policy actions to reduce economic imbalances and achieve sustainable
IMF in accordance with the applicable schedule, and to pay charges on
outstanding purchases and loans.

Asian Development Bank
The bank based in Manila, which was set up in 1966 following the
recommendations of the United Nations Economic Commission for Asia
and the Pacific. It was formed to foster economic growth and cooperation in
the region of Asia and the Pacific and to contribute to the acceleration of
economic development of the developing countries of the region.

B

Balance of payments
A tabulation of the credit and debit transactions of a country with foreign
countries and international institutions, drawn up and published in a similar
form to the income and expenditure accounts of companies.

Balance sheet.
A statement of the wealth of business, other organization or individual on a
given date, usually the last day of the financial year, not to be confused with
the profit and loss account, which records changes in the companys wealth
over one year.

Bank deposits
The amount of money standing to the credit of a customer of a bank. Bank
deposits are assets of its customers and liabilities of the bank. Deposits may
arise from the payments of cash or a check to a bank for credit to a customer
or by transfer into an account from another account, including a loan from a
bank to its customer.

Bank loan
A sum borrowed from a bank, normally for a fixed period of two to three
years or more for a specific purpose, usually by a commercial concern. The
phrase bank loan is also loosely used to include overdrafts and personal
loans. In this broader sense bank loans are more commonly known as bank
advance, while total bank lending includes commercial papers and
acceptances.

Bank rate
A now obsolete term for the rate of interest at which the central bank lends
to the banking system, which in practice meant the rate at which it would
rediscount eligible paper presented by the discount houses or make loans to
them.



Banking
The business of accepting deposits and lending money. Banking defined in
this way, however, is carried out by some other financial intermediaries that
perform the functions of safeguarding deposits and making loans. Building
societies and finance houses, for example, are not normally referred to as
banks and are not regarded as being part of the banking system in the
narrow, traditional sense.

Banknote
A note issued by a bank undertaking to pay the bearer the face value of the
note on demand.

Bankruptcy
A declaration by a court of law that an individual or company is insolvent,
that is, cannot meet its debts on the dates.

Bill
A document giving evidence of indebtedness of one party to another. A bill
may simply be a written order for goods, which can be used as security for a
loan to the supplier from a bank, or it may be a security such as a Treasury
bill or Bill of Exchange.

Bill of exchange
An instrument used in international trade by which the drawer makes an
unconditional undertaking to pay to the draw a sum of money at given date,
usually three months ahead.

BIS
Bank for international settlements

Bretton Woods
An international conference was held at Bretton Woods, New Hampshire,
USA, in July 1944 to discuss alternative proposals relating to post-war
international payments problems put forward by US, Canadian and UK
governments.





C

Capital
Assets which are capable of generating income and which have themselves
been produced. Capital is one of the four factors of production, and consists
of the machines, plant and buildings that make production possible, but
excludes raw materials, land and labor.

Capital nominal
Authorized capital

Capital registered
Authorized capital

Capital sources
Business finance

Capital working
Working capital

Capital account
Balance of payments

Capitalization
The amount and structure of the capital of a company. The conversion of
accumulated profits and reserves into issued capital. Market capitalization is
the market value of a companys issued share capital, the quoted price of its
shares multiplied by the number of shares outstanding.

Cash
Coins or banknote. Legal tender in the settlement of debt.

Cash ratio
The ratio of a banks cashes holdings to its total deposit liabilities.

Certificate of deposit
A negotiable claim issued by a bank in return for term deposits. CDs are
securities, which are purchased for less than their face value, which is the
banks promise to repay the deposit and thus offer a yield to maturity.

Certificate of incorporation
A document issued by registrar of companies certifying the legal existence
of a company after certain legal requirements for registration have been met.

Cheque
An order written by drawer to a commercial bank or central bank to pay on
demand a specified sum to a bearer, a named person or corporation.
Although still very important, the use of cheques is gradually giving way to
other forms of credit transfer, credit cards and electronic payments system

Clearing banks
Members of the London Bankers clearing- house. Often used as a synonym
for commercial banks or joint-stock banks.

Commercial banks
Privately owned banks operating cheque current accounts, receiving
deposits, taking in and paying out notes and coin and making loans.

Commercial bills
Bill of exchange

Commercial paper
Promissory note

Conditionality
Economic policies that members intend to follow as a condition for use of
IMF resources. These are often expressed as performance criteria (for
example, monetary and budgetary targets) or benchmarks, and are intended
to ensure that the use of IMF credit is temporary and consistent with the
adjustment program designed to correct a members external payments
imbalance.

Credit
The use or possession of goods and services without immediate payment.

Credit account
An account against which purchase may be made and paid monthly. A form
of revolving installment credit offered by some retail stores in which the
consumer makes fixed regular monthly payments into an account and
receives in return credit to purchase goods up to the limit of certain multiple
of the monthly payments, normally eight or twelve. A service charge, which
is in effect an interest charge, is normally made as a percentage of value of
each purchase. Bank and agency credit cards in which the consumer pays
his account monthly are also a form of credit account.

Credit bank
Commercial bank

Credit card
A plastic, personal magnetized card with the name and account number of
the holder and the expiry date embossed. Purchases up to a prescribed limit
may be credited on signature of a voucher franked by the card. The vendor
recovers the cash from the issuer on receipt of a monthly statement.

Credit union
A non-profit organization accepting deposits and making loans operated as a
cooperative. Credit unions exits in the USA and some European countries.

Creditor
One to whom an amount of money is due. A firms creditors are other firms,
individuals and perhaps the governments to which it owes money in return
for goods supplied, services rendered and taxes for which it is liable.

Credit Trance policies
Policies under which members may make use of IMF credit. The amount of
such use is related to a members quota. Early in its history, the IMF made
credit available in four trances (segments), each equal to 25 percent of a
members quota. Provided a member is making reasonable efforts to solve
its balance of payments problems, it can make use of IMF resources up to
the limit of the first credit trance on fairly liberal terms. Requests for use
more resources (upper credit trance purchase) require substantial grounds
for expecting that the members balance of payments difficulties will be
resolved within a reasonable period of time. Such use is almost always made
under a Stand By or Extended arrangements, entailing phasing of
purchases, performance criteria, and reviews.

Creditor (or Reserve) Position in the IMF
A member has a creditor (or reserve) position in the IMF if it has lent
reserve assets to the IMF under a loan agreement, and/or the member has
provided reserve assets to the IMF either as a result of its initial quota
payment or through IMF use of the holdings of the members currency to
provide financial assistance to other members. More precisely, the creditor
(or reserve) position is the sum of outstanding borrowing by the IMF from
the member, if any, and the members reserve trance position.
Currency
Notes and coin that are the current medium of exchange in a country. Gold
and, to a lesser extend, national currencies that act as a reserve currencies,
such as the dollar, are referred to as international currency because they are
regarded as acceptable for the settlement of international debts.
Current account
The most common type of bank account, on which deposits do not earn
interest, but can be withdrawn by cheque at any time. That part of the
balance of payments accounts recording current, non-capital, transaction.

D

Debt
A sum of money or other property owed by one person or organization to
another. Debt comes into being through the granting of credit or through
raising loan capital. Debt servicing consists of paying interest on a debt.
Debt is an essential part of all modern, capitalist economies.
Deficit
An excess of liabilities over assets, or of expenditure flow over income
flow, budget deficit, and balance of payments deficit.
Deposits
Money placed in an account at a bank and constituting a claim on the bank.
The term bank deposit includes deposits on all types of account including
current accounts.

E

Equity
The residential value of company assets after all outside liabilities has been
allowed for. In a mortgage or hire purchase contract, equity is the amount
left for the borrower if the asset concerned is sold and the lender repaid. The
equity in a company under liquidation is the property of holders of ordinary
shares; hence these shares are popularly called equities. Equity yields and
prices, although fluctuating, have historically delivered returns about 8 per
cent higher than risk free stocks.

Endorsement
Signature of payee or holder on a bill of exchange or cheque, for the
purpose of transferring it to another person.

Eurobond
Long-term fund raised against the issue of bonds on the international capital
markets in different currencies.

Euro cheque
An agreed system of cheques issued by European banks to be used in
conjunction with an euro cheque card. Despite the name the use of the
system is not solely restricted to Europe.

Eurocurrency
Any currency held by banks, companies or individuals outside its country
origin, for example, Eurodollars.

F

Factoring
Service provides by specialist companies against a firms debtors services
include sales ledger accounting, credit insurance and finance.

Finance house
Financial intermediary specializing in the provision of finance for hire
purchase, leasing and factoring.

Financial intermediary
Any institution which provides a services of bringing together lenders and
borrowers such as banks and buildings societies and their customers.

Fixed assets
Long-term assets of a business; the means of production-premises,
machinery and vehicles, for example.

Foreign exchange market
A market for the purchase and sale of foreign currencies, now and in the
future. See also Spot rate and forward exchange contract.



Futures
Contracts made in a future market for the purchase or sale of commodities
or financial assets, on a specified future date. Many commodity exchange,
wool, cotton, wheat, have established futures markets which permit
manufactures and traders to hedge against changes in price of the raw
materials they use or deal in.

G

General crossing
Two parallel lines across the face of a cheque, with or without the words
and company and not negotiable. See also special crossing.

Guarantee
Collateral security involving three parties in which a guarantor makes
himself secondarily liable for the debts of the second party if he doesnt pay
the first party.

H

Holder
Person in legal possession of a Bill of Exchange or cheque.

Home banking
Banking service operated through a home television set and linked to the
banks computer system by telephone; service handles account balances,
statements, standing order details and allows transfer to be made between
accounts.

I

Indemnity
A security involving two parties in which the indemnified is primarily liable
to the lender for the debts of another.

Inflation
A fall in the value of money: too much money chasing too few goods with
the result that prices of goods and services rise.

Inter-bank market
Wholesale/parallel money market in bank deposits where the dealing is
mainly between banks.

Interest
Price paid for borrowing money.

International money transfer
International method of payment for non-urgent transfer of funds: the
payment instructions are sent by airmail, or through the swift network as
swift message.

Investment trusts
A company which buys shares in other companies to hold for investment
purpose.

Issue department
Functional department of the bank of England concerned with issuing
banknote: note issue is backed by Government and other securities.

J

Joint and several liability
Term usually found on joint account and partnership mandates; each party is
jointly liable for any monies owning to the back, and also liable for the full
amount as individuals.

L

Leasing
Form of business finance under which the ownership of equipment remains
with the lessor but the lessee has use of the item, provided that regular
leasing payments are made.
Legal tender
Notes and coins which must, by law, be accepted when offered in payment.

Lender of last resort
Function of a central bank whereby it undertakes, if necessary, to lend funds
to certain financial intermediaries. In Britain the Bank of England is a lender
of last resort to the discount houses and, indirectly, to the banks.


Lessee
One who is granted use of an asset by a lessor for a set period of time
against rental payments.

Lessor
One who owns an asset and rents it to a lessee for a set period of time
against rental payments.

Liabilities
Items owned: in connection with a business balance sheet, they are divided
between long term liabilities such as debentures and mortgage loans, and
current liabilities such as creditors and bank overdraft.

Lien
A right to retain the property of another until legal demands against the
owner have been satisfied.

Liquidation
Winding up, or closing of a business-surplus funds are returned to the
owners after all the debts are paid.

M

Merchant bank
Specialist bank mainly involved in corporate finance: services include the
acceptance of bills of exchange, the financing of foreign trade, the
underwriting of new issues, the management of investments and the
advising of companies.

Mortgage
Transfer of an interest in land or property to a lender as a security for a debt.

N

Negotiable instrument
Instrument representing money, which can be transferred to another person
by delivery or by endorsement and delivery.

Not negotiable
Words added to the crossing of a cheque, which prevent negotiation but not
transfer.

P

Partnership
The relation who subsists between persons carries on a business in common
with a view of profit.

Payee
Person named on a cheque or bill of exchange to whom, or to whose order,
payment is to be made.

Paying bank
Bank which pays customers cheques drawn on it.

Promissory note
An unconditional promise in writing, signed by the promisor, to pay a
certain sum of money to another at a fixed or determinable future time.

Public sector
Central Government, local authorities and public corporation.

R

Retail banks
Banks which has extensive branch networks and are the main participants in
the clearing system.

Retail deposits
Smaller deposits on current and deposits account usually contributed by the
public.

S

Safe custody
When a bank customer leaves items for safekeeping with the bank, a
contract of bailment arises.

Safe deposit
Special type of safe in which a customer may rent a compartment to keep
items of value.

Savings
The part of a persons income not spent on immediate consumption.

T

Telegraphic transfer
International method of payment for urgent transfers of funds.

Trustee
Person who holds an estate in trust for another.