MBF

1
MONEY BANKING FINANCE
EDUCATION FOR ALL
Prepared By
ARFAN SHAHZAD KHAN M.COM, M PHIL MUHAMMAD NADEEM RAZA MBA, M.PHIL
ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
MONEY
Q1: What is barter s
removes these defects. Q2: Define money. D Q3: Discuss the econo money.-----------------Q4:. Define money di
Q5: What is paper m paper money? ------Q6: Describe the pr

Q1: WHAT IS BARTER SYSTEM. DISCUSS THE PROBLEMS OF BARTER ECONOMY. ALSO POINT OUT HOW INTRODUCTION OF MONEY REMOVES THESE DEFECTS
OR BARTER SYSTEM DOES NOT FULFILL TODAYS REQUIREMENT DISCUSS? (1999, 2000, 2003)
ANSWER: BARTER SYSTEM:

At an early stage of mans economic life, the wants were very limited in number. Man can easily satisfy all his wants, which he produced himself. But as time passed, his needs began to increase. He lost his self sufficiency. He began to produce some goods in greater quantity than he could consume himself. The purpose was to exchange some of his products which he had in excess with those who had surplus products with themselves.
DEFINITION:
ACCORDING TO R.H. PARKER:
Barter is the direct exchange of goods and services with out the use of money as either a means of payment or a unit of account.
ACCORDING TO SLOAN:
Direct exchange of commodity or services for another with out the use of money.
ACCORDING TO G. THOMAS:
Barter is a form of trading in which goods are exchange directly for other goods with out the use of money as an intermediary. Barter, however, is possible only under extremely simple condition of exchange. A pure barter do not exist today:
INCONVENIENCES OF BARTER
1. LACK OF DOUBLE COINCIDENCE OF WANTS:
The basic problem of barter economy was the double coincidence of wants. It means there must be double satisfaction of bother parties in bargain. For Example: In this situation, the exchange can be effective only if a person in able to spare what the other person wants and at the same time needs what the other can spare. Suppose a person needs cloth and has the surplus of wheat, he will have to find a person who needs wheat and want to sell the cloth. Person (A) surplus of wheat (wants cloth) Person (B) surplus of cloth (Wants wheat)
2. LACK OF COMMON MEASURE:

In barter economy, there is a Lack of common measure. For example a man has a horse and other man has a cow. The first man assigns the value of horse equal to two cow and other assigns the value as one cow one horse. In absence of common measures it is very difficult to exchange. The proportion of exchange is difficult to be settled.
3. INDIVISIBILITY OF GOODS (SUB DIVISION):

Another problem of barter economy is the Lack of subdivision. As there are some commodities which can not be subdivided. For example a person has a cow with him and wants to get 40kg of wheat. So what part of cow should be given in exchange for 40kg of wheat?
4. LACK OF STORE OF VALUE:

Lack of store of value is another main inconvenience in barter. Some goods cannot be stored for a long period of time. Because during intervening period the stored commodity may become obsolete or deteriorate in value. It is very expensive to store and prevent their loss over a long period of time.
5. LACK OF SPECIALIZATION:
Specialization is essential for gaining competitive advantage over others. Under barter system each person is jack of all trades, so a high degree of specialization is difficult to achieve. Specialization and inter. Dependence in production is possible in an expanded market system based on market economy. 6. DIFFICULTY IN FUTURE PAYMENT) deferred: In barter economy it is difficult to make payments in future. Because there was no mechanism to state debt and repayment in future with reasonable certainty and security. It is very difficult to land goods to other people as the value of commodities will fall with the passage of time. 7. DIFFICULTIES IN TAX COLLECTION:
Under this system, Tax collected by revenue department in the form of commodities. The goods collected form Tax payer will not be stored for a longer period. They will lose their value with the passage of time.
8. DIFFICULTIES OF TRANSFER OF WEALTH:

There is great difficulty in transferring wealth from one place to another under barter. More ever immovable property cannot be transferred. For example if a person has to take one hundred heads of cattle from Faisalabad to Karachi, how much difficulty would he feel.
9. NO CAPITAL FORMATION:
The creation of capital goods is necessary for further production of goods and services. The basis of Barter is formation is saving. In the absence of capital formation the economic progress become zero.
10. COMPARISON OF LIVING STANDARD:

As under barter, wealth cannot be stated in common units, so it was impossible to compare living standard of the people or different classes of society.
11. ECONOMIC MEASUREMENT:

Under barter it was impossible to measure any economic variable both micro and macro. There was no system to measure personal income on micro level and GDP (Gross Domestic Product) on macro level.
12. NO BUDGETING:
Under barter, it was not possible to budget expenses and incomes. People were unable to for-caste the worth of their mechanism and merchandise. They, there fore cannot make any estimate of their future incomes and revenues.
13. EXIT AT SMALL SCALE:

Barter may only exist at small scale of trade. But if some one wants to expand the scale of trade how he can do so.
14. NO INVESTMENT, NO SAVING:

Under barter, there is no concept of investment and saving. Because we can not express our income in any monetary unit.
ELIMINATION (Removal) OF INCONVENIENCES OF BARTER:

The introduction of money removed the above mentioned problems in the following ways:
1. MONEY AS A MEDIUM OF EXCHANGE:

The goods and services are now purchased and sold with the help of money. The difficulty double coincidence of want has been removed.
2. MONEY AS A COMMON MEASURE OF VALUE:

5 Money is used as a common measure of value by which was can measure and compare the values of different goods and services.
3. MONEY AS A STANDARD OF FUTURE PAYMENT:

In modern economy, goods and services are sold and bought on the promise to pay in future. So it acts as the standard of future payment.
4. MONEY AS A STORE OF VALUE:

Under barter system goods, animals and commodities cannot be stored for a longer period. Now a days wealth is stored in the form of money.
5. MONEY IS AN INSTRUMENT OF MAKING LOANS:

People save money and deposit in the bank. The bank advances these saving to businessmen and industrialists so savings are transferred to investment.
6. LIQUIDITY TO WEALTH:
Money imparts liquidity to various forms of wealth such as land, machinery, stocks and stores etc. These forms of wealth can easily be converted into money.
7. ESTABLISHMENT OF FINANCIAL INSTITUTIONS.

The introduction o0f money has made it possible to establish financial institutions like the central bank, commercial bank etc which deal in currency, and near money assets such as bill of exchange, bonds, shares etc.
8. INFLUENCE OF INCOME AND CONSUMPTION.

The use of money has helped in removing difficulties of barter system. The higher the income, the higher will be production and consumption.
9. INSTRUMENT OF ECONOMIC POLICY:

In order to achieve growth, reduce unemployment, and maintain regular expansion of economic activity, money is the most powerful factor.
10. AIDS TO SPECIALIZATION, PRODUCTION, AND TRADE:

The market mechanism, production of goods, specialization, and expansion of trade is possible by use of money.
11. CIRCULAR FLOW OF MONEY.

In a monetary economy, there is circular flow money. Money flows from firms to the households. It flows again from household to the firms as the prices of goods and services.
12. MONEY AND PROBLEM OF SUBDIVISION:

The problem of subdivision was also solved by the use of money. Now with the help of money we can purchase each and every kind of goods.
13. MONEY AS A TOOL OF MONETARY MANAGEMENT:

Money is an instrument of monetary management if it is effectively used; it helps in increasing, output, and employment,
14. EXIST AT LARGE SCALE:

If some one wants to expand the scale of trade. The money removes this defect easily.
CONCLUSION:
Because Barter System has many difficulties and problems so at is better for everyone to use money. In this time many developing countries are using to the barter system. Even Pakistan was doing trade with Communist Countries like china and Russia.
Q2: EXPLAIN THE EVAULTION OF MONEY? OR

DEFINE MONEY. DISCUSS VARIOUS FORMS OF MONEY. 2000, 2002, 2004, 2004(S), 2006 Answer:
INTRODUCTION
Money is the greatest discovery of modern age. The word MONEY is derived from the LATIN word MONETA. It occupied a unique and important position in all the fields of life. Generally speaking anything that people will accept in exchange of their goods and services and at the same time by which they will purchase goods and formed the modern form.
DEFINITION
(I). WALKER Says: Money Is What, Money Does.
(II) PROF KNAP SAYS:

Money is anything which is declared as money by government, becomes Money.
(III) G.D.H. COLES:

Purchasing power something which buys things.
(IV) ACCORDING TO ROBERTSON:

Any thing which is widely accepted in payment for goods or in discharge of other kind of obligation.
DIFFERENT VIEWS OF MONEY:

I. TRADITIONAL VIEW (M):
It consists only of currency and demand deposits. Thus Mi= C+D.
II. Monetarist view (M2): (broader scope)

It includes saving and time deposits. M2= M1+ Savings deposits+ Fixed deposits.
III. LIQUIDITY VIEW: M3):

This is even much broader definition of money taking into account different current assets. M3= M1+M2+ Saving scheme deposit+ Bearer Certificates.
VARIOUS FORMS OF MONEY:

(i) (ii) (iii) (iv) Commodity money Metallic money Paper money Bank money.
(I) Commodity Money

It is the earliest form of money, initially, a large number of commodities such as skins, arrows, cattle, wheat, rice etc have served as money.
(II) METALLIC MONEY:

This form of money is made of metals, such as gold, silver, copper which are properly shaped to avoid counterfeiting. Coins are different denominations. They are properly manufactured and issued by the state. Manufacturing of coins is known as coinage. This coinage is done in special place called Mint.
EVOLUTION OF METALLIC MONEY:

For the first time, coins were struck in china in the 11 th century or in india in 640 B.C. then coins were started to milled. The first mill was plated in 1561 in London. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
Metallic money has two kinds:

i. ii. Full bodied coins. Token coins.
(I) FULL BODIED COINS:

Full bodied coins are those whose actual value or (Intrinsic value) is equal to its face value. Such coins were in circulation before 1893 in subcontinent. This coin is not manufactured in the present day world.
(II) TOKEN COINS:

The coins whose value (face Value) is much higher than actual (Intrinsic) value of the coins. Now all over the world the token coins are used transactions.
PAPER MONEY
Paper money consists of notes made of paper, issued by the central bank of the country. Paper currency are of fixed denomination (I.e. Rs 5,10,100,500,1000) in Pakistan. Paper money is widely used now days on the following reasons. i. It is easy to count. ii. Easy to print. iii. Easy to handle. iv. Easy to transfer from place to place. v. Large value in small bulk.
EVOLUTION OF PAPER MONEY.

The paper money was originated by gold smith of England, in early 17th century. Now it has become the exclusive right of central bank to issue paper money.
THREE TYPES OF PAPER MONEY. 1. REPRESENTATIVE PAPER MONEY.

That money which is 100% backed by the metallic reserves (gold, silver or foreign exchange). The holder of this money can get it converted into metallic money.
2. CONVERTIBLE PAPER MONEY:

This form of paper money is convertible into metallic reserves (gold, silver). This money may be partially backed by metallic reserves.
3. INCONVERTIBLE PAPER MONEY: (Fiat Money).

That money which cannot be converted into metallic reserves, but that Govt. declares it as money. At present through out world paper money is inconvertible.
BANK MONEY.
Bank money or credit money are the instruments (documents) issued by the banks. This is accepted as a medium of exchange, due to confidence on the bank. It consists of Cheque, draft, bill of exchange.
EVOLUTION OF BANK MONEY

In the second half of 17th century in England, Cheques were issued. Now since 18th century, it has become a normal mean. of exchange.
a. CHEQUE:
A cheque is issued by the account holder to the bank to pay a sum of money to himself or to the third party mentioned in the cheque. Three kinds of cheques: -------Bearer Cheque -------order Cheque -------Crossed Cheque.
b. BILL OF EXCHANGE: (B/E)

8 A bill of exchange is an order from a creditor (seller) to a debtor (buyer) to pay a certain sum of money mentioned in the bill to him or to the bearer at a fixed future date. --------Sight bill of exchange. --------Time bill of exchange.
c. DRAFT:
A draft is a cheque drawn by a bank on its own breach or on the branch of the other bank, requesting it to pay on demand a specific amount to the person named on it.
SOME CONCEPT REGARDING MONEY:

A. LEGAL TENDER MONEY:
Any money (metallic or paper) which creditor must accept in settlement of their claims by law is called legal tender money. a) LIMITED LEGAL TENDER: It can be accepted up to a specific limit. In Pakistan coins of small denominations up to so paisa are limited legal tender money (not practiced in these days). b) UNLIMITED LEGAL TENDER: These can be paid up to any amount for the settlements of dues. In Pakistan notes of Rs. 5,10,50,100,500,1000 are unlimited legal tender money. (i) PLASTIC MONEY, (ii) NEAR MONEY.
(i). PLASTIC MONEY: It is made of plastic e.g. credit cards are

substitute for currency and cheques they are now used very widely. In Europe USA used as VISA CARD, MASTER CARD, AMERICN EXPRESS CARD etc. In Pakistan ABL, MCB, UBL, HBL, have introduced credit card.
(ii) NEAR MONEY: Number of Asses which are liquid and can be converted into money easily. For example govt bonds, shares, time deposits etc.
SUMMING UP:
Consequently the money at present age is the out come of evolution of money. After passing through above discussed stages, now it is the medium of exchange all over the world.
Q3: DISCUSS THE ECONOMIC IMPORTANCE (SIGNIFICANCE, ROLE) OF MONEY. ALSO EXPLAIN THE CHARACTERISTICS (ATTRIBUTE QUALITIES) OF MONEY.
ANSWAR: INTEROUCTIO
Money plays very important role in the economic development. Three is no doubt. That money helps and motivates all economic activity relating to consumption, production, ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
9 exchange and distribution. It has become a vital necessity of people. They use it in daily transaction. The important points are as under:
1. TRADE AND TRADERS:

Money helps in both national and international trade. Money has helped in establishers money and capital market. Now a days the trade is being done both on cash as well as credit basis. There are banks, financial institution, stock exchange, etc which operate on the basic of money. They help traders.
2. MONEY AND PRODUCTION:

The producer because of profit motive which is expressed in term of money. The decision regard what to produce, how to produce, for whom to produce are made in the frame work in which money is at the base. Money helps to produce goods at the large scale level with different varieties. The cost of production sale price is also determine in term of money.
3. MONEY AND CONSUMPTION:

In capitalistic economy, consumer is a king, free to make choice about what he should consume. The consumption depends on income. Both income consumption expenses are stated in term of money. Due to money we can get maximum utility or satisfaction.
4. MONEY AND DISTRIBUTION:

Every year we produce a certain amount of goods and services by combining the four factors of production. (Land, Labour, capital, entrepreneurship). The reward of each factor like rent, wages, interest and profit is paid in term of money.
5. MONEY AS THE BASIS OF CREDIT:

The entire modern business is based on credit and credit is based of money. Cheques, drafts, bill of exchange are credit instrument which are not money, it is bank deposits that are money. Bank issue such credit instruments and create credit. Thus credit expands investment on the basis of public saving lying in bank.
6. MONEY AND EMPLOYMENT:

If the money is properly managed, it raises the level of production. Income and employment in the country. This is only possible with the help of money.
7. MONEY AND PUBLIC FINANCE:

The money also plays an important role in public finance. The govt can easily increase the revenue through which we can raise the level of development. Budgets are prepared by the government through the allocation of money. Receipts of Tax, expenditure, and distribution of wealth are all through the money.
8. SAVING AND INVESTMENT:

Saving and investment process is also possible with the use of money. Money encourages people to save in the bank and then bank uses this money (dept in the form of loans and investment.
9. IMPORTANCE FOR GOVERNMENT:

Money is more important for the government. The taxes can be collected in the form of money. The monetary a fiscal policy of the government are also depends upon money. All projects of government such as establishment of schools, hospitals, and roads are depend upon money. a. Money policy b. Fiscal policy
10. IMPORTANCE FOR BANKS:

Banking system depends upon money. The economic development depends upon the sound banking and credit system. The main business of bank is to collect the saving of people and lend it to needy persons. So in banking progress money play their vital role. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
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11. PRICING FOR ENVIRONMENTAL FACTORS:

Money has played a vital role in pricing and thus determining the importance of environmental and natural resources. The gas, oil, in wells, fishes in oceans, trees in jungles are all priced in monetary terms.
12. SOCIAL IMPORTANCE OF MONEY:

Money is also an index of social growth and progress. The welfare of the people can increase with the help of money.
13. IMPORTANCE FOR LABOUR.

Workers are paid money as wages against their work. If there is no money then the workers cannot get the satisfaction with the rewards which they receive.
14. IMPORTANCE FOR INDUSTRIES:

Money is important for industries as blood for life. The industrial progress and opening of new industries and arrangements of loans for expand the business depend upon money. The transfer of money (funds) from unproductive sector the productive sector is possible due to ready market of Share.
15. EXCHANGE TRANSACTION:

The exchange of goods and service become easy with money. There were greater problems in exchange of commodities under barter system but now the use of money has successfully removed the exchange problems.
16. MONEY AS AN INDEX OF GROWTH AND DEVELOPMENT:

The growth and development can be measured with the help of money. It is the money by which we can measure the value of GNP (Total value of goods & services produce in one year) and per capita income of the country.
CHARACTERISTICS OF MONEY:
Following are the characteristic (qualities) of money: 1. GENERAL ACCEPTABILITY:
The good money is one which is generally acceptable by all with out hesitation. It means that any one will be willing to accept it in settlement of debt or in discharge of any obligation. The people trust because this is issued by Govt. & Central bank.
2. STABILITY:
The value of money should stay stall otherwise people will Loose confidence over it. It means that the commodity Chosen as money not depreciate due to usage or wear and tear.
3. STANDARDIZED:
The good money is of standardized nature and quality of its material does not undergo any great change. It must not be weak of such nature that may loose its original form and shape due to mishandling or temperature.
4. ECONOMICAL:
The issuance of good money should always be economical. This means that cost incurred on it issuance must be very low as compared to its value.
5. STORABILITY:
Good money is one in the shape of which purchasing power can be stored for a longer period. This means the people must be able to save the money with surety that it will not lose it value.
6. DIVISIBILITY:
11 Good money is capable of being divided into smaller denominations. Hence both the costly and cheap things can be purchased from such money.
7. TRANSPORTABILITY:
Good money is that which can easily be transferred from one place to other for payments e.g. currency notes, cheque, bank draft. Etc.
8. RECOGNIZABLE:
Good money is one that can be easily recognized by seeing or touching. It should be of such nature that can be easily identified by any one.
9. DIFFICULT TO COPY:
A good money is one which is very difficult to be copied. In other words there should be no danger of fake issuance.
10. MALLEABILITY:
A good money can be conveniently kept and stamped. It is the quality of metal coins. The coins can be melted and reproduce with new govt seal. More issue PxI B.op (-)
7. LESS STABILITY:
There is less stability in the value of the pap money as compared to metallic money. Some time it over-issued and people lose confidence in the value of money and they prefer to keep their savings in term of gold and silver.
8. UNCERTAINTY:
Paper currency has no value of its own. All the value it commands is because of its status as legal tender. If this status is lost the currency becomes worthless.
9. DIFFICULT TO DETERMINE THE RATE OF EXCHANGE.

It is very difficult to determine the exchange rate. The instability in home prices affects the foreign exchange rates the some currency may be devalued due to inflation.
10. DANGER OF MISMANAGEMENT:

Paper money is useful only when it is efficiently managed. If the monetary authority is not vigilant and does not issue the paper currency as required, it often leads to inflation & deflation.
11. LACK OF CONFIDENCE:

Something the paper money is issued due to the legal force of the government so the paper money can not inspire the public as metallic money doe.
CRUX
Form above discussion we concluded that paper money has also some defects. It is better that metals and it is also helpful for removing the economic problems. It is a source of blessing for mankind. However, when it is properly manage it becomes source of peril and confusion.
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Q4:. DEFINE MONEY DISCUSS THE FUNCTIONS OF MONEY? (2001, 2002, 2003 (S)).
ANSWER: DEFINITIONS OF MONEY:
According to its scope: WALKER:
Money is what money does.
PROFESSOR ROBERTSON:
Anything which is widely accepted in payment for goods or in discharge of other kinds of obligations
ELY:
Money is any thing that passes freely from hand to hand as a medium of exchange and is generally received in final discharge of debts.
ACCORDING TO ITS CHARACTERISTICS:

Money has been defined according to its characteristics into three forms:
1. GENERAL ACCEPTABILITY: SILIGMAN:

Money is one thing that possesses general acceptability.
KENT:
Money is anything which is commonly used and generally accepted as a medium as a medium of exchange or as a standard of value.
2. DESCRIPTIVE DEFINITION:
CROWTHER: Money may be defined as anything that is generally acceptable as a mean of exchange and that at the same time acts as a measure and as a store of value.
G.D.COLE:
Purchasing power, something which buys things. COULBORN: Money may be defined as means of valuation and of payment.
3. LEGAL DEFINITION: KNAPL:

Any-thing which is declared as money by government becomes money. SAMULESON: Money is the modern medium of exchange and the standard unit in which prices and debts are expressed.
FUNCTIONS OF MONEY:
Money performs a number of primary, secondary and contingent functions which not only remove the difficulty of barter but also oils the wheels of trade & industry in present day world:
A: PRIMARY FUNCTIONS:
Money performed the following primary functions:
(1) MEDIUM OF EXCHANGE:

Money serves as a medium of exchange. By serving as a medium of exchange, money removes the need for double coincidence of wants and the inconveniences and difficulties associated with barter. Now money is used to buy and sells things and services. It is used to make payments for goods and services. Goods can be bought and sold in term of money with out any difficulty. The people can sell surplus goods for more they can buy other items of ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
13 their needs with money. It serves as link between the buyer and the seller to complete their transactions.
2. STANDARD OF VALUE:
Money serves as a standard of value. The goods and services of modern world are priced and valued in terms of money. This has greatly helped in reducing the time and effort to make the transaction. Money is used to measure the economic values of goods and services. Money measures the values of every thing in the same way as kg is used to measure weight, km is used to measure distance.
3. STORE OF VALUE:
Money serves as a store of value for future purpose the people keep money for construction of houses, marriage of their children and other expenses. This function of money is useful because most of us do not want to spend our income immediately upon receiving it. They prefer to wait until they have the time or desire to spend it. Money deposited in the bank is a store of value for the account holder. Money is safe and earns interest when it is kept in banks.
4. STANDARD OF DEFERRED PAYMENTS:

Another function of money is that it is used as a mean of setting debts maturing in the future. In modern economy, most of the business is done on credit. Goods are bought and sold on the promise to pay money on a certain date in future. Debts are stated and paid in terms of money.
B. SECONDARY FUNCTIONS:
Following are 2ndry functions of money,
(I) MARKET MECHANISM:

Money is at the base of market mechanism. In other words market mechanism and the forces of demand and supply works only because of money. Money is the factor that leads to the meeting of demand and supply and determination of prices.
(II) INCOME AND CONSUMPTION:

All economic variable including income and money helps in determination, valuation and budgeting of expenses and revenue.
(III) MONEY IS AN INSTRUMENT OF MAKING LOANS:

People save money and deposit in banks. The banks advances these savings to businessman and industrialist money is thus the instrument of making loans. (Saving transferred into Investment).
(IV) MONEY AS A TOOL OF MONETARY MANAGEMENT:

Money is an important tool of monetary management if the money is effectively used; it helps in increasing output, and employment. Money is an important factor in determining the distribution of income and wealth among the members of society.
(V) INSTRUMENT OF ECONOMIC POLICY:

Money is an important instrument of economic policy of the government. In order to achieve growth reduce unemployment, and maintain regular expansion of economic activity, money is more powerful factor.
(VI) AIDS TO SPECIALIZATION, PRODUCTION, TRADE:

The use of money, has helped in removing the difficultly of barter. The market mechanism, production of commodities, specialization, expansion and diversion of trade etc have all been facilitated by the use of money.
(VII) LIQUIDITY TO INTERNATIONAL TRADE:

14 Money has provided the liquidity to international trade. The wealth can be transferred from one country to another. Payment can be made and receive on the other end of the world in no time.
(VIII) UNIT OF ACCOUNT:

Money serves as a unit of account. All business houses keep their books of accounts. The entries are made in terms of rupees. In our country rupee is a unit of account. All goods and services are purchased and sold in term of money (rupee) the transaction may be for credit or cash on delivery basic. The businessmen maintain their accounts for record purposes.
C. CONTINGENT FUNCTIONS:
Contingent functions are derived from the primary and secondary functions. According to KINLEY the contingent functions of money are as under:
(I) DISTRIBUTION OF NATIONAL INCOME:

Money helps to distribute national income among the factors of productions. A large scale production is possible through division of labour. It was not possible to measure and distribute the national income under the barter system. This is only possible in money economy. Money also helps in bringing justice in distribution.
(II) MONEY AS THE MOST LIQUID OF ALL ASSETS:

Money is the most liquid of all liquid assets in which wealth is held. Individuals and firms may hold wealth in infinitely varied forms. Property. Government securities, saving,. Bonds, time deposits, ordinary shares all are liquid form of wealth which can be converted into money and vice versa.
(III) BASIS OF CREDIT:

Money is the basis of credit system. Business transactions are either in cash or on credit. The commercial banks create credit on the basic of cash reserves. The larger the deposits the larger credit creation by the banks. In the absence of money the banks cannot create credit. More over people accept bills of exchange and cheques on the hope that such credit money will be converted into actual money on due date.
(IV)MEASURE OF MARGINAL PRODUCTIVITY:

The marginal productivity of each factor of production is measured with the help of money. Money helps in equalizing the marginal productivities of the various factors. The main aim of the producer is to maximize his profit. For this, be equalizes the marginal productivity of each factor with its prices. The price of each factor is nothing but the money he receives for his work.
(V) MAXIMUM SATISFACTION:

Money helps the consumer to spend his income on various things in such a way to get maximum satisfaction. The consumer can compare the benefits of goods with money.
(D) MISCELLANEOUS FUNCTIONS:

(I) BEARER OF OPTIONS:
The bearer of money has various options of its use. He can use his money for purchase consumer goods or production goods or holding it with banks. There is no restriction on its use.
(II) INDEX OF REPAYING CAPACITY:

The repaying capacity of a person can easily be judged with money. The lenders always advance money only up to repaying capacities of a customer or country.
(III) DETERMINATION OF SOLVENCY:

15 With the help of money, it is possible to determine the solvency of a person, whether the person is able to repay his present debt or not.
CRUX:
Simply, we may say that, money is a matter o-= four functions, a medium, a measure, a standard a store, but it must serve as medium of exchange and it must be accepted by all. Money has converted moneyless economy of primitive states of society into monetary social solving major problems of primitive society.
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Q5: WHAT IS PAPER MONEY? DESCRIBE ITS DIFFERENT FORMS? ALSO DISCUSS THE ADVANTAGE AND DISADVANTAGES OF PAPER MONEY? (1998, 2004)
ANSWER: PAPER MONEY INTERDICTION:
Paper money means the Currency notes issued by central bank of country. In the present age paper money has got a significant place in place of metallic money. Paper money is convenient to carry and easy to handle and store. It is the most advance form of money. It fulfills nearly all the characteristics of ideal money. It is believed that different attempts are made to introduce paper money i.e. in china during 9th century, Iran 13th century and finally paper money was originated by gold smith of England in early 17th century. Now in all developed and underdeveloped countries of world, inconvertible paper money is used as medium of exchange and standard of value.
DEFINITION:
PROF. HANSON: Paper money means the paper instrument such as bank notes, cheque bills and other forms which act as a currency.
According to F ,Perry:
Paper money is documents representing money such as bank notes, promissory notes, bills of exchange etc.
According to Prof. Greener:

Paper money means documents with a value stated on them but having no value in themselves.
KINDS OF PAPER MONEY

Paper money is classified into following kinds: I. Representative paper money II. Convertible paper money. III. Inconvertible paper money IV. Fiat paper money.
(I). REPRESENTATIVE PAPER MONEY:

Representative paper money is one which is fully backed by gold or metallic reserve. This means that state is in a position to convert all the notes into gold, if they are presented for conversion at the same time. The govt. keeps these reserves for the confidence of people. In USA before 1934 the notes were issued on this principle. The example of this is American gold and silver certificates.
(II) CONVERTIBLE PAPER MONEY:

It is such a form of money which can be converted in to gold and metallic reserves, but not all the notes issued by the state are fully backed by govt. no need to keep 100% gold reserves as compare to representative paper money.
(III) INCONVERTIBLE PAPER MONEY:

Inconvertible paper money cannot be exchanged or converted into gold. The gold or silver reserves are not kept by the monitory authority. The money is issued on the written promise of the government. This paper money can cause over issue of notes.
(IV). FIAT PAPER MONEY:

Fiat money is the form of inconvertible money having little or no value in it. Fiat means the order of government. Fiat money is accepted by the people for purchase or exchange of goods, due to government order. Paper money is fiat money. Whenever government cancels any notes, the holder will lose the whole value. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
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ADVANTAGES OF PAPER MONEY:

1. ECONOMICAL:
Paper money is normally much easy to issue the cost of currency as compared to its face value is very low. The central bank has not to keep gold or silver for issuing of the paper notes.
2. UNLIMITED LEGAL TENDER:

Paper currency is unlimited legal tender money i.e. any amount of debt can be paid in it. It can be used to discharge all kinds of business obligations and liabilities. No one refuse to accept in settlement of any debt.
3. LIGHT WEIGHT:
The paper money has less weight than metallic money. It is easy to handle than metallic money.
4. EASY COUNTING:
Paper money due to its elasticity is very useful for the government. It can be increased or decreased according to business requirements.
5. EASY COUNTING:
Paper money is much easier to count and piled up in bundles. It can be counted either manually or by specialized currency counting machine
6. CONVENIENCE:
The paper money is convenient to carry and transfer. It can be easily kept in pocket or wallets.
7. DIFFICULT TO COPY:
The design of paper currency is very intricate and special type of ink and paper is used hence it is difficult to copy it.
8. RECORD:
Paper currency is always numbered. Each one has a distinct number. So in case of robbery, bank fraud, the involved person can be traced out when they use the embezzled money.
9. EASILY RECOGNIZABLE:
The paper money is easily recognizable. There is no botheration of testing the genuineness of the money material.
10. CONVERTIBILITY:
Paper currency is easily convertible into other credit instruments such as draft, promissory note and bills etc.
11. USEFUL IN EMERGENCY:

The paper money can be used in emergency like was and floods. The government can meet the expenses by printing notes short period.
12. SAVING IN USE OF METAL:

Paper currency indirectly leads to the saving in the metallic reserves of the country. Due to the issuance of paper currency there is no need to issue coins in greater value.
13. HIGH VALUE IN SMALL BULK:

Paper money has the quality that it has high value in small quantity or bulk. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
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14. UNIFORMITY:
The paper money stays uniform. The apparent loss of colour or tearing of paper does not affect the value. It is uniform in colour, size, design, weight etc.
15. EASY PAYMENTS:

It is easier and less expensive to make payment in thousand of rupees through paper money.
16. ADVANTAGES TO BANK:

Paper money is of great advantage to banks they can keep cash reserves in this form.
DISADVANTAGES OF PAPER MONEY:

1. LIMITED ACCEPTANCE:
Demerit of paper money is that it has a limited acceptance. Its acceptance is limited with in the boundaries of home country. It is not legal tender money in other countries.
2. DANGER OF INFLATION:
The biggest demerit is that paper money is over issued then it brings inflation in the country which is harmful for purchasing power.
3. DEMONETIZATION:
The other demerit is that paper money is just a piece of paper. It has value only because of the back of government and if some time the govt. replaces old money with new one the old money has not value after certain period.
4. LACK OF DURABILITY:
Normally paper money has a short life than metallic money. There are chances of damages to paper. Fire may burn it. Paper money loses its good appearance and shape.
5. SMALL DENOMINATIONS:
Paper money is not suitable for small monetary denominations such as 1,2,5,10,25 and 50 paisa in this case metallic money gets preference over paper money.
6. BALANCE OF PAYMENTS:
More and more currency issue decreases its value. This cause inflation. Due to which prices of imports increases because they are to be paid out by in exchange of devalued local currency.
CONCLUSION
HAZRAT ALI (MAULA ALI) A.S KE AQWAAL ZARIN

Koi mumlikat Kufr ke saath to chal sakti hai magar naa insaafi ke saath nahi Main ne Allah Ko apne iraadon ke totne se pehchana hai Jab mere dua qabool hoti hai to mujhe khushi hoti hai ke Allah ne mere dua pori ki. Aur jab mere dua rad hojati hai to mujhe aur bhe ziada khushi hoti hai ke ye mere Allah ki marzi nahi.
Q6: DESCRIBE THE PRINCIPLES OF NOTE-ISSUE? ALSO EXPLAIN THE METHOD OF NOTE ISSUE WITH THEIR ADVANTAGES AND DISADVANTAGES: Answer: 2001, 2005 ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554

19 INTRODUCTION In all over the world, all most all the countries have fiat standard and fiat paper money. The management regulations and control of paper money is normally assigned to central bank of the country. The main advantage of this single authority control and management is that is that there is uniformity in quality, size and design of all paper currency notes.
PRINCIPLES OF NOTES ISSUE:

There are basically two principles of notes issue which are discussed in detail: 1: CURRENCY PRINCIPLE 2: BANKING PRINCIPLE 1. CURRENCY PRINCIPLE: Mr. Over stone was a member of the parliament of England. He presented the idea of currency principle. According to him notes are better than metallic money. The central bank keeps gold for full value of notes issued. It means every note issued is fully backed (100%) by gold reserves. The notes are convertible into gold on demand. In this principle there is no danger of over issue. This principle provides safety to the notes issued. But it is inelastic and unresponsive to meet the needs of trade and industry.
MERITS:
I. STABLE VALUE:
The value of money will be kept stable because over issue is not possible due to security of gold. Because value of gold is almost stable, so the value of paper money issued against gold also stable.
II. PUBLIC CONFIDENCE:

The currency principle provides greater confidence to the public. The notes issued are convertible into gold on demand.
III. CONTROL OF MONEY:

The currency principle is automatic the problem of control of money does not arise.
IV. FULL SAFETY:

This principle is 100% safe as there is 100% backing. So central bank is able to convert any number of notes.
DEMERITS:
I. INELASTIC: The currency principle is inelastic. The expansion and contraction of note issue is based upon the inflow and outflow of gold. Not fit for business need. II. EXPENSIVE: The currency principle demands that every note issued must be covered by value of gold. It is the game of richer countries and not for poor countries. III. IDLE GOLD RESERVES: The gold kept by the note issuing authority remains useless. The principle is not acceptable in real world.
2. BANKING PRINCIPLE
J.W. Gilbert was a leading banker in England. He says that only a percentage of notes in circulation should be covered by gold. It means there is no need to keep 100% gold or silver against note issued. The total money supply can expand or contract according to the needs of trade and industry. The notes over the needs will be returned to bank for encashment.
ADVANTAGES:
20
I. Elastic supply:
The principle gives an elastic supply of currency. As there is no restriction of 100% backing of gold so central bunk can issue currency in response to changes in economic and monetary situation.
II. ECONOMICAL SYSTEM:

It is economical as compared to currency principle because it needs less gold reserve for the issue of notes.
III. USAGE OF GOLD RESERVES:

This system allows the govt. or issuing authority to make effective and efficient usage of gold and metallic reserves, in other economic requirements.
IV. SUITABLE FOR MODERN ECONOMY:

The system is suitable for modern economy.
V. HELPFUL IN EMERGENCY:
The principle is helpful in emergency. It means in time of need such as war, flood, famine, govt. can print notes with out keeping 100% reserves.
DISADVANTAGES:
I. DANGER OF OVER ISSUE:
This system is unsafe because there is always a danger of over issue of currency notes.
II. ECONOMIC CRISIS:

This system doe not keep cent percent gold reserve. During economic crisis the convertibility of notes may be refused. But in normal circumstances people do not need demand convertibility of currency.
METHOD OF NOTE ISSUE:

There are three method of note issue.
1. FIXED FIDUCIARY SYSTEM. 2. PROPORTIONAL RESERVE SYSTEM. 3. MINIMUM RESERVE SYSTEM.
1. FIXED FIDUCIARY SYSTEM.

Under this method of note issue an upper limit of total quantity of note issue by central bank is fixed. The upper limit is called Fiduciary Limit. So central bank issues currency notes up to this limit with out keeping any gold reserves. Beyond this limit central bank has to keep hundred percent (100%) gold reserves against every note issue. England adopted this method in 1844. Infect, till the WWI (World war First) most countries were on this system.
ADVANTAGES:
(I) SAFETY:
This method ensures the safety of note issued. It acts as brake on the undue expansion of money supply.
(II) STABILITY OF VALUE:

This method helps maintaining monetary stability.
DISADVANTAGES:
(I) INELASTIC:
This system is relatively inelastic. As when there is need of more notes beyond the fiduciary limit every note should be fully backed by gold reserves.
(II) NOT SUITABLE FOR MODERN ECONOMY:

21 This system is suitable to those economies where money needs do not change very much and frequently as was the case before world war I.
(III). METAL DRAIN:

In this system an internal and external drain of gold will cause a decrease in money supply.
2. PROPORTIONAL RESERVE SYSTEM:

Under this method the central bank keeps a percentage in gold against the note issued. Generally 25-40% is kept in gold or silver before issue of notes. This method was first introduced in Germany in 1875 in USA it was adopted in 1914. This method was followed by the state bank of Pakistan till 1965.
ADVANTAGES:
(I) ELASTIC:
This system is more elastic than fixed fiduciary system because under it the central bank can issue a larger amount of notes.
(II) SAFE GUARD:

The reserve requirement in this method serve as a safe guard against excessive note issue.
DISADVANTAGES:
(I) UNABLE TO CONTROL PRICE:
This system does not help in controlling sharp fluctuations in prices which brings inflation in the economy.
(II) UN-ECONOMIC USE:

It is also criticized that a large amount of gold, silver and foreign exchange is locked up as a cover for note issue instead of being used for productive purposes.
(3) MINIMUM RESERVE SYSTEM:

According to this system the central bank is required to keep only a minimum amount of reserve in the from of gold and foreign exchange securities. The central bank can expand note issue in accordance with the volume of business activities with out backing of gold. This method is suitable for poor and developing countries. In Pakistan the level of currency backing by gold is fixed at Rs. 1200 million (1.2 billion rupees). Pakistan adopted this method in 1955. south Africa in 1930. > A sound systems of notes issue must have elasticity, economy, stability, simplicity and convertibility.
ADVANTAGES:
(I) ELASTIC:
The money supply in this system is very elastic.
(II) ECONOMICAL:
It is very economical because only a fixed amount of gold, silver, and foreign exchange has to be kept under this system.
DISADVANTAGE:
(I) DISADVANTAGE ISSUE OF CURRENCY:
There is always a danger of over issue of currency in this system.
22
METHOD IN PAKISTAN:
Till 1965, the note issue in Pakistan was base on proportional reserve system. In 1965, the SBP (Stat bank of Pakistan) adopted fixed minimum reserve system. The amount was fixed out 1.2 billion rupees. It can be changed by the government in consultation with the state bank. This method was the safety as well as the elasticity.
CONCLUSION
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18 GOLDEN WORDS OF Hazrat ALI(A.S)

3 chizon ka Ahtraam kro: Ustaad Waaldain Buzurg 3 KO SATH RAKHO: Sachaai Emaan Naiki 3 CHIZON KO YAAD RAKHO: Ahsaan Nasehat Maut 3 CHIZON K LEY LARO: Watan Izat Haq 3 CHIZON PE QAABU RAKHO: Zubaan Ghussa Nafs 3 CHIZON S BACHO: Buraai Chughli Hasad
Q7: WHAT IS INFLATION? DISCUSS ITS KINDS. WHAT ARE THE CAUSES OF INFLATION? SUGGEST MEASURE TO CONTROL INFLATION. (1988, 1999, 2000, 2002, 2003(S), 2004, 2006)
ANSWER:
Inflation means a situation where the general price level increases over a period of time. Inflation is term which is known to most of us. It is criticized by many of us. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
23 It is feared by all of us. But it is not understood by majority of us .
DEFINITIONS:
ACCORDING TO R.P. KENT:
Inflation is nothing more than a sharp upward movement in the price level.
ACCORDING TO CROWTHER:
In the state of inflation the prices are rising c.e. the value of money is falling.
ACCORDING TO ACKLEY:
A persistent and appreciable rise in general price level.
ACCORDING TO COULBORN:
Too much money chasing too few goods.
TYPE OF INFLATION:
A. ON THE BASIS OF RATE OF INFLATION:
(I) CREEPING INFLATION:
It is a situation where the increase. In the price level is very slow. i.e. 2% P.a. (Japan, USA, Singapore)
(II) WALKING INFLATION: In this situation increase in price level is more than
creeping inflation i.e. 5% P.a.
(III) TROTTING INFLATION: In this situation prices rise more than they are in
creeping inflation i.e. 5-20% (Pakistan, Greece, and Italy).
(IV) GALLOPING OR HYPER INFLATION:

It is situation where general price level rises rapidly with in a short period of time.
B. ON THE BASIS OF DEGREE OF CONTROL:

(I) OPEN INFLATION:
It is a situation when the inflation gets out of control and cannot be controlled by government price control or similar measures.
(II) SUPPRESSED INFLATION:

It is a situation when the inflation can be controlled by the government price control policy.
C. ON THE BASIC OF CAUSES:

(I) DEMAND PULL INFLATION:
Inflation that occurs due to high demand in the economy called demand pull inflation. The higher consumption. Causes aggregate demand to grow, wile aggregate supply lack behind. In this situation. AD>AS (which tends the prices level increase)
(II) COST PUCH INFLATION:

It is the inflation that is result of higher cost of production. Production cost consists of direct material, direct labor and factory overhead. In this situation the supply decreases due to cost increase.
(III) BUDGETARY INFLATION:

When the government covers the budget deficit by borrowing then there will be budgetary inflation.
(IV) MONETARY INFLATION:

When there is an expansion in the currency notes in circulation then there will be monetary inflation. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
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(V) INCOME INFLATION:

The inflation that occurs form high income level. Income may increase due to change in salary or foreign remittance.
(VI) PROFIT INFLATION:

Profit inflation is the result of the greed of businessmen. It usually occur in such economy which are dominated by monopolies.
CAUSES OF INFLATION.
I. INCREASE IN SUPPLY OF MONEY:
The rapid increase in money supply is the major cause of inflation. It increases the demand for gods and services. And due to more demand, the price level starts rising. He who not economizes will have been struggle.
2. DEFICIT FINANCING:
When the govt. expenditures exceed then revenue in a budget it is called budget deficit. In order to fill up this gap the government prints more notes. This process again increases the supply of money in the country and price level. 1952-1.2 billion but in 1998- 447 billion.
3. SLOWER GROWTH RATE:

The growth rate of the country is very slow. i.e the production of goods and services is not increasing. This situation brings the problem of shortage which pushes up the price level.
4. FOREIGN REMITTANCE:
The people who work abroad they send money to their relatives and families. Due to increase in the income of the people, they increase their demand and hence the price level goes up. 195248.7 million 19981500 million. Income demand for goods P
5. POPULATION EXPLOSION:
The increase in population, increases the demand for goods and services. Due to this reason the price level shows up ward trend.
6. BLACK MONEY:
The black money earned through smuggling, tax evasion etc. increase the demand for Luxurious goods. So this in factor of inflation. Black money is estimated about 25% of GNP.
7. IMPORTED INFLATION:
As we import a lot of goods from the other countries. If the price of the imported goods is high, it further increases the price level in the country.
8. DEVALUATION OF RUPEE:
Pakistan has devalued its currency in order to correct the BOP deficit. Yet at has not achieved its goods. Due to devaluation, the import become expensive which increases the price level in the country.
9. SICK INDUSTRIAL UNITS:

There are a lot of industrial units which are closed due to shortage of fund. For this reason the output of industry is decreasing.
10. INCREASE IN WAGES:

If there is an increase in wages. (due to trade union) the cost of production goes up. In order to compensate. This additional cost, the producers increase the price level. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
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11. CONSUMPTION HASITS:

Pakistan living in urban and rural areas are mostly spend thrift. They are proud of spending money on the goods which are used by people in advanced countries of the world. The increased expenditure on clothes, foods, cosmetics etc. have added much to the inflationary pressure in the country.
12. BURDEN OF INDIRECT TAXES E.G SALES TAX:

If the govt. imposes more taxes on goods. The producer normally transfer the burden to the consumers the increase in the selling prices of goods push the price level upward.
13. NATURAL CALAMITIES:

The natural calamites like flood, famine and earthquake bring inflation. Due to natural calamities the production goes down and demand remains the same. There is decrease in supply of goods and services. The decrease in supply of goods and services means prices will go up.
14. GOODS SHORTAGE:

The shortage of goods is a cause of inflation. The black marketing, hoarding, more exports and less imports increase. In population and strikes can create shortage of goods. The result is that there is increase in prices due to excess demand.
15. LAW OF RETURNS:

The law of decreasing return is applicable in agriculture and industry. The increase in cost of factors may not increase out put at the same time. The increase in cost induces the business man to raise the price level.
MEASURE TO CONTROL INFLATION:

1. TIGHT MONETARY POLICY:
The central bank has now given full control for monetary stability and financial soundness in the economy by adopting tight monetary policy central bank can control over credit and monetary expansion and rise in average level of prices, in the country.
2. CUTS IN ADMINISTRATIVE EXPENSES:

The govt. should cut down its non development expenditure in order to avoid budget deficit.
3. CONCESSION IN TAXES:
The government has lowered the tax rates of income tax excise duty, custom tariffs. The tax reform introduce will control inflationary pressure in the economy.
4. COMPULSORY SAVING:
The government may start Schemes of compulsory savings to take from each person some portion of his earnings. The purpose is to decreasing purchasing power
5. CREDIT CONTROL:
The central bank can control credit in order to control inflation. Money is needed to do business. The limit of credit is fixed by govt. from time to time. Monetary authority should act according to the credit ceiling approved by the state.
6. CONTROL ON IMPORTS:
The govt. must reduce its imports of luxury goods. The govt. must adopt the policy of import substitution and save its foreign exchange.
7. PRICE STABILITY:
Price committee must be formulated to control the price level. The weekend markets must be introduced in order to stabilize the price level. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
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8. OVER VALUATION:
The govt. can overvalue its money in terms of currencies of other countries. The holder of overvalued money can buy more goods and services than before. V.m p
9. INCREASE IN PRODUCTION:
The increase in production of goods is helpful to increase the supply in the market. The increased production can regulate the price level.
10. CONTROL OF INVESTMENT:

The govt. can decide about the areas of investment. The area of low investment must be pointed out for investment.
11. POLITICAL STABILITY:

By political stability in the country can help to control inflation.
CONCLUSION:
The causes of inflation may operate singly or combination of one another. Inflation is bad for economy and measure should be taken to stop it. No country can be on the way to progress unless inflation is under control.
ALI MOLA A.S
ONE GRAIN OF SAND AT A TIME. MEANS: TAKE ONE TARGET AT A TIME.
Q 8: WHAT IS DEFLATION? WHAT ARE ITS CAUSES AND REMEDIES? 2005-2006 ANSWER:
DEFINITIONS: ACCORDING TO G. THOMAS:
Deflation is a reduction in the general price level due to a decrease in the economic activity of a nation.
ACCORDING TO JAMES PHILLIPS:

Deflation is a period during which level of prices declines and the value of money rises.
ACCORDING TO WILLIAM J. BAUMOL:

27 Deflation refers to a sustained decrease in the general price level. it is clear that deflation reduces the general price level that is due to decrease in output and employment. It is a set back to the rate of economic growth in the country.
CAUSES OF DEFLATION:
1. EXCESS PRODUCTION:
The production of goods and services in excess of its demand is a cause of deflation. The price level comes down. The producers may not be able to continue their output at present level.
2. HIGH TAXES:
A high rate of income taxes means the low purchasing power of general public. The decrease in income due to taxes forces the people to buy less than before. High tax forces the people to lower their demand rate.
3. LESS DEMAND:
The decrease in demand is cause of deflation. The demand may decrease due to decrease in income, wages and population. The excess supply and less demand brings deflation in the economy.
4. POOR STORAGE FACILITY:

The businessmen may have poor storage facilities. The perishable goods can not be kept for long period of time. The sellers have no choice but to sells goods at any rate. The result is that the price level comes down.
5. SURPLUS BUDGET:
The surplus budget is a cause of Deflation. The govt. revenue is excess as compare to expenditure. The supply of money reduced in the market. The income of peoples comes down; demand for goods is lowered leads deflation.
6. EXCESS SAVING:
Excess saving is a cause of deflation. The banks can start saving scheme to collect deposits from general public. When saving exceeds the desirable limit there is deflation.
7. LOWER PROFIT:
The low rate of profit is a cause of deflation. The businesspersons cut their profits to retain the market. The lower profits induce the people to cut the activates so there is deflation.
8. HIGH RESERVE RATIO.

The central bank has powers to regulate the reserve ratio. When reserve ratio increase the banks are bound to keep cash with them. The lending capacity is lowered in order to lower the money supply in the market.
9. LESS MONEY SUPPLY:

The central bank can issue money according to the requirement of business activities. The business working is reduced due to fess money supply.
10. INCREASING COST:

An increase in the cost of goods may be due to increasing cost of factors of production. The consumer fails to buy costly goods due to high cost.
11. POPULATION DECREASE:

28 The decrease in population can lower the demand for goods and services. All marketing activities are useless when there is no demand. The population is a source of demand for purchase of goods.
12. CREDIT POLICY:

The central bank may ask the schedule banks to contract credit. The contraction of credit is made by commercial banks. The contraction of money beyond certain limits lowers the business activities. Definition started. .
13. HEAVY IMPORTS:

Imposts in large quantity increase supply of goods in country. The excess supply puts the pressure on businessmen. The rate of profit comes down. thus excess imports are the reason for lowering the business work.
CONTROL OF DEFLATION:
1. CURRENCY EXPANSION:
The central bank can issue new notes to increase the supply of currency in the country. The demand increases which raises the level of production. In this way deflation is driven out of the economy.
2. CREDIT EXPANSION:
The central bank can ask commercial banks to expand the volume of credit in the country. The rate of interest is lowered. The business activities goes up and deflation comes to an end.
3. LOW BANK RATE:

Deflation may be controlled by lowering the bank rate. The central bank lowers the bank rate to provide more funds to commercial banks the lower bank rate means that there is less money supply in the economy.
4. CONSUMER CREDIT:
The loans are provided to consumers for the purchase of household assets. The number of installments can be increased to provide relief to the borrowers. In this way more money remains in the business.
5. TAX DECREASE:
Deflation can be controlled through tax decrease. The rate of tax may be seduced so that income of people may increase. The amount saved can be used for purchase of goods and services. The demand for goods goes up.
6. Public debt repayment:

The government can return the debt in order to increase the supply of money. The amount so saved can e used for purchase of goods and services. The demand for goods goes up.
7. PUBLIC WORKS:
The govt. can start public works programmer to eliminate deflation the amount is transferred from govt to general public. The demand for goods increases and there is increase in production.
8. NEW INVESTMENT:
The investment can be made to set up new factories and mills. The production and employment increases due to new investment.
9. PRODUCTION CONTROL:
The control over production can help to control deflation. The producers can fix production quota for each producer. The control over supply is necessary to maintain price level.
10. INCREASE IN EXPORTS:

29 The exporters can play their part for selling extra out put in the overseas market. The businessmen can reduce the worries of deflation.
11. FIXED PRICE:

The prices of goods and services can be fixed by the state to control deflation. A price commission can be set up to supervise the price level from period to period.
12. WAGES INCREASE:

The wages of workers can be increased to control the deflation. The govt. fixes the minimum wage rate. The increased wages raise the income level of worker. They go to market for purchase of goods and services.
CONCLUSION
Q9: DIFFERENCE BETWEEN INFLATION AND DEFLATION? ANSWER: DEFINATION OF INFALATION AND DEFALATION
INFLATION DEFLATION
1. PRICES: 2. output:
The general price level goes up due to inflation in The general price level comes down due to deflation in the economy. the economy. The out put of goods and services increases The out put of goods services decrease due to due to inflation in a free market economic system deflation. In a free market economic system.
3. EMPLOYMENT:
The rate of employment increases due to ever The rate of employment decreases due to decreasing activities in the country. increasing a activities in the country. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
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4. BUSINESS:
The business earns higher profits due to rising The business earning is disturbed due to prices. The production factors are paid at old deflation. The prices come down. the unsold rates but goods are sold at current market prices. stock become a problem for the business person during deflation.
5. IN VESTMENT:
The shareholders feel comfort due to The shareholders feel sorry due to deflation. The inflation. The share prices and dividend increases investment is unable to generate reasonable income for them due to low activities. due to expanding business activities
6. INCOME:
Inflation does not reduce the national income Deflation reduces national income of the country. of the country. The business work do not shrink The low business activities shrink the size of income. the size of income.
7. AGRICULTURE:
Inflation is a friend of agriculture. The prices Deflation is an enemy of agriculture. The prices of goods and services go up. The farmers are of goods and services comes down. the farmers feel burden due to it. happy due to it.
8. SAVING:
The saving is looted by inflation due to The savers are encouraged due to deflation. They decreasing value of money. The savers are can buy more goods with their saving due to decreasing prices. discouraged due to increasing prices.
9. HOARDING: 10. QUALITY:
The boarding of goods is profitable during The hoarding of goods becomes unprofitable due to decreasing prices. inflation. The Quality of output is adversely affected The quality of output is maintained during by inflation. The producers pay attention to deflation. The producers can attract customers due to better quality of goods. quantity rather then quality.
11. EXPORTS:
The demand for goods in overseas markets The exports become necessary during deflation. come down due to rising prices. The foreign The goods are cheaper for overseas customers the demand for exports increases due to decreasing customers can buy goods form elsewhere. prices.
12. PAYMENTS: 13. control:
The balance of payments position become The balance of payments position can be improved by exporting goods abroad. unfavorable due to inflation. It is easy to control inflation the governments It is difficult to control deflation. The government can fix the prices of goods and services for some has to do a lot of work through fiscal and monetary measures. time.
14. TIME:
The time of deflation is longer. It takes a long The time period of inflation is short. It is easy to fall. The government can take measure to time to go up. The government can regulate the activities through various measure. regulate the activities.
15. speculation:
Inflation helps the speculation activities. The Deflation can not help speculators to earn profits. businessmen put their energies to make quick Artificial demand can not attract investor to profits. They do not take care of genuine indulge in non-productive activities. productive work.
16. GOVERNMENT:
The government is in trouble due to The govt. revenue can be used to complete the inflation. The revenue raised loses its value. The projects. But deflation is also a burcine on the on going projects remain incomplete due to high economy in the years to come. prices.
31
17. estate:
The real estate owner lose their purchasing The real estate owners feel happy as they receive power due to high prices. They collect rent at old rent at old rates but now prices are low so they can buy more goods with the same income. rates according to the agreements already made.
Father of Nation
Q10: CRITICALLY EXPLAIN QUANTITY THEORY OF MONEY? OR Q: HOW TO VALUE OF MONEY IS DETERMINED?
ANSWER: CLASSICAL, APPROACH. INTRODUCTION:
The quantity theory of money was presented by jean Bodin in 1568 for the first time. Afterward John Law, David Hume and J.S. Mill have also worked on this theory. But it was popularized by professor irving fisher with the help of an equation in his book purchasing power of money in 1911. By value of money is meant the purchasing power of money over goods and services with in a country. What a monetary unit (e.g. Rupee) can buy represents the value of money of the rupee. The relation between value of money and price level is an ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
FISHER,
TRANSACTION
BALANCE
32 inverse one, and relation between quantity of money and price level is direct one. When price (P) rises, the value of money decreases .and vice versa. The quantity theory of money states that the quantity of money is the main determinant of the price level or value of money.
DEFINITION:
ACCORDING TO IRVING FISHER:
Other things remaining unchanged, as the quantity of money in circulation increases, the price level also increases in direct proportion and value of money decreases and vice versa
ACCORDING TO PROF TAUSSING:

Other things remaining the same, double the quantity of money, price level will be twice high as before; and the value of money one half. Halve the quantity of money, prices will be one half of what they were before; and the value of money doubles.
ASSUMPTIONS OF THEORY:
The quantity is based on some assumptions:
(I). FULL EMPLOYMENT:

The theory is based on the assumption of full employment in the economy.
(II). PRICE LEVEL IS A PASSIVE FACTOR:

The theory assumes that price level is affected by other factors of equation.
(III). CONSTANT VELOCITY OF MONEY:

In fishers equation, the velocity of circulation of money (v) and bank money (VI) are assumed to be constant.
(VI) CONSTANT VOLUME OF TRADE (T)

The total volume of transaction remains unaffected by changes in M and M1.
(V) BARTER TRANSACTION:

The theory is applicable to well established money economy. It can not be applied to money less or barter economy.
(VI) CONSTANT RELATION BETWEEN M & M1.

In fishers equation, it is assumed a proportional relationship between currency money (M) and bank money (M1).
EQUATION OF EXCHANGE:
Prof Irving fishers expressed the relationship between the quantity of money and its value of money in the form of equation. PT= MV+M1V 1 PT= total demand for money. From the equation: P= General price level. M= Quantity of legal tender money. M1= quantity of bank/ credit money. V= velocity of circulation of legal tender money. V1= velocity of circulation of bank money. T= total transaction. The above equation shows that a proportional change in quantity of money brings of money brings proportional change in prices.
NUMERICAL EXAMPLE:
Let M=100, M1=200, V=3, V1=3 T=90. Putting the values in the equation of exchange. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
33 P= (100x3) + (200x3) P = 300+600 =10 In order to prove that variation in money supply produces proportional change in price, we now double the supply of money by keeping other variables Constant: P= (200x3) + (400x3) = 600+1200 = 1800 =20 90 90 90 The general price level has doubled by doubling the supply of money. Now we half the supply of money and keeping V, V1 and T constant. P2= (50x3) + (100x3) = 150+300 = 450 =5 90 90 90 The price is now one half what it was before and value of money is double now.
GRAPHICAL INTERPRETATION OF FISHERS APPROACH:

y p1 Po P2
0
ms2
mso A
ms1
B
C 50 100 200
Fig (a) shows, the direct relationship between the supply of money and general price level. When total money supply MSo and price is Po. When we increase the supply of money from Mco to MS1 price also increases from Po to P1 and in the same way when we decrease the supply of money from MSo to MS2, the price also comes down from Po to P2. Fig (b) shows the inverse relationship between the supply of money and price level. As the supply of money is MSo the value of money is VMo. By increasing the supply of money Ms. From MSo to MS1, value of money decrease from VMo to VMI and vice versa.
Quantity of Money Fig (A)
Quantity of money.
CRITICISM:
Quantity theory has been criticized on the following grounds:
(I) CIRCULATION OF MONEY:

It is very difficult to measure the circulation of the legal money and credit money, therefore, velocity of money cannot be measured in a country.
(II). DYNAMIC TREATMENT:

Another objection is that this theory does not treat the problem dynamically. It has failed to explain the process through which the change in Qty of money affects price level.
(III) FULL EMPLOYMENT:

The theory assumes that there is full employment in the economy, but it is not so in real life.
(IV) PROPORTIONAL CHANGE:

The change in price level may not be proportional to the change in the quantity of money. If there is increase in the quantity of money by 20% then there will be increase in price level of a country more or less than 20% so the proportional change may not be possible. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
34
(V) TRADE CYCLE:

During great depression of 1930, many countries tried to rise general price level by increasing the supply of money. But it was not worth. So it is proved this theory does not take into account the phases of trade cycle.
(VI) STATIC THEORY:

It is a static theory. The changing world and ups and downs in the economy cannot be explained under it.
(VII) USELESS ASSUMPTIONS:

This theory is criticized because mathematical equation is based on useless assumptions.
(VIII) IGNORES THE RATE OF INTEREST:

Another serious defect in that, this theory does not take into consideration the influence the rate of interest of cash balance.
(IX) MEDIUM OF EXCHANGE:

This theory considers only the medium of exchange function where as store of value function is ignored.
(X) IGNORING THE REAL FACTORS:

This theory states that price level is the function of money supply alone. The price level is influenced by many other factors as well, like saving, income and expenditure and investments all are ignored.
CONCLUSION:
Although the quantity theory in its original and crude form has been rejected. Yet all modern theories accept that change in the quantity of money is one of the factors affecting price level. -----------------------------------------------------------------------------------------------------------Come forward as servants of ISLAM, organize the people economically, socially, educationally and politically and I am sure that you will be a power that will be accepted by everybody.
By Father of Nation
35
Q11: DEFINE THE TERM TRADE CYCLE. EXPLAIN ITS CHARACTERISTICS DESCRIBE THE DIFFERENT PHASES OF THE TRADE CYCLE: (2002), 2003(S).
ANSWER:
MEANING:
The fluctuations (ups & down) in business activities which originates different phases of trade (business) cycle. So the periodic fluctuations in economic activities of a country is called trade cycle.
DEFINITION:
According to Hanson, business cycle is the fluctuations in the following variables: (1) Employment (2) Output (3) Prices.
IN THE WORDS OF KEYNES.

A trade cycle is composed of period of good trade characterised by rising prices and low level of unemployment of the other hand a period of bad trade characterised by falling prices and high rate of unemployment.
ACCORDING TO J.H. ESTAY:

There are four distinct phases of business cycle namely contraction, revival, expansion and recession. Some economist call them depression, recovery, boom and recession.
EXPLANATION:
The fluctuations in the economy may be positive or negative. If the change in fluctuations is called period of Good Trade of BOOM. On the other hand if the changes in characterized by low price and high unemployment is called period of bad trade or depression. If we see the history of the world, we see that sometimes there is a period of goods trade and some times a period of bad trade.
CHARACTERISTICS/ FEATURE OF TRADE CYCLE:

1. FOUR PHASES:
A trade cycle may have four phases i.e. boom, recession, depression and recovery.
2. RECURRING CHANGE:
There is a recurring change in the phases.
3. RHYTHMIC CHANGE:
The business activities are rhythmic and balanced.
4. SHOW RECOVERY:
The movement of business activity is slow from depression to boom.
5. RAPID DECLINE:
There is rapid decline of business activity from boom to depression.
6. EMPLOYMENT LEVEL:
The employment level falls with the contraction of business activity and rises with its expansion.
7. TIME PERIOD:
The time period between the two successive booms is one to two years but it may increase from 8-10 years or even up to 50 years.
8. WORLD WIDE:
36 A trade cycle is not the problem of one country. It is world wide in nature.
9. PRICE MOVEMENT:
The prices move downward with the reduction of activity and upward with the expansion of activity.
10. CAPITAL GOODS:

The capital goods industries are the first to be depressed and first to recover.
IMPORTANT:
According to Hanson, trade cycle may be a period of over 80 years. Trade cycle thus in short run fluctuation in economic activity. PHASES OF TRADE (BUSINESS) CYCLE: There are four phases of trade cycle written below:
TRADE CYCLE
Depression
Recovery
Boom
Recession
Now we discuss it in detail: Figure:
ECONOMIC ACTIVITY
PERIOD DEPRESSION: /SLUMP/CONTRACTION:

Depression means a period of bad trade: This stage (phase) is characterized by: 1. Low productivity: 2. Low national income. 3. Low per capita income. 4. Fall in aggregate demand. 5. Low prices. 6. High purchasing power of money. 7. Low rate of investment. 8. Contraction in bank credit. 9. Low rate of interest. 10. High rate of unemployment. Symbolically we can write: y, , P D (PCI) EMPL
RECOVERY OR REVIVAL:
37 After the depression has lasted for some time a ray of hoe appears in the business horizon. Businessmen start thinking about their businesses. They decide to repair their industrial units. And alert the factors of production. This phase is characterized by: 1. 2. 3. 4. 5. 6. 7. 8. 9. Optimistic approach of businessmen. Investment in consumer and produce goods starts. Profit margin increases. Per capital income is increasing. An upward trend in national income. Prices show upward trend. Bank starts advancing loans. Employment rate is increasing. Propensity to consume is increasing.
BOOM (PEAK, EXPANSION)

A period of good trade is called boom this is the end of recovery period. Here economic activities reach up at the maximum possible level and optimism spreads every where in the economy. This phase is characterized by: 1. 2. 3. 4. 5. 1. 2. 3. 4. 5. 6. 7. New investment in sectors of economy. Revival in all industries. Highest most per capital income. Very high level of propensity to consume. High level of national income. High prices. Low purchasing power of money. High profit margin. High rate of employment. Prosperity prevails very where. Credit expansion by bank increase. Aggregate demand increases.
RECESSION:
In this period economy moves from boom to depression. The periods of boom does not last forever. In order to increase production in boom, less efficient factors of production are employed at high cost. Due to increased demand, the production falls short which result in increase in prices. The main characteristics of recession are as under: 1. Pessimistic approach of businessmen. 2. Aggregate demand starts decreasing. 3. Per capital income is falling. 4. National income also starts falling. 5. Over-production tasks place. 6. Investment starts decreasing. 7. Prices also come down. 8. The profit margin decreases. 9. Unemployment creates in the economy. 10. Banks feels hesitation in advancing loans.
CONCLUSION:
In a nutshell, trade cycle means the whole course of business activities which passes through all phases of prosperity and adversity. Business cycle generally refers to those fluctuations which take place in the business enterprise and occurs with a fair degree of regularity. ------------------------------------------------------------------------------------------------------------
38
Q12: WHAT ARE CAUSES AND REMEDIES OF TRADE CYCLE?

ANSWER: DEFINITION: ACCORDING TO A.H. HANSEN:
the business cycle is a fluctuation in employment, output and prices.
CAUSES OF IRADE CYCLE:

A: EXTERNAL CAUSES:
The external causes are those which find the root of the expansion and contraction in economic activity outside the economic system are as under:
1. WARS:
During war, the resources are used for the production of armaments. As such the output of capital and consumer goods greatly falls. The fall in output, income, profit etc, causes contraction in economic activity.
2. POST WAR PERIOD:

In the post war era, the levels of consumption, spending and investment begin to increase. The construction of ware houses, bidges, roads is also started by the govt. as well as the households. The level of effective demand increases pushing up the economic variables, output income and employment.
3. REVOLUTIONS:
The revolutions disturb the economic development. The economy leads towards depression any disturbance slows down the rate of new investment. The foreign investors hesitate to bring their capital into the country. If there is boom it works for depression.
4. POPULATION:
The population increases aggregate demand. The investment, employment and income go up. There is tendency towards boom. High rate of inflation will make the bankers nervous. They will take back loan due to which investment level will shrink.
5. SCIENTIFIC BREAKTHROUGH:
The discovery of new material, machines, and methods helps to produce more at low cost. The invention leads to high level of competition in the economy. There is big investment in the economy. There is tendency towards boom.
6. INNOVATIONS:
Innovation includes improvement in existing ideas and process. Many new business houses are established and boom takes place. When the products of the innovation reach the market the old products lose the market.
7. GOVERNMENT POLICES:
Govt. policies at home and abroad bring changes in total spending and hence in the level of economic activity.
8. SURPLUS EXPORTS AND FOREIGN AID:

Surplus exports and foreign aid raise the level of consumption and investment spending. The output, income, and employment are boosted.
9. WEATHER:
The good and bad weather affect the production in agriculture sector. When weather conditions are bad there is low production in agriculture. The result is that there is low production in industrial sector. The demand Is the same but output is low so price level goes up.
39
B. INTERNAL FACTORS:
1. UNDER CONSUMPTION:
There is too much saving during boom which reduces the level of consumption. The prices goes on increasing but wages lag behind. The profit of rich increase at higher rates but income of the poor does not increase as compared to price level. The result is that demand for consumption goods decrease.
2. INVENTORIES:
Trade cycle occurs due to unsold stock. There is excess supply of goods and services but people are unable to buy goods of their own choice. The unsold stock results in depression.
3. IMPORTS:
The imports increases the supply of goods in the economy. If the total stock of goods in more than its demand there is depression.
4. MONEY SUPPLY:
The changes in money and credit supply have a major effect upon the level of economic activity . an expansion in money and credit supply stimulates economy activity and its contraction brings down economic variables over period of time.
5. OVER INVESTMENT:
Excessive investment in capital goods industries brings upswing and a fall in investment brings downswing in economic activity.
6. MARGINAL EFFICIENCY OF CAPITAL:

Keynes claims that fluctuations in marginal efficiency of capital is the main cause of trade cycles. The expansionary phase of the trade cycle commence when the marginal efficiency of capital is higher than the rate of interest and vice versa (contraction phase).
7. AGGREGATE MARKET::
The business cycle can also be caused by changes in aggregate demand and change in aggregate supply. The contraction phase of the business cycle is caused by decline in aggregate demand and expansion phase by increase in aggregate demand.
REMEDIES TO CONTROL CYCLE:

A: MONETARY POLICY:
1. BANK RATE:
The central bank can increase bank rate when there is prosperity. The bank rate can be reduced in case of depression. The borrowing and lending is made according to bank rate. The commercial banks help the central bank to control trade cycle.
2. MARKET OPERATION:
The central bank can buy and sell bills and government securities. When money supply is less as compared to its demand the central bank buy the securities and vice versa. The purpose is the regulate supply.
3. RESERVE RATIO:
The central bank can increase or decrease the reserve ratio. The rate of reserve is decreased during depression, and increase in expansion.
4. SELECTIVE CONTROL:
The central bank can provide credit to one sector at low rates and at high rate for another sector. The central bank can check the loans granted by commercial banks, to control trade cycle.
B. FISCAL POLICY:
40
(1) PUBLIC WORK:

The government can start public works programs during depression and stop construction of various project during good trade period. Public works programs help to control trade cycle.
(2) TAXES:
The state can increase or decrease rates of taxes. The government can raise more taxes for contraction of money supply. The tax rates may be lowered to provide excess money supply.
(3) BUDGET:
The government can prepare surplus budget during boom period. There is need of deficit budget during deflation. The government can use budge teary measure alone with other methods to control trade cycle.
4. PUBLIC DEBT:
The government must take loans during depression to meet various needs. In case of boom the debt should be repaid. The government can overcome the difficulties of low business activity through public debt.
5. IMPORTS:
The government can allow import of goods, which are needed by public. during depression there is no need to import the items, but when there is boom period the supply of goods can be maintained through imports.
INTERNATIONAL MEASURES:
1. PRODUCTION CONTROL:
The production control measures can be made at international level. The goods produced in excess of demand create problems. The producers can fix quota for production at world level. In this way trade cycle can be controlled.
2. BUFFER STOCK:
Buffer stock can be kept in warehouses. When production is low the suppliers can meet the demand from such stock. In case of excess production they hold surplus stock. Control over supply means control over trade cycle.
3. INVESTMENT CONTROL;
The government may allow investment in an area where there is low investment. Excess investment in any sector may lead towards depression. There is need for balanced investment in all economic sectors.
CONCLUSION
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By Father of Nation QUIED E AZAM MUHAMMAD ALI JINNAH RA With faith, discipline and selfless devotion to duty, there is nothing worthwhile that you cannot achieve.
41
Q13: WHAT IS AN INDEX NUMBER? DISCUSS ITS CONSTRUCTION, ADVANTAGES, LIMITATION AS WELL. ALSO EXPLAIN AND CONSTRUCT THE SIMPLE INDEX NUMBER AND WEIGHTED INDEX NUMBER? 2003
ANSWER:
A large number of commodities are offered for sale in every country of the world. The prices of commodities sometimes fall or rise. So in order to find the relative changes in prices level we use index number.
DEFINITION:
D. GREENWALD: index number is a measure of relative changes occurring in a series
of values compared with base year.
ACCORDING TO A. HABER:
an index number is a ratio, usually expressed as a percentage of prices, quantities, or values that relates a given period with a comparison period
STEPS FOR CONSTRUCTION OF INDEX NUMBER:

(I) SELECTION OF BASE YEAR: (PERIOD):
One year is selected in the past as base. The index number for the base in 100. changes in prices are expressed in percentage (%) from the base year.
(II) SELECTION OF COMMODITIES:

A number of commodities are selected. The class of consumers must be decided to select the goods. The selection depends on the purpose for which the index number is prepared.
(III) PRICE QUOTATIONS:

The price quotations are obtained form selected markets only, then the price of each commodity is noted.
(IV) WEIGHTING:
Each commodity is a weight. The weight shows the impotence, people give to different commodities.
(V) PERCENTAGES CHANGES:

The percentage changes in prices are calculated.
VI. CALCULATION OF AVERAGE:

the average of individual Indices ( ) is calculated. The individual indices are added up and divided by no of weights. This average figure is called index number.
APPROPRIATE FORMULA:
CONSTRUCTION OF SIMPLE AND WEIGHTED INDEX NO:
According to simple index number all items are equally important for the people. But in practical life it is not so. The commodities should be given due importance according to their consumption.
SIMPLE INDEX NUMBER:

Commodity Price in 1990 (Po) Base 1990=100 Price in 2000 (P1) Relative (R) price
A 20/ Kg B 5/ Kg C 15 Kg D 40 Kg E 200/ Quintle N=5 Formula: R= price in current year
100 100 100 100 100 P1
Rs. 25 10 30 50 450 x 100
125 200 200 125 225 R= 875
42 Price in base period x 100 or Po 1. 25 x 100= 125 20 2. 10 x 100 = 200 5 3. 30 x 100 = 200 15 4. 50 x 100 = 125 40 5. 450 x 100 = 2250 200 price index in 200 = R = 875 = 175 N 5 As the index is 175 which means that the price level rose 75% in 2000 over 1990.
WEIGHTED INDEX NUMBER:

Now we assign high weights to commodities of greater importance to consumers and lesser weights to commodities of lesser importance.
Commodity Weight (w) Prices in Base year Prices in Price 1990 (Po) 1990= 100 2000 (P1) relative (R) WxR
A B C D E
5 4 2 3 10 w=24
20 5 15 40 200
100 100 100 100 100
25 10 30 50 450
125 200 200 125 225
625 800 400 375 2250 WR=4450
The weighted index in 200 = WR = 4450 = 181.2 W 24 The weighted price index number is more accurate than the simple index number. the index 181.2 shows that there is 81.2% rise in prices in 2000 as compared to 1990.
ADVANTAGES (USES) OF INDEX NUMBER:

1. COMPARISON:
Index number is very useful for comparing the values of things over two periods.
2. FORECASTING:
Index numbers are very helpful for forecasting economic and business conditions.
3. POLICY MAKING:
Many economic policies are formulated with the help of index number.
4. PRICE INDEX NUMBER:

Index numbers are used to compare the prices of two periods. It serve as a guide for framing monetary and fiscal policy and other policies.
5. COST OF LIVING INDEX NUMBER:

It is very important in order to know the economic welfare of the people. Cost of living index numbers are very helpful in adjusting wages and in the settlement of wage disputes. It must be taken into account while revising wages & salaries.
6. PRODUCTION:
Index numbers are useful for measuring the change in production level. The goods and services produced during one year are compared with the goods and services output level. The government can decide to import or export goods for welfare of people.
7. INVESTMENT:
43 Index number is helpful to note the changes in investment. The stock exchange prepares index numbers to show the investment made by people from period the period.
8. SALES:
Index of sales is prepared to find out the quantities and value of total sale between times.
9. CHANGES IN EMPLOYMENT LEVEL:

Index numbers are useful to note the changes in employment level. The state can try to increase the rate of employment, by creating new job opportunities.
10. PERFORMANCE OF STUDENTS:

Index numbers are useful to measure the intelligence and performance of students. The teachers can check their efficiency through such index.
LIMITATIONS (DIFFICULTIES) OF INDEX NUMBER:

1. SELECTION OF BASE YEAR:
The base year must be accurate otherwise the results achieved will be misleading.
2. SELECTION OF COMMODITY:
The pattern of consumption of all categories of people is not the same. So selection of commodities is a difficult job.
3. PRICE QUOTATIONS:
An index number may be for wholesale or retail prices. Whole sale prices are easy to obtain, but they do not show the real cost of living.
4. WEIGHTING:
The weight (preference, importance) people give to different commodities in base year may be changed, in current period due to change in taste and income etc.
5. AVERAGE:
An index number is an average. An average can not give a complete picture of the situation.
CONCLUSION
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EDUCATION FOR ALL

44
Q14: DEFINE FOREIGN EXCHANGE. DISCUSS MAIN OBJECTIVES OF FOREIGN EXCHANGE CONTROL. ALSO POINT OUT THE METHODS EMPLOYED FOR EXCHANGE CONTROL? (2000, 2001, 2002, 2002(S). ANSWER: INTRODUCTION:
The term foreign exchange denotes either a converted into another or means and methods by which one currency is exchanged for another. It is related to the exchange methods and with international trade are made.
ACCORDING TO ENCY BRIT:

The system by which commercial nations discharge their debts to each other.
ACCORDING TO HARTLEY:
Foreign exchange is a mechanism by which international indebtedness is settled between two countries.
ACCORDING: TO H.E. EVITT:

the means and methods by which rights of wealth expressed in terms of the currency of one country are converted into rights to wealth in terms of the currency of another country are known as foreign exchange. In Simple Words, the term foreign exchange is used 1. It is the currency of the other country. 2. It is the procedure by which international payments are made. 3. It is the rate at which foreign currency is bought and sold.
EXCHANGE CONTROL:
Exchange control refers to restrictions put by the government on the private foreign exchange dealings. In Pakistan foreign exchange regulation act 1947 is used to control and regulate foreign payments, import and export of currency, bullion and foreign exchange.
ACCORDING TO G.V. HABERLER:

the state regulation excluding the free play of economic forces form the foreign exchange market.
ACCORDING TO G.N. HALM:

Exchange control refers to measure which replace part of the equilibrating functions of the foreign exchange market by regulation alien to the pricing process.
OBJECTIVES OF EXCHANGE CONTROL:

Exchange controls are basically implemented to safe guard the interest of whole of the economy. The main objectives are as under:
1. TO CORRECT ADVERSE BALANCE OF PAYMENTS (BOP):

One of the main objective Is the correction of adverse BOP. This objectives is achieved by curtailing the volume of import.
2. TO CONSERVE FOREIGN EXCHANGE:

A country may introduce exchange control for conserving hard earned foreign exchange. There reserves are exclusively used for, (i) payment of external debt (ii) import essential goods. (iii) purchase of defense material.
45
3. TO PROTECT HOME INDUSTRY:

Exchange control is also employed to protect home industry. If some industries face competition form abroad and the govt. desires to protect them, then foreign exchange control is employed.
4. TO STABILIZE EXCHANGE RATE:

The fluctuation in exchange rate cause disequilibrium in the economy. In the government officially fixes the exchange rate.
5. TO PROMOTE ECONOMIC GROWTH:

Exchange controls are used by low_ income countries for promoting economic growth. They are very useful for allocating resources according to development plans.
6. PAYMENT OF FOREIGN DEBTS:

Exchange controls are also adopted for the purpose of acquiring foreign exchange to pay foreign debts.
7. SUBSTITUTE FOR TARIFFS:

Exchange controls may be employed as a substitute for tariffs and other restrictions on imports for the purpose of protecting home industries form foreign competition.
8. TO INCREASE THE FOREIGN EXCHANGE RESERVES:

Every got. Wants to increase foreign exchange reserves, so to get this objective exchange control policy is adopted.
9. CONTROL OVER FLIGHT OF CAPITAL:

Exchange control may be used to check capital fights to foreign countries. Capital flights in and out of the country are of vital importance. This is very serious problem for those underdeveloped countries which are experiencing political instability.
10. SOURCE OF INCOME:

Exchange controls are also source of income for the government. Since during during exchange controls the government directly retains the foreign exchange and as foreign exchange is directly sold by govt. so difference between buying and selling rate goes income to govt.
11. UNDER-VALUATION:
It means to fix a rate, lower than it would be in a free floating exchange system. The basic aim of this to protect local industry and favour of local exporters.
12. OVER VALUATION:

It means exchange rate is fixed over and above its normal level. This policy is adopted in following cases: 1. When supply of local currency is extra ordinary. 2. When country is facing high inflation. 3. When a country has a massive foreign debts.
METHODS OF EXCHANGE CONTROL:

1. EXCHANGE PEGGING:
Exchange pegging means the act of fixing the exchange rate (value) of a currency to some chosen rate. When exchange rate is fixed (pegged) higher than the market rate, it is called pegging up When exchange rate fixed lower than market rate it is called pegging down (under valuation). This is a temporary measure to remove fluctuations in the foreign exchange rat, England adopted it during WWI
2. IMPORT QUOTAS AND LICENCES:

For maximum effectiveness import quotas and licensees are used. The govt. fixes quotas for the importation of goods.
3. BLOCKED ACCOUNTS:
46 If a country prohibits the transfer of funds of foreigners held in its banks, the accounts are said to be locked and funds to be frozen. The account holders can not draw cheques with out the permission of the central bank of the blocking country.
4. CLEARING AGREEMENTS:
Under this system, the governments of two countries agree to clear the accounts in home currency through their central banks.
5. STAND STILL AGREEMENT:

This is also a method to control exchange the short term debt is converted to long term debt or gradual payments in (installments) is allowed. Germany adopted it in 1931.
6. EXPORTS BONUS SCHEME:

To encourage the exporters, a certain (specific) part of foreign exchange is given to the exporter for their personal use.
7. COMPENSATION AGREEMENTS:
According to this agreement the two countries import and export the commodities of equally valued. Since no payment is made to foreign exchange. Problem of foreign exchange doesnt arise.
8. PAYMENT AGREEMENT:
The payment agreements are made between a debtor and creditor country. This method is used in such a way that debtor country make more & more exports to creditor country and import less and less quantity form it. In this way the transactions are sttled and cleared.
9. RATIONING OF FOREIGN EXCHANGE:

The government requires that all foreign exchange receipts should be handed over to the central bank then the govt. through the central bank rations or allocates this foreign exchange among the importers.
10. EXCHANGE EQUALIZATION ACCOUNT:

Exchange equalization account is the device adopted for smoothing out temporary or short term fluctuations in the rate of exchange as a result of any abnormal movement of capital. England adopted it in 1932. France and USA in 1936. so a fund is created for the purpose of buying & selling foreign currencies to control exchange rate fluctuations.
11. MULTIPLE EXCHANGE RATE PRACTICE:

Some times tow or more exchange rates are employed for buying and selling foreign currencies. The major objective of this multiple exchange rate is to encourage or discourage certain types of imports and exports.
CONCLUSION
===============================================================
EDUCATION FOR ALL

47
Q15: DEFINE MONEY MARKET? ALSO DISCUSS ITS FUNCTIONS, INSTRUMENTS AND MAJOR PARTICIPANTS? ANSWER?
Money market is a financial market for short term loans. It is a market for short term borrowing and lending of funds.
DEFINITION: ACCORDING TO G. CROWTHER

Money market is the collective name given to the various firms and institutions that deal in various grades of new money
ACCORDING TO DOUGLAS GREENWALD:

Money market means the financial institutional which handle the purchase, sale and transfer of short term credit instruments.
FUNCTIONS OF MONEY MARKET:

1. SAVINGS IN TO INVESTMENT:
It allocates savings in to investments and tends to obtain and equilibrium between the demand for and supply of loan able funds. Such an action of the money market leads to a more rational allocation of resources among various sectors and regions.
2. SUPPLY OF FUNDS:
Money market is responsible for supply of funds. The money supply is a source of earning income for members of money market. The interest rate its follows the bank rate fixed by the central bank. The borrowers can approach the members of money market. The lenders must be satisfied with the securities offered for loan. The loan is provided on short term basic for meeting the working capital needs. Recovery may be made in installment or as a whole.
3. SAFETY OF FINANCIAL ASSETS:

It promotes liquidity and safety of financial assets. It is the prime function of a money market to promote liquidity and safety of financial assets. It deals in those asssets which are relatively liquid. And by doing so the encourages savings and investment.
4. FINANCIAL STABILITY:
It promotes financial stability. A money MKT promotes financial stability. By enabling the transfer of funds from one sector to the other. Such flow of funds is regarded as essential for growth of trade and commerce in an economy.
5. REDUCE BORROWING FROM CENTRAL BANK:

It removes the necessity of borrowing by a commercial bank from the central bank. The existence of a developed money market removes the necessity of borrowing the commercial banks from the central bank.
6. EARN REASONABLE PROFIT:

The money market uses funds for earning reasonable profit on funds issued. The members of money market do not keep funds idle. When the time is short the rate of profit is low. In case of long period the rate of profit is high.
7. SHORT-TERM FINANCING REQUIREMENTS:

It provides the government with a means of meeting short-term financing requirements. Money market when it is well developed is also very helpful to governments. The government may borrow from it to meet its short-term financing requirement. Money MKT lessens the burden of taxes on public.
8. BETTER USE OF FUNDS:

48 The better use of funds is possible through money market. The idle funds in one sector are transferable through money market to more productive sector. If one sector is not earning reasonable profit the money market rate attracts the investor to shift their funds. The funds so collected are given to those people who are able to generate more money.
9. SUCCESSFUL IMPLEMENTATION OF MONETARY POLICY:

Monetary policy depends upon the institution which constitute money market, e.g. central bank, commercial bank, etc. so if the money market is well developed and performing its function efficiently then obviously the implementation of monetary policy would be much easier.
INSTRUMENTS OF MONEY MARKET:

The main short term debt instruments traded in the money market are as follows:
1. TREASURY BILLS:
The treasury bills are the short term debt instruments issued by the central bank of a country they are always issued on discount basis and the period of maturity ranges from 3 to 12 months. The governments of a country pays a set amount at the maturity of the bill and have no interest payments treasury bills are the most liquid of all instruments.
2. BILLS OF EXCHANGE:
Bill of exchange is another important short term debt instrument. The commercial banks advance loans by discounting bills of exchange of exchange of their clients. These loans are granted to meet the working capital requirements of the firms.
3. CALL LOANS:
Call loans are the loans which are granted for a very short period not exceeding seven days in any case. Bill brokers and dealers in the stock exchange generally borrow money at call from the commercial banks. The borrowers have to repay the money immediately whenever the bank call these loans back. No securities are needed against these loans.
4. REPURCHASE AGREEMENT (REPOS):

Repurchase agreement is short term loans which usually mature with in less than two weeks. Here the treasury bills serves as security for the loans. Repose are an important source of banks funds.
5. BANKERS ACCEPTANCE:
A bankers acceptance is a draft issued by a firm upon a bank and accepted by it. The bank, here, is required to pay to the order of a specific party or bearer a specific party or bearer a specific sum of money at some future date. These are mostly used in financing the commercial transaction both with in and outside country. The accepted draft can be sold or discounted in the money market.
PARTICIPANTS OF MONEY MARKET:

1. GOVERNMENT:
Government, as a matter of fact, is a separate participant although it generally participates in the market through the central bank, which acts as her agent. In case of developing countries, always short of funds and they use money market as a means that provides tem with timely supply of funds.
2. CENTRAL BANK:
Central bank is the top institution of the money market. Its role is not confined to just participation. In the market but also extends to the regulation of the market. In this capacity its role is crucial and delicate. On one hand it has to make sure that market is functioning alright and on other hand it has to make sure that unhealthy practices do not take place in the market.
3. COMMERCIAL BANKS:
49 Commercial banks are active participants. On one hand, they act as suppliers of funds in the market by providing short term loans to their customers under scheme of temporary running finance and by discounting their bills of exchange and, on the other hand, they also act positively on the demand side. The major buyers of PAKISTANS GOVERNMENTS treasury bills are commercial banks.
4. NON-BANK FINANCIAL INTERMEDIARIES (NFIS)

These include development finance institution, insurance companies, investment banker, modaraba, leasing companies, provident funds and other financial corporations. They form an integral part of money MKT.
5. DISCOUNT HOUSES AND BILL BROKERS:

Discount houses are not common in developing countries but hey play an important role in the money market in developed countries. The major functions of that discount house is the discount the bills There are some individuals also who act as an intermediary between the borrowers and lenders. They do this job on commission. These are bills brokers. They also form a part of the money MKT.
6. ACCEPTANCE HOUSES:
These institutions facilitate the business by making bills of exchange tradable on the market. They do so by accepting the bills of exchange.
7. OTHER PARTICIPANTS:
Every institution or individuals who buys or sells a short-term commercial paper becomes a participant of the money market. I.e. co-operative banks, IDBP, PICIC, HBFC. What is capital market?
3. CAPITAL MARKET:
Financial market whether it is a money market or capital market performs an essential economic function. It mobilizes surplus funds and provides these to those to those who have a shortage of funds. Money market is a financial market which deals in short term securities and loans. Whereas capital market is a market in which long term debt having maturity of one year or greater is traded.
SECTIONS OF CAPITAL MARKET:

Capital market has tow main sections (i) Non-securities market and (ii) securities market.
I. NON-SECURITIES MARKET.
In Pakistan, the non-securities market consists of (a) commercial banks (b) development finance institutions such as PICIC, NDFC, etc, and (c) specialized banks for providing loans to agriculture and industry such as ADBP, IDBP etc. Pakistan etc. Pakistan non-securities market is now well developed. It has helped in raising a large portion of its investment funds form national savings these national saving are mainly routed through commercial banks and national saving schemes. The national saving Organizations, modarabas and leasing companies are providing long term loans to industry for the purchase of fixed assets such as machinery, tools, construction of buildings etc. a portion of the total national investment is being funded from ordinary and concessional loans from bilateral and multilateral financial institutions.
2. SECURITIES MARKET:
Securities market deals with equity shares. It has two main components (a) the new securities market and (b) secondary market.
(A) THE NEW SECURITIES MARKET.

The new securities market is a market in which new shares issued by a company are purchased by investors. The new issues of shares attract new capital investment in the country and help in the strengthening of the economy.
(B) SECONDARY MARKET:

50 The secondary market also called stock exchange specializes in buying and selling of old shares. The shares are purchased and sold by investment banks, firms and individual investors through the members. At present there are three stock exchanges working in Pakistan. The largest and also the oldest one is Karachi stock exchange it has 761 companies listed on it. The third is the Islamabad stock exchange which has 224 registered companies. The securities and exchange commission of Pakistan (SECP) through various measuries is increasing the efficiency of the stock exchanges and is also ensuring the protection of the interest of investor.
3. NON-BANK FINANCIAL INSTITUTIONS:

The non-bank financial institutions provide medium and long term debt funds in the capital market. The development finance institutions (DFIs) investment banks, modarabas and leasing companies, national saving organizations provide loans for the purchase of capital equipments, fixed assets, such as machinery, tools, construction of factory building etc. The national savings organizations (NSO) perform deposit bank functions by selling government securities through a net work of 369 saving centers spread all over in Pakistan.
MAIN INSTRUMENTS OF CAPITAL MARKET:

The capital market instruments are debt and equity instruments. These instruments are not liquid in nature and have maturities of more than one year. The principal capital market instruments are (1) shares (2) debentures (3) mortgages (4) securities of the government. These instruments used in the capital market are now discussed in brief.
1. SHARES:
Finance is essential to any business. The larger the business grows, the wider the sources of finance should be available to it. A public company raises capital through the sale of shares called equity financing and by borrowing named as debt refinancing. Shares are the equity claims on the net income and assets of a company. The holders of ordinary shares or equity shares are the real owners of the company. In case of bankruptcy, claims of share holders are paid only after the other claims have been paid.
2. DEBENTURES:
Debenture is a long term loan to the company with very strong credit rating. Each year debenture holders receive a fixed rate of interest whether a company is making profit or not. If the company goes bankrupt, the debenture holders must be paid before any other claim is met.
3. MORTGAGES:
Mortgages are long term loans provided to individuals, firms against tangible security. When the loan is not paid in accordance with the terms of the loan, the little of the property is transferred to the creditor. The commercial banks and specialized financial institutions are actively engaged in providing long term finance to business in Pakistan.
4. FEDERAL INVESTMENT BONDS:

The govt. of Pakistan mobilizes long term loans by the sale of federal investment bonds having a maturity of five or ten years. The objective of introducing this debt instrument is to mobilize private savings, contain inflationary pressures in the economy by absorbing funds of the financial sector and also to provide investment opportunities to the financial institutions.
4. ROLE OF CAPITAL MARKET.

Capital market plays an important role in the mobilization of long term funds for the economic development of the country. Its importance can be judged from the following various functions it performs.
1.
MOBILIZATION OF EQUITY CAPITAL.
51 The securities market both primary and secondary help the companies to raise long term capital. If there were no such organized markets, it would then be very difficult to exchange their shares for cash. The stock exchanges provide this facility. The sale and purchase of shares of the company does not affect the capital raised by it. The life of the company remains unaffected. 2.
SAVERS AND BORROWERS.

The capital market provides a link between savers of money and the borrowers of funds. There are number of organizations link commercial banks, insurance companies, saving organizations etc, which collect the savings of individuals. They provide the mobilized savings to the institutions which specialize in advancing loans for promoting investment in the county. The capital market, Thus, provides a link between severs and investor.
3.
SAVING INCENTIVES.
If in a county, the capital market is organized, it encourages people to save money. If there has been no banking and non-banking financial institutions to collect savings of the people, it would have been diverted to unproductive channels such as purchase of Jewelers, land, gold etc.
4.
BALANCED ECONOMIC GROWTH.

The capital market provides an opportunity to mobilize savings from the areas where people are economically quite well of. The financial resources are then transferred to backward areas of the country for expansion of trade and industry. The capital market, thus, helps in promoting balanced growth in the country.
5.
ATTRACTION TO FOREIGN INVESTORS.

An efficient capital market attracts the foreign companies to invest funds in the shares of companies, build up factories etc. the foreign investment, thus, helps in increasing the productivity and prosperity of the country.
6.
STABILITY IN SECURITY PRICES.

The organized and well kint capital market brings stability in the prices of shares and reduces fluctuations in their values to the minimum.
5. DIFFERENCE BETWEEN MONEY MARKET AND CAPITAL MARKET:

Money market 1. It is a market for short term loans. 2. The instruments of money market are (a) promissory note (b) bills of exchange (c) treasury bills and (d) call loans. 3. The instruments of money market are highly liquid. 4. the main institutions of money market are bill market, commercial banks, acceptance houses discount houses, central bank, Capital market 1. This market is for long term. Loans 2. the instruments of capital market are (a) shares (b) debentures (c) mortgages (d) FIBs 3. The instruments of capital market are not liquid. 4. The main institutions of capital market are insurance companies, investment banks, commercial banks, stock marker.
5. The demand for short term loans comes from 5. The demand for long term loans comes from government industrial and commercial concerns, private sector manufacturing industries, merchants, stock exchange. companies and government. 6. The money market revolves mostly around 6. Commercial banks play a par but they are not the commercial banks. the centre of activation in the capital market. ------------------------------------------------------------------------------------------------------------
52
Q 16. CRITICALLY EXPLAINS MODERN THEORY OF MONEY? (2005 (A) 2003 (A).
ANSWER: INTRODUCTION:
Milton Friedman of Chicago school developed modern quantity theory of money in 1956. According to Friedman people hold money not for specific purpose such as transaction speculative and precautionary motives. The demand for money in fact is a wealth theory of demand. In his view money is durable consumer goods. It held for the services it renders. It yields a (give) flow of services proportional to the stock. Thus the money is demanded as an asset or capital. The theory of demand for money is the theory of assets demand for money.
DETERMINANTS OF DEMAND FOR FIND OUT MONEY:

In Keynesian analysis, the demand for money is function of level of income and the rate of interest. According to Friedman, the demand for money or an asset is a function of the following factors.
1. THE RATE OF RETURN ON BONDS:

If the rate of return on bond is higher in the market, the smaller is the demand for money and vice versa. R.RD.M.
2. RATE OF RETURN ON SHARES:

Higher the rate of return of equities of shares, lower is ht demand for money and vice versa. S.R D.M
3. RATE OF CHANGE OF PRICES:

If prices are rising rapidly in a country, the smaller is demand for money. People hold smaller amount to avoid a fall in the real purchasing power of their money holdings. P V.MD.M
4. DEGREE OF RISK:
The degree of risk also affects the demand for an asset. Holding other things constant, if an asset risk raises relatively to that of an alternative asset, its quantity of demand for money will fall.
5. LIQUIDITY:
Another factor which affects the demand for an asset is how quickly it can be converted into cash with out incurring large costs. If an asset is highly liquid relatively to an alternative asset, other thing remaining unchanged, the greater will be its quantity demanded and vice versa. Liquidity D.M
STATEMENT OF THEORY:
The theory of assest demand indicates that the demand for money is a function of resources available to individuals and the expected return on other assets relative to the expected return on money. Friedman developed simplified version of the demand for money. His money demand equation is expressed as: MD=F(YP) In Friedmans view, the demand for money is a function of permanent income (YP). The permanent income is affected by the yield on securities and human and non human wealth holdings. According to Milton Friedman, demand for money is insensitive to the changes in the rate of interest.
CRITICISM OF MODERN QUANTITY THEORY

53 The Milton Friedmans quantity theory of money is criticized on the following grounds:
1. INFLUENCE OF RATE OF INTEREST IGNORED:

Milton Friedman was involved too much in defining the various form of money (time deposits, demand deposit, currency in circulation) he has failed to attach importance to the powerful factor of the rate of interest which affect the demand for money.
2. RELATION BETWEEN MONEY SUPPLY AND MONEY GNP.

Friedman has observed that money supply and money GNP are positively correlated with each other. Mr. N. Kolder disagrees with his views and asserts that there is no correlation between the money supply and money GNP due to number of variables which cannot be kept under control.
3. PROPORTIONAL RELATIONSHIP:
Friedman tested the proposition that demand for money varies directly and proportionately to changes in the price level. The fact is it is more than proportionately changes in the level of income.
4. SIMULTANEOUS OPERATIONS OF WEALTH & INCOME:

Milton Friedmans function assumes the simultaneous operations of the wealth and income variables. Summing up Friedman quantity theory has given new life to the fishers quantity theory of money. It is now widely discussed, analyzed and adopted by many economists.
CONCLUSION
Q:1 WHAT IS BANK? EXPLAIN DIFFERENT KINDS OF BANK? (2003, 1999) ANSWER: INTRODUCTION:
54 The word bank is derives from Italian word BANCO and French word BANQUE which means a bench. It is also derive from German word bank which means a heap and stock of money. Generally, it is said that A financial institution which deals in money and credit. It borrows and lends money and credit. It borrows money and lends money and in this way acts as financial intermediary between the lender and borrower We can say that: The banker is a man who lends you an Umbrella when it rains, and takes it away when the weather is fair.
DEFINITIONS:
ACCORDING TO PROF-KINLEY:
A bank is an institution which receives deposits and advances loans
ACCORDING TO H.L.HART:
A banker is one who, in, the ordinary course of his business, honors cheques drawn upon him by persons from or for whom he receives money or current account
ACCORDING TO PROF-CROWTHER:
A bank collects money from those who have it spare or who are saving it out of their incomes. It lends money to those ho require it
ACCORDING TO BANKING COMPANIES ORDINANCE 1962.

Banker means a person transacting the business of accepting for purpose of lending or investing of deposits of money from the public, repayable on demand or otherwise with draw able by cheques, draft order or other wise
KINDS OF BANKS:
Banks can be classified on the basic of: A) FUNCTIONS: B) OWNERSHIP C) REGISTRATION
FUNCTIONAL CLASSIFICATION:
(I) COMMERCIAL BANK:
The most popular kind of bank is the commercial bank. The commercial bank receives surplus money from the public and lends to others who needs funds. The bank collects cheques, bill of exchange etc for customers. It transfers money from one place to another. The purpose of a commercial bank is to earn profit. The main commercial banks of Pakistan are national bank, Habib Bank, Allid Bank, United Bank; MCB etc. these banks play a vital role in economic development.
(II) CENTRAL BANK:

Central bank is the most important bank of any country. Almost all countries of the world now have central bank. The central bank is the leader of all other banks. It does not compete for profit. It has a right to note issue. It is a bank of government and the commercial bank. It controls the operations of other banks for monetary and economic stability in country. The central bank represents the Govt. in international conferences.
(III) INDUSTRIAL BANKS:

The industrial bank is very important for the development of any country. To provide medium and long-term finance to industry is the distinguishing.
(VI) MERCHANT BANK:

The bank provides services lasing, hire-purchase and insurance broking. It is a whole sale bank and accepts large sums for fixed term from individual, companies and financial institutions. Baring, Lizards are examples of merchant ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
55
(VII) CONSORTIUM BANK:

A consortium bank is owned by other banks. The bank is formed to meet the financial requirements of large companies for long period of time. The bank receives the funds from the parent bank. It can also arrange syndicate loans. International energy bank, British Middle East bank Orion bank is the example of consortium bank.
(VIII) SCHOOL BANK:

This bank provides banking facilities to the students in schools. The boxes or bags are supplied to the students who keep their savings in boxes. Accounts are opened in the name of students. The bank officers go to the school after regular interval and collect the amount of their saving. In U.S.A Beloit saving bank started working school bank in 1882.
(IX) LABOUR BANK

The bank is opened by trade union of Laborers the purpose of this bank is to manage worker funds like pension fund, provident fund etc in a better way. The laborers also keep their saving in it. The banks provide loans to the concerns which are under the control of trade union. E.g. union bank, saving bank of Chicago, state bank of Kansas City.
(X) MORTAGE BANK:

These banks provide loans to people against moveable and immovable property. HBFC is doing the working of Mortgage Bank features of these banks. Industrial banks generally provide finance for fixed capital requirements. They provide fianc for expansion, modernization, and establishment of industries. In Pakistan, the industrial development bank (IDBP) was set up in 1961. The other institution engaged in providing financial assistance to industries are PICIC, NDFC etc.
(IV) AGRICULTURAL BANK:

Pakistan is an agricultural country and most of our exports consist of agrobased products. So well organized agriculture sector is necessary for the development of a country. Agricultural banks provide loan for this purpose. ADBP, agriculture credit advisory committee and rural credit banks are the few examples of Agriculture Bank in Pakistan.
(V) SAVING BANK:

The banks are established for encouraging and collecting savings of people. Saving banks are not banks in the real sense of term. They only provide saving facility. These banks usually invest their funds in govt. securities. The well-known post office savings bank is an institution of this type. Commercial banks are also providing the service of saving banks in Pakistan.
(VI) INVESTMENT BANK:

The bank is opened to buy and sell shares and other securities. It also provides loans for purchase of shares and debenture etc. it keeps new companies by under writing the shares, bonds & other securities. At the end of June, 1992 seventeen investment banks, both Pakistani and foreign were functioning in Pakistan.
(XII) COOPERATIVE BANK:

These banks are set up to provide credit facilities to farmers and small producers. The bank is opened by persons of similar occupations living in same areas for providing banking facilities. In Pakistan the co-operative bank. Registered under the cooperative societys act 1925. And can be registered with registrar of co-operative societies at provincial Headquarters.
B: ON THE BASIS OF OWNERSHIP:

(1) PUBLIC SECOTR BANK:
Such banks are owner by government & works under the direct control of the government. The chief executive of such banks is appointed by federal government. HBL & NBP are example of public sector bank. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
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(2) PRIVATE SECOTR BANK:

These banks are under the direct ownership of the private organization of cooperative societies. The banks are controlled by the individuals or Private Organization MCB, ABL are the examples.
C: ON THE BASIS OF REGISTRATION:

(1) SCHEDULED BANK:
These are the banks which are registered in the list of central bank. They are bound to follow the instructions and policies of central bank.
(2) NON SCHEDULED BANKS:

These are the banks which are not registered in list and policies, policies, instructions of central bank.
CONCLUSION
Q2: DEFINE COMMERCIAL BANK. DISCUSS ITS FUNCTIONS IN DETAIL? 1999, 2001, 2002, (S) 2003(S) 2006) ANSWER:
A commercial bank is a public limited company. It is set up under companys ordinance 1984. The operations of commercial banks are controlled under banking companys ordinance 1962, foreign exchange act 1947 and stat bank of Pakistan act 1956. The bank receives deposits from general public. Different accounts are opened to collect ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
57 money. The bank keeps some money to honor cheques of customers. A large part of such money is provided to people as loans. The bank is important for government, businessmen and general public. A commercial bank is something with which every one of us is familiar. Commercial bank plays very important role in economic development of the country. It is often called the HEART of financial system of an economy.
DEFINITIONS:
ACCORDING TO CAIRN CROSS:
Bank is a financial intermediary, a dealer in loans and debts.
ACCORDING TO SAYERS:
Banks is an institution whose debts are widely accepted in settlement of other peoples debts to each other.
ACCORDING TO PROF GILBERT:

A banker is a dealer in capital, or more properly a dealer in money. He is an intermediate party between the borrowers and the lender. He borrows of one party and lends to another.
ACCORDING TO CROWTHER:
Bank is a dealer in debt of its own and other people.
FUNCTIONS OF COMMERCIAL BANK:

1. 2. 3. 4. Functions of commercial bank can be classified as under: Basic / primary functions. Secondary functions. Agency functions. Utility functions.
BASIC FUNCTIONS:
1. ACCEPTING DEPOSITS:
Bank accept deposits from those who have surplus money in their in their hands but they cant use it in a profitable way. So banks give them opportunity to deposit their money and enjoy profit.
a. CURRENT ACCOUNT:
In this account the depositor can deposit and with draw money at any time. Normally traders, businessmen, are interested to open this account - bank pays no interest on this A/Cs. A cheque book is given to the account holder to with draw his money.
b. SAVING ACCOUNT:
This account is suitable for those people who have small level of savings. In this account, a nominal interest is paid to customer. Cheque book is given to account holder.
c. FIXED DEPOSITS ACCOUNT:

In this account a specified amount (money) is deposited in the bank for a particular period of time. The longer the duration, the higher would be the interest. In this account, a receipt is given to customer, called FDR (Fixed deposit receipt).
2: ADVANCING LOANS:
The bank gives loans in order to earn profit. In this way it accepts deposits at low rate of interest and advances loans at high rate of interest. The difference becomes profit of the bank. Advances are given in the following forms.
a. OVER-DRAFT:
This is a short period financing facility. In this facility, the bank sanctions that the customer can with draw his money over and above the balance lying in the bank. This facility is provided to current a/c holders. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
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b. DISCOUNTING OF BILLS OF EXCHANGE:

Discounting of B/E means, making payment before the maturing of the bill. The payment made by the bank before the date of maturity is the loan to the holder.
c. CASH CREDIT:
In this loan facility the bank sanctions a particular amount. The facility is provided against security.
d. TIME LOAN (TERM LOANS)

1. Short term less than one year. 2. Medium term for period of 1 to 3 or 5 years. 3. Long term for period of more than 5 years. All these loans are given against proper security.
SECONDARY FUNCTIONS:
1. TRANSFER OF MONEY:
The banks transfer money from place to place by means of banks draft, collection of cheques, telegraphic transfer and direct debt. The banks purchase bills of exchange to help their customer for collection of money.
2. ISSUE OF CREDIT MONEY:

The banks issue various types of near money. The cheques, bank draft, credit cards, are main instruments which are used as medium of exchange to settle their obligations.
3.
INVESTMENT
OF
FUNDS:
the banks can invest funds in stocks shares and bonds. As per law commercial banks invest at least 25% of their deposits in securities.
4. FINANCING FOREIGN TRADE:

The bank performs duty of financing foreign trade. The receipts and payments on accounts of exports and import are possible through bank.
5. FOREIGN EXCHANGE DEALING:

The bank deal in foreign exchange. They buy and sell currencies of other counties. The commercial banks are dealers of foreign exchange market.
6. STATUS REPORT:
The commercial bank act as referee for supply of information about its customer, relating to financial position of party concerned.
AGENCY FUNCTIONS:
1. COLLECTION OF CHEQUES:
A commercial bank acts as agent to the customer to collect and make payment on the cheques. The cheques may be local or out station.
2. COLLECTION OF INCOME:
Banks collect pension, dividend, rent and interest of their customers. A credit voucher is sent to customer for information.
3. PAYMENT OF EXPENSES:
The bank makes payment of insurance premium, trade subscription, school fee and similar other expense.
4. ACT AS TRUSTEE: (takes cares affairs of its client).

The bank can act as trust to manage trust property as per will of property owner. The order of court is obtained to act as trustee. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
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5. TAX RETURN:
The banks act as agents of customers who are bound to pay tax to government.
6. HAJJ APPLICATION:
The bank collects hajj applications from general public on behalf of government.
7. SAFE CUSTODY.
The bank accepts valuables and other papers for safe keeping. A nominal fee is charged from customer. .
8. ZAKAT DEDUCTION:
Deduct Zakat on first Ramzan every year.
UTILITY FUNCTIONS:
1. LETTER OF CREDIT:
Commercial banks issue letter of credit in order to provide financial assistance to the customers dealing in foreign trade.
2. INFORMATION:
The banks collect and supply trade information to businessmen. The issue bulletins that provide update information about companies working abroad.
3. GOVT. LOANS.
The banks participate in debt management for government. The bank can by bonds, and other securities offered by central bank.
4. LOCKERS FACILITY:
Banks provide lockers facility to general public. Gold ornaments, documents, and their valuables can be placed in lockers.
5. TELEVISION LICENCE:
Bankers issue television licenses on behalf of Pakistan Television Corporation.
6. SHARE APPLICATION:
Bank accepts applications for subscription of shares on behalf of company. The price of shares is collected with application money.
7. FOREIGN EXCHANGE:
Banks deal in foreign exchange and facilitate both foreign and foreign travel.
8. UNDERWRITING:
Banks underwrite shares, bonds etc, issued by government, public bodies or trading corporations in order to raise capital or fund.
9. ACCEPTANCE OF B/E
Banks accept bills of exchange on behalf of customers to meet their financial needs.
10. 24 HOURS CASH SERVICE:

Now a days, modern commercial banks use computerized counters to provide twenty four hours cash service through Auto-Matted Teller Machines (ATM) to their valuable customer.
CONCLUSION:
60 Banks play a dominant and useful role in promoting economic development by mobilizing the financial resources of the country. In past activities of commercial bank were very limited but now commercial banks are Multi Services Organization ----------------------------------------------------------------------------------------------------------
RICH PEOPLE OF PAKISTAN

01: Mian Muhammad Mansha 02: Asif Ali Zardari 03: Sir Anwar Pervaiz 04: Nawaz Sharif and Shehbaz Sharif 05: Saddaruddin Hashwani 06: Nasir Schon 07: Abdul Razzaq Yakoub 08: Rafiq Habib and Rasheed Habib 09: Mr. Farooqui 10: Mr. Imran $ 2.5 BILLION $ 1.8 BILLION $ 1.5 BILLION $ 1.4 BILLION $ 1.1 BILLION $ 1 BILLION $ 1 BILLION $ 720 MILLION $ 400 MILLION $ 250 MILLION
61
Q3: WHAT ARE THE DIFFERENT TYPES OF DEPOSITS THAT COMMERCIAL BANKS ACCEPT? (2002)(S). OR Explain The Salient Features Of Different Types Of Accounts? What Are Different Types Of Accounts Maintained By Bank?
ANSWER:
There are many types of accounts which are kept with a bank by customers. They are named as: (i) Current account, (ii) Saving account (iii) Fixed account. The classification of bank deposits into current, saving, and fixed account is normally based on the duration (period) and purpose (aim) for which the account is maintained at a bank. The salient features of these accounts are as under?
(A) CURRENT ACCOUNT:

Every bank maintains current account for its customer. In this account the customers can draw the current deposits without previous (advance prior) notice to bank. The current account is opened and operated by traders, businessmen, and industrialists etc, who wish to keep their money liquid and safe.
SALIENT FEATURES:
The current account has the following features:
(1) WITHDRAWAL OF MONEY:

A customer who has current account can with draw his money at any time without giving prior notice to bank. He can also deposit his money in this account many times during a day.
(2) SUITABLE FOR BUSINESSMEN:

Current account is much popular among businessmen, firms whose transactions are frequent in a day. Any how any person can open this account.
(3) NO INTEREST/ PROFIT ARE PAID:

On current account bank pays no interest (profit) because bank has to reserve this current deposit amount for payment and it is not possible to invest or lend it for long term.
(4) INITIAL DEPOSIT:

A current account can be opened by the initial deposit of Rs. 1000. This would be the minimum credit balance of a customer.
(5) OVER DRAFT FACILITY:

The bank may allow the facility of overdraft to the trust worthy customer. In this facility the customer can withdraw amount in excess of his credit balance as per sanctioned limit of the bank.
(6) CASE OF ZAKAT:

In this account no Zakat is deducted because in this account the amount is not kept for a specific period.
(7) STATEMENT OF ACCOUNT:

The bank sends statement of account to their customers at their address. The customer can ask for statement of account for any particular period.
(8) CHEQUE BOOK:

The customer can withdraw amount through cheque book supplied by bank. A cheque book is issued to account holder at the time of opening an account.
(9) PAY-IN-SLIP:
62 The customer can use pay in slip to deposit money and cheques into bank accounts.
(10) INTRODUCTION:
Bank can open current account after proper introduction the old customers are allowed to introduce new one.
(B) SAVING DEPOSIT ACCOUNT:

Saving deposit account is much popular among the people who have small savings but can not profitable invest it any where else as the amount is small. The account is opened to encourage thrift (the habit of saving) the people can meet their needs in future. They can earn profit (income) on their present saving.
SALIENT FEATURES:
(1) WITH DRAWL OF AMOUNT:
In this account the account holder is allowed to withdraw an amount twice with in a week or month with the help of cheque. But if he wants to withdraw a big amount then he would have to give a prior notice of 7-=15 days.
(2) INTEREST:
The bank pays interest on saving account according to the prescribed rates by the central bank of the country.
(3) CHEQUE:
The customer can withdraw money through cheques.
(4) INTRODUCTION:
THE saving account is opened with proper introductions. By an old customer or an employee of bank.
(5) INITIAL DEPOSIT:

Saving account is opened with Rs.2 Only. The account holder can deposit can deposit more amounts at the time of opening an account.
(C) PLS SAVING ACCOUNT:

People who do not want to earn fixed rate of interest open the profit and loss saving bank account. The commercial banks collect deposits from people having low fixed income. In our country these accounts have been introduced form July 1, 1985. A minimum amount of one hundred is considered necessary for opening PLS A/C.
FEATURES:
(1) INITIAL AMOUNT:
Profit & loss sharing (PLS) saving account can b opened with a minimum of Rs.500 or 100.
(2) SHARING OF PROFIT AND LOSS:

Under PLS saving deposit scheme, the account holder will not for interest but will share in profit (earned) or loss (incurred) declared by bank announced after six month.
(3) INTRODUCTION:
There is requirement of introduction for opening account. The customer has to find out old customer of bank for introduction.
63
(4) ZAKAT IS DEDUCTED:

The bank staffs are bound to deduct Zakat at prescribed rate on first of Ramzan every year. Rate of Zakat is fixed. (2.5%)
(5) CHEQUE BOOK PASS BOOK:

In this account the customer is provided the cheque book for withdrawal and pass book for analyzing balance in bank.
(6) STATEMENT OF ACCOUNT:

Statement of account is supplied to the account holder at a prescribed interval.
(7) RESTRICTION ON WITHDRAWL:

There is restriction on withdrawing the money from this account. If the customer wants to withdraw the amount exceeding Rs. 5,000 (may be varied). He will have to give a prior notice to the bank.
(D)FIXED DEPOSIT ACCOUNT:

Fixed or time deposits are the main source of funds of a commercial bank. In fixed deposit, the amount is kept for a fixed period of time. They are not payable on demand like the current account. The people who have surplus money are interested to open this account. The rate of interest on this account is higher as compared to other account. The longer the deposit period the higher will be the interest.
SALIENT FEATURES:
(1) WITHDRAWL AFTER A SPECIFIC PERIOD:
This deposit can be withdrawn after a specified period of time. The time for which the money is deposited varies from 03 months to 05 years or more.
(2) PROFIT ON FIXED DEPOSIT:

The profit on this account is higher. The longer the period of deposit the higher will be the profit.
(3) ISSUE OF TDR (TERM DEPOSIT RECEIPT):

After opening the term deposit, bank issues a term deposit receipt (TDR) to the customer which is not transferable.
(4) DEDUCTION OF ZAKAT:

Zakat is deducted on this account at the rate of 2.5%.
(5) WITHDRAWING BEFORE MATURITY:

If a customer wants to withdraw his money before maturity then he will have to forgo (sacrifice) the interest earned on the amount as the terms and conditions require.
(6) MINIMUM AMOUNT:

This account is opened with the minimum Rs.1000.
(7) REQUEST FOR PRESENTATION OF TDR:

Ten days before maturity, bank requests in writing to his customer to present the TRD for encashment or removal.
(8) LENDING AGAINST TDR:

Bank can advance loan to the deposit holder against the security of term Deposit.
(9) NO CHEQUE BOOK & PASS BOOK IS ISSUED:

In this account no cheque book & pass book is issued because there are no frequent withdrawals or deposits.
(E) JOINT ACCOUNT:

64 Joint account as the name suggest are jointly owned and operated by more than one person. It is opened in the name of two or more person. In order to draw cheque, all the person will have to sign it otherwise the bank will not honor it. However parties may give rights to anyone to draw cheques with signatures of other person.
(F) FOREIGN CURRENCY ACCOUNT:

Foreign currency account is opened by the bank hold deposit in foreign currency. These are opened only in authorized branches. Such accounts can be maintained in US dollar, UK pound, German Mark, Japanese Yen etc. the distinguishing features of such accounts it that they are exempt form all taxes and deductions. No income tax or Zakat is deducted from such account. Usually such accounts can be opened with $ 500. This balance must be maintained at all times.
CONCLUSION
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65
Q4 BANKING, Discuss
THE PROCEDURE FOR OPENING CURRENT, SAVING AND FIXED DEPOSIT ACCOUNT WITH A BANK?
ANSWER: FORMALITIES FOR OPENING CURRENT & SAVING ACCOUNT WITH A BANK:
There are certain formalities which to be observed for opening a current and saving account with a bank. These formalities are as under:
1. FORMAL APPLICATION:
The customer is required to fill in account opening form. It is a formal request to the bank to allow him to operate the account. This form is then signed and name of introducer is also mentioned.
2. INTRODUCTION:
Introduction is very much important in order to open an account with the bank. The introducer may be old account holder or responsible person etc. a current account opener must be introduced by the person who has current account with the bank.
3. SPECIMEN SIGNATURE:
When the banker is satisfied about the customer, he agrees to open the account. The banker of the branch takers specimen signatures on the specimen signature card
4. DECLARATION:
The signature of account opener is obtained on a declaration by which he binds himself to follow the rules and regulation of the bank which are read by him or read to him.
5. DEPOSIT OF INITIAL MONEY:

In Pakistan the current account can be opened with a minimum of Rs.500 and PLS saving account with a minimum of Rs.100. The account opener fills in the pay-in-slip and deposit the initial deposit of money.
6. ACCOUNT IS OPENED:
After the deposit of initial money, the account is opened by the banker in his books.
7. ISSUANCE OF ACCOUNT NO AND DOCUMENTS:

After making necessary inquires, the banker opens account and account number is allotted to the customer and following documents are given:
PAY-IN-SLIP:
Pay-in-slip is given to the customer in order to deposit the cash or cheque in the bank.
CHEQUE BOOK:
When the account is opened, the banker give cheque book which contains cheques for with drawing money from the bank.
PASS-BOOK
A pass-book is issued to the account holder. This is a copy of entries of amount deposited and withdrawn and then the net-balance.
FORMALITIES FOR OPENING FIXED DEPOSIT:

ACCOUNT:
The following procedure is usually adopted for opening and operation of fixed deposit account.
1. SUBMISSION OF APPLICATION:
66 The person will submit the form available from the concerned bank. In this from the person will write his name, period and amount of deposit. He will put his signatures and provide a copy of identity card also.
2. ISSUE OF FDR (FIXED DEPOSIT RECEIPT):

The bank after making inquiry will issue a receipt called FDR. In this receipt all the terms and conditions of the account. The amount of deposit and rate of interest etc are mentioned.
3. PAYMENT OF INTEREST:
The bank normally pays the interest after the expiry of the period. However if the customer desires the interest can be paid quarterly, half yearly, and on yearly basis.
4. PAYMENT BEFORE THE DATE OF MATURITY:

If the customer wants to withdraw his money before maturity, he will have to forgo (sacrifice) the interest received on that amount.
5. TIME OF DEPOSIT:
The customer can decide time of deposit. It may be very form 03 months to 05 years
6. NO NEED OF INTRODUCTION:
The bank accepts fixed deposits account without introduction. A copy of identity card is sufficient to open such account. The banker is free from risk of loss.
CONCLUSION
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67
5: WHAT IS CENTRAL BANK? EXPLAIN ITS FUNCTIONS IN DETAIL? OR DISCUSS IN DETAIL THE FUNCTIONS OF STATE BANK OF PAKISTAN? (2000, 2001, 2002, 2004)
ANSWER:
Central bank is the most important bank of a country. Its importance has increased manifold during past 50 years. It is the symbol of financial sovereignty and stability of the country. It is the head of banking and monetary system. The principles on which a central bank operates are different from those of the commercial banks. It does not work form profit motive. It acts in the public interest and earning of profit is only a secondary consideration. Before the world war first (WWI), there were a few countries which had their own central banks. After the war, the number of central banks has increased and now there is not a single country which does not have its own central bank. Central bank has different name in different countries. e.g. in USA federal reserve system, in India it is reserve bank of India, in U.K. Bank of England Pakistan, state bank of Pakistan which was established in July 1948. (The first central bank in the world is Risk bank of Sweden. Declared by central bank of country in 1668.
DEFINITION:
ACCORDING TO DR. DE. KOCK:
The guiding principles of central bank are that it acts only in the public interest and for the welfare of the community as a whole and without regard to profits as a primary consideration.
IN WORDS OF KENT:
An institution which is charged with the responsibility of managing the expansion and contraction of volume of money in the interest of general public welfare
IN WORDS OF PROF HAWTRYS:

A central bank is that which is lender of last resort.
OBJECTIVES OF CENTRAL BANK:

Following are the principles / objectives of central bank:
1. SAFEGUARDING FINANCIAL STABILITY:

The main objective of the central bank is to protect and safeguard economic and financial stability. It is established in order to design and implement policies to avoid depression and unwanted fluctuations in economy.
2. WORKING IN PUBLIC INTEREST:

Central bank works in the best interest of the economy and public. It does not give advances, nor does it allow any interest on deposits. It performs its functions without any consideration of profit:
3. SUPERVISION OF BANKING SYSTEM:

Central bank object is to have supervision and effective control over commercial banks structure. Central bank set guidelines for commercial bank, and parameters in which commercial banks are allowed to perform their operation.
4. CONTROL OF CREDIT & MONEY SUPPLY:

Central banks object is t exercise effective control over credit and currency supply in the economy. It has a sole monopoly over note issue and it constantly keeps an eye on the supply of currency in the economy. It also watches the credit creation of commercial bank.
5. ACCOMMODATING COMMERCIAL BANKS:

It saves commercial banks from bank runs and panics. In case commercial banks find any difficulty in meeting their liabilities, the central bank comes to their help.
6. ENSURING ECONOMIC DEVELOPMENT:

68 The object of central bank it the direct finances towards important sectors of the economy and ensure that credit requirements of such sectors are fulfilled.
FUNCTIONS OF CENTRAL BANK:

A central bank usually performs the following functions:
1. MONOPOLY OF NOTE ISSUE:

In early periods of banking development, all banks used to issue their own notes. This caused confusion, frequent trouble, over issued, causing high inflation and economic crisis. At present through out the world, central banks have the sole right of issuing currency notes. In Pakistan state bank of Pakistan issues the currency notes of worth five to Rs. 1000, (5, 10, 50, 100, 500, and 1000) the main purpose of giving the monopoly right of note issue are as under: Uniformity in the system of note issue. The central bank can exercise better control over money supply. It increases public confidence. There are two principles of note issue (i) Banking Principles (ii) Currency principles.
2. BANKER TO THE GOVERNMENT:

Central bank is the banker to the government. It means that central bank provides some important services for government as: Control of gold and other reserves of government. Keeps the government accounts. Principle advisor of Govt. (Regarding annual budget, taxation system, international trade and foreign exchange reserves etc. To formulate of lending facility (for various projects). Agent to govt. (attending national and international conference on behalf of govt.
3. BANKERS BANKER:
The central bank acts as banker to commercial bank as: It holds cash reserves and deposits of commercial banks. Discounting of bill of exchange of commercial bank. Enabling the commercial banks to create credit. Clearing house facility (i.e. the settlements of mutual claims of commercial banks) Lender of last resort (granting of loans to commercial banks in the days of financial crises) Establishment of new banks (prior permission necessary). The advance policy (keeping in mind the influence of rate of interest). Every commercial bank sends a monthly statement of its assets and liabilities to central bank.
4. LENDER OF LAST RESORT:

Central bank is the lender of last resort to the commercial banks. It means that whenever the scheduled commercial banks are short of funds and are unable to get help from anywhere, it is the central bank which provides them loans and brings them out of trouble. A commercial bank gets loans from other banks in normal routine. But when they do not get such help they approach the central bank.
5. CLEARING HOUSE:
Central bank also performs the functions of a clearing house. Since central bank holds the cash reserves of other bank, it easily helps to settle their mutual obligations. Payments by one bank to another are settled through central bank daily, n every bank, people deposit cheques which are to be drawn from other banks. In this way every bank has to receive amounts on behalf of its customers and has to make payments on behalf of them. But the banks do not get cash from each other. They settle their accounts with the help of central bank. Every bank has account at central bank. So funds can be transferred from the account of one bank to other bank.
6. CONTROLLER OF CREDIT:
69 The central bank also regulates and controls the supply of money in the country. In order to mange the supply of money it implements monetary policy. The important tools of monetary policy are bank rate, open market operation and varying reserve requirement. So by controlling the supply of money & credit achieves the following target. --- Internal price stability --- Exchange rate stability --- Stability in money market.
7. CONTROLLER OF FOREIGN EXCHANGE:

The whole business of foreign exchange control and financing of international trade is down by the central bank. It is the function of central bank to see that exchange rate does not change undesirable. The preparation of balance of payments of a country is done by the central bank. If there is deficit in the BOP, the central bank suggests to the governments, what action should be taken to correct the situation.
8. MAINTENANCE OF EXCHANGE RATE:

An other important functions of central bank are to stabile the foreign value of home currency. A stable exchange rate is necessary to encourage foreign trade and foreign investment which is essential for economic growth particularly.
9. CUSTODIAN OF METALLIC RESERVES:

It is the central bank which serves as the custodian of national reserves of gold, and foreign exchange. It is its duty to take appropriate measure to safeguard these reserves.
10. ROLE IN ECONOMIC DEVELOPMENT:

Majority of the countries of the world are poor and are following planned economic development. The central bank, through its policies, directly influences the rate of economic development. It provides funds to other banks to advance the same to industry. It establishes financial intuitions.
11. FINANCIAL INSTITUTIONS:

The central bank takes keen interest in the development of banking sector. The promotion and development of commercial bank, agricultural, industrial, and investment banks leads to development of economy as a whole. This function is most important for developing economy.
12. SUPERVISION:
The central bank can supervise actives of bank management. The bank has powers to look after working of commercial banks fine is imposed on banks that violate the rules framed by central bank for smooth working. In developed countries there is no need to supervise the working of commercial banks. But in developing countries the management may not be professional so there is need to guide the management for successful working.
13. REMITTANCE FACILITY:

The central bank provides remittance facilities to general public, banks and governments through its own branches, treasuries, and sub treasuries. The bank can transfer funds from one place to another by means of telegraphic transfer, mail transfer, and bank demand draft.
OTHER FUNCTIONS:
i. establishment of training institutes (for staff training) ii. Representation in international financial institutions (IMF, world bank) iii. Publication of annual report. iv. Industrial and agricultural development.
CONCLUSION:
70 Central bank performs variety of important functions. All these functions in turn play important role in economic development of the country. Central bank can be deemed of as a castle that takes care of the whole banking system of the economy. =============================================================== HISTORY OF PAKISTAN BANKS UNITED BANK LIMITED PAKISTAN Description: With over 1400 domestic branches all over Pakistan and 19 overseas branches UBL is one of the largest banks in Pakistan. MCB BANK Description: MCB is one of the leading banks of Pakistan with a deposit base of about Rs. 280 billion and total assets of around Rs.300 billion. The Bank has a customer base of approximately 4 million, a nationwide distribution network of over 1,000 branches and over 450 ATMs in the market. ALLIED BANK LIMITED Description: Established in Lahore in 1942 before independence, Allied Bank Limited is one of the largest bank in Pakistan with more than 700 Branches connected to an online network. In August 2004 the Bank was restructured and the ownership was transferred to Ibrahim Group. HBL Description: HBL has the largest domestic branch network with over 1,400 branches and is present in 25 countries. THE BANK OF PUNJAB Description: Established in 1989, in pursuance of The Bank of Punjab Act 1989 and was given the status of scheduled bank in 1994.The Bank of Punjab is working as a scheduled commercial bank with its network of 272 branches at all major business centers in the country. The Bank provides all types of banking services.
71
Q6: Give A Comparison Between Central Bank And Commercial Bank? ANSWER:
DEFINITIONS OF CENTERAL BANK AND COMMERCIAL BANK
Central Bank Commercial Bank The central bank is formed under an act of The commercial bank is formed under the companys law. parliament or ordinance. The share capital of the central bank is owned by The share capital of the commercial bank is owned by the people the government or people The management and the employees are appointed The management and other employees are appointed the board of directors. by the government.
1. FORMATION: 2. OWNERSHIP
3. MANAGEMENT:
4. NUMBER OF BANK:
There is only one central bank for every country.
There are many banks in every country.
The central bank has only in land branches. It has The commercial banks have both inland and foreign branches no foreign branch. The aim of central bank is to maintain monetary The sole aim of commercial bank it to earn profit. and economic stability therefore profit is not the sole aim of the bank. The central bank can issue currency money like The commercial banks can issue plastic money, cheque, credit and visa card. Rs. 2, 5, 10, 50,100,500. The government and commercial banks are the The individual, partnership, limited companies are the account holders. account holders. The central bank advises the government on The commercial banks advise their customers for investment & business consultancy. financial matters. The central bank opens the government accounts The commercial banks open current, saving, PLS, fixed deposits accounts under various head of accounts.
5. BRANCHES: 6. AIM
7. ISSUE OF MONEY:
8. ACCOUNT HOLDER: 9. ADVISER:
10. NATURE OF ACCOUNT: 11. MONEY MARKET:
Central bank is the leader of the money market.
The commercial banks are the members of money market.
The bank controls the volume of credit through The commercial bank creates credit according to money available. various methods.
12. CREDIT CONTROLLER:
13. EXCHANGE CONTROL:

It is the controller of foreign exchange.
It is the authorized dealer in foreign exchange under the supervision of central bank.
The central bank can not be closed up even if The commercial bank can be closed up if the management so decides due to unsuccessful working at loss. business.
14. WIND UP
It makes the foreign payment on behalf of the It makes the foreign payment for customers due to import of goods and services. government.
15. FOREIGN PAYMENT:
72
It transfers money from one place to an other for It transfer the money from place to place for the people. the government and banks.
16. TRANSFER:
It arranges loans for the government and provides It provides loans, cash credit and overdraft to the loans to commercial banks as lender of last resort. customers.
17. LOANS
18. DISCOUNT OF BILLS.

It discounts the bills of the commercial banks.
The discount the bills of the customers.
The central bank does not provide evening The commercial banks provide evening banking services for the customers. banking services.
19. EVENING BANKING
It is responsible for the monetary stability of a They assist the central bank for achieving monetary stability. country.
20. MONETARY STABILITY:
21. RECEIVING OF DEPOSIT:

It does not receive deposits
It receives deposits of the people.
It is not the custodian of ornaments or important It provides the facility of lockers to their customers. documents of people.
22. CUSTODIAN:
CONCLUSION
Q7: DEFINE THE TERMS BANKER AND CUSTOMER.

73
WHAT IS THE RELATIONSHIP BETWEEN THE TWO? DISCUSS THE RIGHTS AND DUTIES OF BANKER AND CUSTOMER. ALSO POINT OUT THE REASONS FOR TERMINATION OF RELATIONSHIP? (2003, 2002,2006) ANSWER:
Banker or bank means any company which transacts the business of banking. A customer is a person who maintains an account with the banker. The relationship is created due to contract between the banker and customer. A banker is debtor for deposits and creditor for loans and advances.
BANKER:
G. CROWTHER SAYS:
A banker is a dealer in debt of his own and other peoples.
J.W.GILBERT:
A banker is a dealer in capital or more properly a dealer in money. He is an intermediate party between the borrower and the lender. He borrows from one party and lends to another.
CUSTOMER:
ACCORDING TO JUSTICE LINDLEY:
Customer is a person who has some sort of account either deposit or current account or some similar relation with a banker.
ACCORDING TO DR. HART:

A customer is one who has an account with the banker or for whom a banker habitually undertakes to act as such. The customer should have the following QUALIFICATIONS: a. He should not be a minor. b. He should be person of sound mind. c. He should not have been debarred form entering into any contract under the law.
RELATIONSHIP between banker and customer:

1. General Relationship: 2. Special Relationship:
1. GENERAL RELATIONSHIP: (A) DEBTOR AND CREDITOR:

The basic relationship is that of debtor and creditor. If a customer deposits money in the bank then he is the creditor and the bank is debtor. If the customer has an overdraft balance then he is the debtor and the bank is the creditor.
2. SPECIAL RELATIONSHIP:
(A) PRINCIPAL AND AGENT:
The customer is the principal when deposits cheque, drafts, dividends for collection with bank. The bank is an agent when he sells or purchase securities and installments of loans etc.
(B) BAILER AND BAILEE:

When a customer hands over his valuable to the bank for safe custody then the customer becomes the bailer and the bank is the bailee. Bank charges small amount for services rendered (Provided)
(C) PLEDGER AND PLEDGE:

When the customer pledges moveable property (goods & document) with the banker as security for loans, he becomes pledger & banker as pledge. This relationship is also known as Pawner and Pawnee. The pledged good should be returned (with out any damage) after the debt is repaid by customer. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
74
(D) MORTGAGOR AND MORTGAGEE:

When the loans are taken against immovable property (land & building) the customer is called mortgager and the banker is mortgagee.
(E) BANKER IS A TRUSTEE AND EXECUTOR:

The banker receives valuables and documents of the customer and keeps them in safe custody. The banker also executes the standing instructions of its customers. So banker becomes as trustee and executor.
(F) CONSULTANT:
Bank usually undertake financial consultancy for their client. In such a situation the bank becomes a consultant. When a bank advises his client on any important financial matter, bank becomes advisor and client becomes advisee.
(G) GUARANTOR AND PRINCIPAL DEBTOR:

Guarantor is the person who gives the guarantee. Principal debtor is the person for whom the guarantee is given. In todays banking business giving of guarantee is an ordinary job of a bank. When a bank gives guarantee, it becomes guarantor and client becomes principal debtors.
(H) FINANCER AND FINANCEE:

We all know that bank give loans to their clients after accepting appropriate security. When a loan is granted or fianc is provided, bank becomes financer and client becomes financee.
(I) INDEMNIFIER AND INDEMNITY HOLDER:

Indemnity is a contract when one party promises to save the other party from the loss caused to him by the conduct of the promisor himself or by the conduct of any other person. The person who promises to make goods the loss is called indemnifier and promise is called indemnity holder. So by this logic when bank makes a contract of indemnity with the client, bank becomes indemnifier and client becomes indemnity holder.
(J) REFERENCE AND REFEREE:

When a bank informs the state bank or any other authority about the financial status of a client, bank is called referee and client becomes reference.
RIGHTS AND DUTIES OF CUSTOMER:

1. RIGHT TO ENCASH A CHEQUE:
It is the right of the customer that his cheque is to be encashed. He should be given the amount as per the balance.
2. RIGHT TO RECEIVE DOCUMENTS:

It is the right of the customer to receive the pass book, cheque book, and statement of account from the bank.
3. RIGHT TO SUE AGEISTS WRONGFUL DISHONOUR:

A customer has the right to sue a bank if the bank dishonors the cheque with out any positive reason.
4. SECRECY:
It is the right of customer that bank can be kept his account secret and not disclosed to any one.
5. RIGHT TO INTEREST:
It is the right of customer to receive the interest and bank is bound to pay, depends upon the nature of account.
DUTIES OF CUSTOMER:
1. OBEY BANKING HOURS:
75 A customer must present his cheques for encashment (payment) and collection with in banking hours and days.
2. SAFE CUSTODY OF CHEQUE BOOK:

It is the duty of the customer to keep his cheque book safe. So that it may not go into the hands of unauthorized.
3. PRESENTATION OF CHEQUE BEFORE EXPIRY:

It is the duty of the customer that he should present the cheque with in six month of its issue date. Other wise no claim would be for payment.
4. CASE OF FORGED CHEQUE:

It is the duty of the customer that he must inform the bank believing that his signature is being forged on a cheque so that no payment should be made.
5. SAFE DEPOSITS:
The bank should act as trustee and keep the deposits in safe custody.
6. STANDING ORDER (BANKERS ORDER):

The bank obeys the standing orders of the customer in making periodical payments on his behalf. To club, library etc.
7. COURT ORDER:
It is the duty of the banker to stop the operation on a specified account as per the order of the court.
TERMINATION OF THE RELATIONSHIP:

The relationship between the banker and customer is terminated on the following grounds:
TERMINATION BY CUSTOMER:
1. 2. 3. 4. 5. 6. 1. 2. 3. 4. 5. 6. The customer will terminate the relationship on the following: The rate of interest/ profit is not acceptable to him. Bank does not give him the facility as offered by other. Not satisfied with the services. His confidence in the bank is not. He changes his place of residence. Due to the death of the customer. If the customer does not obey the banking hour. intimation of death of customer: Due to insanity of customer. Due to insolvency of the customers. Due to court order. Character is not satisfactory.
TERMINATION BY BANKER:
THE RIGHTS OF THE BANKER ARE AS UNDER:

1. RIGHT OF INTEREST AND CHARGES:
The banker has the right to charge interest on loans. It also charges commission as for services provided. The services include collection of cheques, bills of exchange, and dividends etc.
2. RIGHT OF LIEN:
The bank has a lien on the goods and securities of the customer until he repays his dues. The bank can sell such items after giving proper notice.
3. CHARGE COMPOUND INTEREST:

The banker has right to charge compound interest over-drafts calculated on daily balance. There is agreement between banker and customer about rate and time period. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
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4. ADJUSTMENT OF BALANCES:
The banker has right to adjust debit balance against credit balances.
DUTIES OF THE BANKER:

1. SECRECY OF CUSTOMERS ACCOUNT: Bank should maintain the secrecy of the customers account. He is disclosed the customer may suffer loss. 2. PURCHASE AND SALE OF SECURITIES Is the duty of the bank to obey the instructions ding the purchasing and selling of securities? 3. ISSUANCE OF LETTER OF CREDIT (L/C) It is one the duties of the bank to issue letter credit for its customers in the international
4. HONOUR THE CUSTOMERS CHEQUE.

It is the duty of the banker to honor cheques and by the customers. The cheques must be drawn properly presented during working hours.
CONCLUSION
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77
Q8: WHAT DO YOU MEAN BY MONETARY POLICY? DISCUSS ITS OBJECTIVE AND METHODS OF MONETARY POLICY? EXPLAIN THE LIMITATIONS OF MONETARY POLICY? OR
DISCUSS ROLE OF CENTRAL BANK AS CONTROLLER OF CREDIT? OR EXPLAIN THE DIFFERENT METHODS OF CREDIT CONTROL?
ANSWER:
Monetary policy is formulated and implemented by the central bank of the country. The central bank is responsible of monetary system. The central bank gives primary importance to public interest and profit seeking is only a secondary motive. Monetary policy refers to the measures which the central bank of a country takes in controlling the money and credit supply in a country, with a view to achieving certain specific economic objectives. The commercial banks increase total money supply in the country by creating credit. The ups and downs in the volume of credit affect the purchasing power of money. The central bank as Leader of money market controls the volume of credit for many purposes. The rules & regulations which make by central bank for controlling credit called monetary policy
DEFINITIONS: ACCORDING TO S.A. MEENAI:

Monetary policy is the regulation of the cost and availability of money and credit in the economy
ACCORDING TO H.W.ARUDT:
Monetary policy is that branch of economic policy, which is concerned, with regulation of the supply, the cost and the direction of credit.
ACCORDING TO H.G.JHONSON:
It is a policy of central bank in control the supply of money with the aim of achieving macro economic stability.
OBJECTIVE OF MONETARY POLICY:

Following are the main objectives of policy:
1. CONTROL ON INFLATION AND DEFLATIONS:

Central bank generates economic stability by controlling inflation and deflation in a country, through monetary policy.
2. PROMOTE ECONOMIC GROWTH:

The purpose of monetary policy may be to promote economic growth with stability. The establishment of new industries and improvement of existing industries depends upon economic stability.
3. EQUITABLE DISTRIBUTION OF CREDIT:

Monetary policy should be formulated in such a way to ensue increased flow of credit to backward areas and borrowers.
4. PROMOTE EMPLOYMENT:
The main objective of monetary policy is not only to maintain the conditions of employment in country but also create more opportunities of new employments.
5. IMPROVEMENT IN STANDARD OF LIVING:

It is also a major objective of monetary policy that it should improve the quality of life in a country.
6. INCREASE IN PRODUCTION:
78 With the help of monetary policy, various productive sectors are encouraged to get loans, due to which a comprehensive increase in production can be expected.
7. INCREASE IN INVESTMENT:
With the help of monetary policy, central ban plays vital role in the enhancement of investment with results in economic stability.
8. MORE EXPORTS:
The central bank helps in increasing the exports of a country, sanctioning credit to the selected industries. The commercial banks are directed to advance loans to the exporters.
9. STABLE PRICES:
The credit is controlled to keep price stable. The economic development depends on stable prices. Monetary authority determines the credit limits. The central bank can control money supply according to business needs for stable price level.
10. STABILITY IN EXCHANGE RATE:

The policy helps to stabilize the exchange rates of currency i.e. external value of home currency. It also means the maintenance of balance of payment in equilibrium.
11. STABLE MONEY MARKET:

The central bank must keep stable money market. The demand and supply of credit must be adjusted in the best of interest of the country.
TOOLS OF MONETARY POLICY:
(1)QUANTITATIVE CONTROL
(a) (b) (c) (d) (e) Bank Rate Policy: Credit Rationing Discount Rate Policy. Open Market Operation. Varying Reserve Ratio.
(2)QUALITATIVE CONTORL
(A) Consumer Credit Control (B) Direct Action. (C) Marginal Requirement. (D) Moral Persuasion. (E) Publicity.
1. QUANTITATIVE CONTROL:
(A) BANK RATE POLICY:
Bank rate is the rate at which central bank advances loans to commercial banks or discounts or rediscounts their bills.
(I) TO CONTROL INFLATION:

If the central bank wants to control inflation it will raise the bank rate and borrowings will becomes expensive. There will be low demand for loans. BRSM I I Inflation declines.
(II) IN DAYS OF DEFLATIONS:

In days of deflation the bank rate is decreased to encourage demand for loans. Bank rate money supply interest rate investment output GNP Economic growth.
(a) OPEN MARKET OPERATION:

Open market operations mean the purchase and sale of securities in the open market by the central bank. When the central bank wants to decrease the amount of money it will sell the securities in the open market, so the portion of banks cash will fall and subsequently the lending power of banks will declines. But if central bank wants to expand money supply it will purchase the securities in the way the lending power of bank will go up leading to an increase in credit. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
79
(b) CREDIT RATIONING:

This method is adopted by central bank at times of financial crisis. The central bank rations the credit of each member bank i.e. it fixes the limit up to which it can give loans to commercial banks.
(c) DISCOUNT RATE POLICY:

This method refers to the varying of the rate at which the central bank rediscounts the bills of exchange of banks. In case of inflation the central bank increases the discount rate but in case of deflation central bank decreases the bank rate.
(d) VARYING RESERVE RATIO:

Each commercial bank has to keep a certain percentage of its total deposit with the central bank. So central bank can also control the volume of credit by changing the reserve requirement of member bank. Whenever central bank desires to decrease money supply it raises the reserve ratio and whenever central bank wants to increase money supply it decrease reserve ratio.
(2) QUALITATIVE CONTROL:

(a) CONSUMER CREDIT CONTROL:
The central ban can increase or decrease number of installments payable under hires purchase or installment sales agreements. Sometimes the grant of credit for consumer goods on installments basis is completely banned by central bank.
(b) MARGINAL REQUIREMENTS:

Margin means the difference between the amount of loans and value of security. The minimum margin requirement on securities may be relaxed to encourage the borrowings and can be imposed to discourage the borrowing.
(c) DIRECT ACTION:

When commercial banks fail to follow credit policy of central bank, direct action may be taken against defaulter bank. By following actions: i. Does not provide the facility of clearing house. ii. Increase the reserve ratio of cash. iii. Refuse to discount the bills of exchange. iv. Declares the scheduled banks as non-schedule bank and takes the facility bank.
(d) MORAL PERSUASION:

The central bank can use this method of moral persuasion as leader of commercial bank. It regularly advises and guides commercial banks to follow a particular policy for loans, avoid mal practices and to adopt the right ways.
(e) PUBLICITY:
The central bank can inform other banks about credit and business conditions. The annual reports are published on trade, industry public finance and money market. The central bank keeps the nation well informed about the economic condition through publicity.
LIMITATIONS OF MONETARY POLICY:

Following are the limitations of monetary policy.
1. CO-OPERATION OF BANKS:
It is very difficult for central bank to control credit, if commercial banks do not extend their full co-operation.
2. CONFLICTING OBJECTIVES:
The greatest difficulty in controlling credit is the simultaneous achievement of conflicting objectives of price stability, economic stability etc.
3. CONVENTIONAL TECHNIQUES:
In under developed countries like Pakistan, the conventional techniques of credit control namely, bank rate policy, open market and reserve ratio are not all powerful. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
80
4. EXISTENCE OF NON-MONETIZED SECTOR:

In underdeveloped countries, there exits a large non-monetized and rural subsistence sector. Thus a big sector of community is quiet unaffected by the monetary policy.
5. DEFICIT FINANCING:
A large sale of deficit financing by govt. many makes the central bank powerless in controlling the credit which causes inflationary pressure in the country.
6. ABSENCE OF DEVELOPED MONEY MARKET:

In under developed countries like Pakistan central bank has to face man difficulties in controlling credit to absence of well developed money market.
CONCLUSION
===============================================================
HISTORY OF BANKING IN PAKISTAN

Banking in fact is primitive as human society, for ever since man came to realize the importance of money as a medium of exchange; the necessity of a controlling or regulating agency or institution was naturally felt. Perhaps it was the Babylonians who developed banking system as early as 2000 BC. IT is evident that the temples of Babylon were used as Banks because of the prevalent respect and confidence in the clergy. The partition plan was announced on June 3, 1947 and August 15, 1949 was fixed as the date on which independence was to take effect. It was decided that the Reserve bank of India should continue to function in the dominion of Pakistan until September 30, 1948 due to administrative and technical difficulties involved in immediately establishing and operating a Central Bank. At the time of partition, total number of banks in Pakistan were 38 out of these the commercial banks in Pakistan were 2, which were Habib Bank Limited and Australia Bank of India. The total deposits in Pakistani banks stood at Rs.880 million whereas the advances were Rs.198 million. The Governor General of Pakistan, Muhammad Ali Jinnah issued the order for the establishment of State Bank of Pakistan on 1st of July 1948. In 1949, National Bank of Pakistan was established. It started with six offices in former East Pakistan. There were 14 Pakistani scheduled commercial banks operating in the country on December 1973, the name of these were: National Bank of Pakistan Habib Bank Limited Habib Bank (Overseas) Limited United Bank Limited Muslim Commercial Bank Limited Commerce Bank Limited Australia Bank Limited Standard Bank Limited Bank of Bahawalpur Limited Premier Bank Limited Pak Bank Limited Lahore Commercial Bank Limited Sarhad Bank Limited Punjab Provincial Co-operative Bank Limited
81
Q9: HOW DO THE COMMERCIAL BANK CREAT CREDIT? INDICATE THE LIMITATIONS ON THE POWER OF A BANK TO CREAT CREDIT?
OR
(1998, 1999, 2004(S))
LOANS ARE CHILDREN TO DEPOSITS AND DEPOSITS ARE CHILDREN OF LOANS EXPLAIN:
CREDIT:
The term credit is an evolution of a Latin word Credo which means I entrust and I put my faith in. the word credit has been described by Gide in the following ways. An exchange which is completed after the expiry of certain period of time after payment. In simple words credit means a loan.
CREDIT CREATION:
The creation of credit or deposits is one of the most important functions of commercial banks. Like other corporations banks aim earning profits. Credit creation is the multiple expansions of banks demand deposits. When a bank advances a loan, it does not pay the amount in cash, but it opens a current account in his name and allows him to withdraw the sum by cheque. In this way the banks create deposits or credit. It is an open secret that banks advance a major portion of their deposits to the borrowers and keep smaller part of them for payment to the customers on demand.
DEFINITION: IN SIMPLE WORD:

The tendency on the part of commercial banks to expand their demand deposits as a multiple of their excess cash reserves is known as creation of credit
ACCORDING TO PROF CROWTHER:

The important work of bank is to provide easy. Medium of exchange for this payment and receipt to people. Banks are considered as manufacturer of credit. It means they are not only the dealer of money but in actual meaning they are creator of credit. A single bank can not create credit. It is the banking system as a whole which can make loans more than their excess cash reserves.
ASSUMPTIONS OF CREDIT CREATION PROCESS:

1. 2. 3. 4. 5. The process of credit creation is based on certain assumptions which are as under: There are many banks say A, B and C etc in the banking system. Each bank has to keep 20% of its deposits as required reserves. In other words 20% is the required reserve rate fixed by law. Business conditions remain normal in the country. Central bank does not adopt any credit policy. The loan amount drawn by the customer of one bank is deposited in full in the second bank, and that of the second bank into the third bank and so on. The bank creates credit in four ways. Loans. Overdraft. Discount bills of exchange. Purchase of assets.
PROCESS OF CREDIT CREATION:

i. ii. iii. iv.
By over drafting bank creates credit. Secondly, bank purchases the securities and paid them with its own cheque. The holder of theses cheque deposits them in the bank. They create deposits which is nothing other than creation of credit. It is recognized that the process of credit creation cant proceed without involvement of the whole banking system According to Samuelson. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
82 The banking system as whole can do what each small bank can not do. It can extend its loans and investment many times. The new reserves of cash created for its even though small bank is lending out only a fraction of its deposits
EXPLANATION:
The credit creation process can be explained follow. The bank receives Rs.5000 as fresh deposits form a customer. The bank keeps some cash to honor cheque of customers. The amount so kept is known as cash reserves. Suppose cash reserve ration is 20% the bank can lend 80% of deposits to the needy people. The position of first category bank after credit creation is as follow:
BALANCE SHEET OF 1ST BANK

Liabilities Deposits Rs 5000 Assets Cash 20% Loan 80% Rs. 1000 4000 5000
5000
The loan of Rs. 4000 may be deposited by the customer with this or other bank. The receiving bank can lend 80% of it by keeping 20% as cash reserve. It can be stated in the balance sheet of second bank
BALANCE SHEET OF 2nd BANK

4000 The deposits creation position of the third bank is stated below:
BALANCE SHEET OF 3rd BANK

3200
The process is not yet complete. It will continue further. The whole process can be settled in a summary form as follows:
EXPANSION OF BANK DEPOSITS:

Bank A B C D E F G H = Deposits 5000 4000 3200 2560 2048 1638 = = 25000 Cash Reserve 1000 800 640 512 410 328 = = 5000 Loans 4000 3200 2560 2048 1638 1310 = = 20000
83 The fresh deposit of Rs. 5,000 is used to create credit of Rs. 25,000. If the reserve ratio is 10% then created credit will be Rs. 50000. The amount can be calculated by following formula. Deposits x ____100______ Cash reserves% We have discussed the credit creation process through loans. Deposits can also be created by overdraft, discounting of bills & purchase of assets.
LIMITATIONS ON THE POWER OF BANK TO CREATE CREDIT:

Following are the limitations of credit creation:
1. AMOUNT OF CASH:
The credit creation power of bank depends upon the primary deposits, with the bank the larger the cash. The larger the amount of credit that can be created by bank.
2. PROPER SECURITY:
An important factor that limits the power of bank to create credit is the availability of securities because the bank advances loans to its customers on the basis of securities or a share, or a bank, or a building or some other types of assets.
3. BANKING HABITS OF THE PEOPLE:

If people have more banking habits banks will create more credit and vice versa.
4. LEGAL RESERVE RATIO:

The ability to create credit also depends upon the cash reserves ratio imposed by central bank. The higher this ratio the lower is the power to create credit.
5. SHORTAGE OF BORROWERS:
If there is shortage of borrowers due to business slump or due to any reason, the ability of banks to create credit will also be decreased.
6. CLEARANCE FACILITY:
If banks enjoy clearing house facility by the central bank then they can create more credit and vice versa.
7. BEHAVIOUR OF OTHER BANKS:

The power of credit creation is further limited by the behavior of other banks. If some of the bank do not advance loans to the extent required of the banking system, the chain of credit expansion will be broken.
8. POLICY OF THE CENTRAL BANK:

The central banks policy regarding the expansion and contraction of credit also restricts the credit creation by the commercial banks.
9. CASH IN CIRCULATIONS:
If the loan issued by the bank may not be deposited in to the bank. The cash may remain in circulation can not be used by banks for credit creation.
10. ECONOMIC CLIMATE:

Bank can not continue to create credit limitlessly. Their power to create credit depends upon the economic climate in the country.
SUMMING UP:
We can say that creation of credit is an important function of commercial banks. However the power of credit creation by the bank is not unlimited. ===============================================================
84
10. DEFINE LETTER OF CREDIT? WHAT ARE VARIOUS PARTIES

INVOLVED IN LETTER OF CREDIT? WHAT IS PROCEDURE TO OPEN A LETTER OF CREDIT? (1998, 1999, 2002)
Or What Do You Mean By Letter Of Credit? What Is The Procedure Of Opening The Letter Of Credit And Also Explain Its Kinds And Importance Of L.C For Banker, Importer And Exporter?
ANSWER:
The import and export of things take place between different countries. A letter of credit is a mean of making payment for the import of goods. It is issued by the buyers bank In favour of the seller. The terms and conditions of the sales are also stated in it. It is also known as documentary credit.
DEFINITIONS: ACCORDING TO FRANK HEINOUS

A letter of credit is a written instrument, issued b the buyers bank, authorizing the seller t draw in accordance with certain terms and conditions.
ACCORDING TO PRITCHARD:
A letter of credit is a commitment on the part of the buyers bank, to pay or accept draft, drawn upon it, provided such drafts, do not exceed specified amount.
PARTIES TO LETTER OF CREDIT:

According to above definition there four parties involved in this letter
1. IMPORTER, BUYER, OPENER, ACCOUNT PARTY:

Importer is a person who buys from a foreign country and at whose request; the letter of credit is opened. (Issued, established).
2. IMPORTERS BANK, ISSUING, OPENING BANK:

It is the bank, which opens the letter of credit at the request of importer, in favour of exporter.
3. EXPORTER, SELLER, (BENEFICIARY)

Exporter is the person who sells goods to a foreign country and in whose favour L.C. is opened.
4. EXPORTER BANK (NEGOTIATING, INTERMEDIARY BANK):

The bank which makes the payment to the exporter after receiving the L.C is called paying bank.
Following steps are involved for opening of letter of credit:

1. SALES CONTRACT:
The importer contracts the exporter for purchase of goods. He settles terms and conditions and mode of payment. Then the importer informs his banker to open a letter of credit.
2. PERFORMA INVOICE & IMPORT LICENSE:

The banker asks the applicant to provide import license and Performa invoice or indent of goods to be imported. After checking these documents these documents these documents the banker permits importer to file an application on printed form.
3. APPLICATION FORM:
Application from, usually known as application and agreement for irrevocable letter of credit, is filled up by the banker and signed by the importer. All terms and conditions of the sale agreement are recorded in it.
4. COMPLETION AND SCRUTINY OF THE FORM:

85 The letter of credit form is filled by the banker as per information provided by the applicant. The banker completes the form and scrutinizes the documents.
5. OPENING OF LETTER OF CREDIT:

After complete processing of the application, if the banker finds that every document is correct, it opens the letter of credit in favour of exporter behalf of importer.
6. INFORMATION TO THE ADVISING BANK:

The issuing bank in informs the advising bank (exporter bank) that letter of credit has been issued. Therefore 03 copies are made. One is kept by the issuing bank, and the other two copies are sent to the advising bank. The advising bank gives one copy to the exporter.
7. INFORMATION TO THE SELLER:

Advising bank informs the seller that letter of credit has been issued. The seller thus sends the goods to the buyer and provides shipping documents to advising bank. The bank checks the documents and then sends them to issuing bank.
8. MARGIN ON LETTER OF CREDIT:

State bank of Pakistan decides the percentage of amount to be paid to the issuing bank, by the importer. This interest is known as margin. This amount is deducted from the total payment made by the importer.
9. PAYMENT TO THE EXPORTER:

The issuing bank, on receipt of shipping documents, make payment to the seller. The shipping documents are released to the buyer, upon payments of the amount due.
TYPES OF LETTER OF CREDIT: (KINDS)

Following are various types of letter of credit:
1. IRREVOCABLE LETTER OF CREDIT:

It is a letter of credit which can not be cancelled or modified. It gives a complete protection to the exporter.
2. REVOCABLE LETTER OF CREDIT:

It is a letter of credit which can be cancelled and modified by the importer bank at any time without any obligation on its part. Therefore it is not usually acceptable by the exporter.
3. CONFIRMED LETTER OF CREDIT:

It is a letter of credit in which exporters bank also gives guarantee to make payment to the exporter even if the importers bank fails to make the payment. It means in this type of letter of credit exporter enjoys double protection i.e. form the importers banks as well.
4. UNCONFIRMED LETTER OF CREDIT:

It is a letter of credit in which the exporters bank does not gives any guarantee of payment to the exporter. Exporters bank will pay the exporter if it receives money from the importers bank.
5. DOCUMENTARY L.C.:
It is a letter of credit in which payment is made only after receiving the following documents: a. Bill of lading. b. Packing list. c. Invoice d. Insurance policy.
6. CLEAN LETTER OF CREDIT:

It is a letter of credit in which there is no condition of documents attached for the payment.
7. FIXED LETTER OF CREDIT:

86 It is a letter of credit in which the credit is available for a fixed total amount payable in one or more than one draft.
8. REVOLVING LETTER OF CREDIT:

It is a letter of credit in which the amount of credit can be revolved or renewed on the fulfillment of credit conditions.
9. RED CLAUSE LETTER OF CREDIT:

In this L.C. the intermediary bank can provide loan to exporter for packing and transportation of goods before the shipment goods.
10. GREEN CLAUSE LETTER OF CREDIT:

It is the developed from of red clause L.C. in which the exporter can get loan not only for packing or transportation but also for storage as well.
11. DEFERRED PAYMENT LETTER OF CREDIT:

Under such letter of credit the importer has the facility to make payment in installment.
12. BACK TO BACK LETTER OF CREDIT:

In this letter of credit is one where the person in whose favors it has been opened, uses it to establish another credit in favors of another person. Thus one credit backs another credit.
ADVANTAGES OF LETTER OF CREDIT:

ADVANTAGES TO EXPORTER:
1. ADVANCES MAY BE SECURED:
The exporter may secure an advance from the bank on the basis of letter of credit.
2. SECURITY FOR PAYMENT:

An irrevocable confirmed letter of credit provides maximum security to exporter for payment of sale price.
3. IMMEDIATE PAYMENT:
The exporter presents the L.C. dismounts to the advising bank after the shipment / dispatch of goods. The exporters bill is immediately paid by the advising bank.
4 PRE-SHIPMENT FINANCES:
Sometimes the exporter may get pre-shipment finances for the packing, handling etc.
5. NO CONCERN AFTER PAYMENT:

After receiving payments of the draft from the advising bank, the exporter needs no concerns.
ADVANTAGES TO IMPORTER:
1. SATISFYING THE EXPORTER:
An importer of goods from abroad will have to satisfy the exporters that he will be paid for the letter of credit enables the importer to satisfy the exporter.
2. NO RISK ABOUT THE CONTRACT:

The importer does not run any risk about the sale contract. He may be suing that terms in L.C. will be fully fulfilled because the opening and advising banks are responsible for that.
3. FACILITY OF PAYMENT:
87 The importer has not to pay the price of goods until he receives the title to goods, by means of which he can take the delivery of goods.
4. BUSINESS EXPLOSION.
Letter of credit facilities foreign business and makes the payment of goods easy.
5. BRIDGES CREDIT GULF:

Letter of credit bridges credit gulf between importer and exporter and makes the foreign trade possible.
6. PAYMENTS IN DOMESTIC CURRENCY:

Through letter of credit importer makes payment in his domestic currency and exporter receives in his domestic currency.
ADVANTAGES TO BANKER:
1. OWNERSHIP.
Until the payment of the amount, the ownership of goods remains with the bank. (Opening bank).
2. SOURCE OF INCOME:
Bank is a commercial institution; it charges commission to open letter of credit which is a source of income for the bank.
3. INCREASES BALANCE:
With the help of L.C. bank increases its balance as banks keep cash margin for opening for L.C.
4. NEW BUSINESS OPPORTUNITIES:

If bank fulfill its commitments well in time, promptly, and effectively it may have new business opportunities.
5. GOOD WILL.
If importers bank serves effectively, promptly, the exporters bank reciprocates by sending a bulk of business.
CONCLULSION
By functioning of letter of credit, every deal and transaction gets documented. This helps in the overall documentation of the economy. It helps the governments authorities in the assessment of businessmen for tax purposes. ===============================================================
EDUCATION FOR ALL

88 Q11: WHAT ARE THE DIFFERENT TYPES OF ADVANCES USUALLY MADE BY COMMERCIAL BANKS? WHAT IS THE PRECAUTIONS FOR BANK WHILE SANCTIONING LOANS?
A bank is a profit seeking institution. It attracts surplus balances from the customers at low rate of interest and makes advances at a higher rate of interest to the individuals and business firm.
TYPES OF BANK ADVANCES:

The loans and advances are the major source of income forms the commercial banks. In order to meet the various types of requirements of clients, commercial banks make different types of advances. These are as follows: 1. 2. 3. 4. Running finance (Over draft). cash finance (cash credit) Demand finance (demand loan). Discounting of bills.
1. RUNNING FINANCE: (OVERDRAFT).

It is a facility provided by a bank to his client that he can withdraw a limited amount in excess of his original balances. Running finance is granted to the approved and selected parties.
FEATURE:
a. CURRENT ACCOUNT:
This facility is only available in current account.
b. APPLICATION:
Application has to be made to bank requesting to grant overdraft.
c. CREDIT ANALYSIS:
Bank examines the reason the dealing of the party before granting overdraft.
d. SHORT TERM:
Overdraft is short term finance but the term can be negotiated with the bank.
e. INTEREST:
Interest is charged by the bank (daily product basis)
f. SECURITIES:
Bank in order to secure advance usually keeps certain securities. The securities may fix deposits receipts, life insurance policies, saving certificates, shares and bonds of listed companies.
g. GUARANTEE:
In certain cases when party is of sound reputation the bank can grant facility without keeping any security or it can be granted on the guarantee of a third party.
ADVANTAGES TO THE BANK AND CUSTOMER:

1. The bank earns income by making advances, which are mostly secured. 2. The Customer gets temporary accommodation. He has also the option to with draw the sanctioned amount in lump sum or in installments. He has also the facility of repayment in installments. Te interest is charged only on the debit balances.
2. CASH FINANCE (CASH CREDIT)

89 Cash credit means that bank after deciding the amount of loans transfer the amount in an account. The customer is given a cheque book of that account and he can with draw any portion of the amount. Cash credit is similar to overdraft only difference is that current account is not need in this case.
FEATURES: a. SEPARATE ACCOUNT:

Usually the cash finance is provided in separate a/c. the bank transfers the fund sin the credit account.
b. SECURITIES:
The bank can demand securities against loan. E.g. shares bonds, bill of lading, cotton, rice, ware house keepers bill.
c. TERM FINANCE:
Cash credit can be granted for short or medium term.
d. INTEREST:
Interest is charged on the amount withdrawn by the client. It is charged on daily basis so client can save the interest by depositing money at any time.
e. PLEDGE:
Usually the cash credit is advanced against pledge or hypothecation of goods.
3. DEMAND FINANCE (DEMAND LOAN)

Demand loans are the loans granted by banks for an agreed period of time. The whole amount of loan is transferred to the account of customer. The can withdraw it either in lump sum or in installments.
FEATURES: a. PURPOSE:
The purpose of demand finance is to meet the working capital requirements of the business people. b. INTEREST: Interest is charged on the whole amount and time period for which it is taken.
c. SECURITIES:
The loan advanced is secured by way of mortgage or pledge. Securities are government securities, shares, life insurance policy, fixed deposit receipts. Etc.
d. REPAYMENT:
The loan is repayable with in a fixed time period. However the bank reserves the right to call bank the loan after one year.
e. RENEWAL:
It can not be renewed. A customer in need of more funds can ask for other demand loans.
CLASSIFICATION OF DEMAND LOANS: I. TERM FINANCE:

Term loans are advanced for a particular time period. They are repayable at eh expiry of period.
II. PERSONAL FIANC:

Personal loans are advanced for the improvement of living standards. Purchase of vehicles or construction of houses.
4. DISCOUNTING OF BILLS:
90 By discounting of bills exchange, bank makes a payment to the holder of amount before the maturity date. Bank deducts an amount called discount for making early payments.
FEATURES: a. INCOME:
The discount constitutes the income of the bank.
b. FINANCE.
The holder of instrument can get finance (cash) from the bank. He does not have to wait until maturity.
c. TIME PERIOD:
The time period of the bill may be 7 days or more.
Conditions observed by banks in advances

While sanctioning loans bank follow the following rules.
1. CUSTOMER TO BE HONEST, RESPONSIBLE AND TRUSTWORTHY:

Before advancing loans against goods or of title to goods, ht banker must thoroughly satisfy himself about the honesty, truest worthiness and experience of the borrower in the trade.
2. FAMILIARITY WITH DIFFERENT MARKETS:

The banker must be familiar with the fluctuations of the prices in the commodities against which he is to advance saleable loans.
3. READILY SALEABLE COMMODITIES:

The banker should advance loans against those commodities which are readily saleable in the market.
4. COMMODITIES HAVING STABLE MARKETS:

The banker should prefer to advance loans against to advance loans against those commodities whose demand is inelastic.
5. PROPER EVALUATION:
The banker should accurately ascertain the prices of the commodities pledged for loan. The can get information form bankers, Journals and newspapers.
6. PROVISION OF ADEQUATE WAREHOUSES:

The banker must take every care in properly storing the goods pledge with the bank. Deterioration in the commodities reduces the securities of the bank.
7. POSSESSION OF GOODS:
In order to secure loan, the banker should take possession of the goods.
8. INSURANCE OF GOODS PLEDGED:

The banker must also insure the goods of the customer pledged with the bank against loss of fire, theft etc, up to full value of goods.
9. ABSENCE OF PRIOR CHARGES:

The bank as far as, possible, obtains security, which is free from any prior charge.
CONCLUSION
91
Q12: WHAT IS PRIVATIZATION? WHAT ARE ITS OBJECTIVES? EXPLAIN ITS MERITS & DEMERITS? (2004, 2003) ANSWER: DEFINITION:
BY CHRIS COOK:
Privatization means selling of nationalized industries and other parts of the public sector to private businesses and individuals.
BY CHRISTOPHER PASS
Privatization is the denationalization of an industry transferring it from public to private ownership.
OBJECTIVE OF PRIVATIZATIONS:
1. IMPROVE PERFORMANCE:
The purpose of privatization of banks is to improve performance. When ownership is in private hands they work for profit. The operational efficiency increases due to proper control.
2. PROMOTE COMPETITION:
The purpose of privatization of banks is to promote competition. The owners are interested to increase the rate of deposits. The larger the deposits the larger the profit. The sense of competition develops among bankers.
3. REDUCE BURDEN OF GOVERNMENT:

The business in conducted by private sector. The govt. can frame rules for proper working. It is not the duty of government to own and run financial institutions. The privatization of banks reduces burden of government.
4. RELEASE OF FUNDS FOR SOCIAL SECTORS:

The privatization of banks provides funds to the government. The capital invested in bank is available for social sectors. The govt. can set up schools and hospitals for welfare of general public.
5. ACCELERATE PACE OF INDUSTRIALIZATION:

The sale of banking business to private parties is helpful to accelerate place of industrialization. The funds invested in banking sectors become free for development of physical bank technological infrastructure.
6. PROMOTE CAPITAL MARKET:

The privatization of banks is useful for promotion and strengthening of capital market. The shares of privatized banks are sold to general public. The capital market becomes strong due to increase in shareholders.
ADVANTAGES OF PRIVATIZATION:
1. PROFESSIONAL MANAGEMENT:
The owners of privatized banks can hire services of professional management. If is large-scale business and requires the services of experts in the filed of banking. The professionals can run banking business on sound lines.
2. HEALTHY COMPETITION:
Privatization of banks is essential for healthy competition. Private Banks work for Profit. The sense of competition develops for increasing the rate of profit. The management must control wasteful competition.
3. OPERATIONAL EFFICIENCY:
92 The efficiency of privatized banks increases due to reasonable pay, promotions and other facilities for employees.
4. REASONABLE PROFIT:
The main source of profit is lending. Moreover management can control its expenses in order to raise the rate of profit. The loans are provided at higher rate, and receive deposit at low rate. The difference is Profit of bank.
5. QUALITY SERVICES:
The banks are successful if they offer all services to customers. The like quality services in order to do their business. It is the age of competition so quality services are the need of the day.
6. EQUAL INCOME:
There is equal income distribution due to privatization of banks. The shares are sold to general public. The number of shareholders may be in million. The profit is distributed among shareholders.
7. PRODUCTIVE LOANS:
The banks can offer loans to deserving parties. The loans are provided for productive purposes. The banks may discourage consumption loans or speculative loans. Productive loans can increase the rate of economic development.
8. EMPLOYMENT OPPORTUNITIES:
The banks provide loans to businessmen and other peoples. They can set up new companies or expand their existing business. In this way employment is created for many people.
9. EARNING FOREIGN EXCHANGE:

The management can open branches in other countries. The banks earn foreign exchange for the country. In PVT sector effort is connected with reward.
DISADVANTAGES OF PRIVATIZATION:
1. SURPLUS EMPLOYEES:
The draw bank of privatization is that employees are declared surplus. There is increase in the rate of unemployment. The jobless workers increase the worries of welfare state.
2. NO BRANCH IN RURAL AREAS:

The banks hesitate to set up branches in rural areas. The facilities are provided in cities where sufficient deposits are available. So a large part of population can not get help.
3. UNBALANCED GROWTH:
The management of privatized banks provides loans in particular areas. The result is that there is unbalanced growth in the country. The areas may remain underdeveloped where loans are not disbursed.
4. JOBS FOR RELATIVES:

The management of privatized banks may not follow the policy of merit. The deserving persons are neglected and jobs are provided to friends and relatives.
5. LOANS TO RELATIVES:
The management likes to lend money to persons who are relatives or friends of directors of banks. In this way only few people have approach for loans.
6. OWNERS ASSOCIATION:
93 The owners of private banks can make information agreement for earning high profits. The bank can raise the rate of service charges. Such associations do not care for the customers.
TYPES OF PRIVATIZATION:
1. PARTIAL PRIVATIZATION:
Where a part of enterprise is transfer to PVT sector.
2. LIBERATION:
When the ownership of enterprise is transferred in full it is known as liberation.
3. FRANCHISING:
When got. Gives the right to PVT sector to use his name for business proposes for a specific period of time it is known as Franchising.
PRIVATIZATION IN PAKISTAN
After The nationalization of bank, it was hoped that it will play vital role in economic development but unfortunately in spite of showing remarkable performance, there was a large scale corruption, nepotism, and unbalanced growth, distribution of credit. The govt. therefore, decides to privatize banks. A privatization commission was set up on January 12, 1991. The bank ordinance 1991 was promulgated for the privatization of banks.
IMPLEMENTATION OF POLICY:
In first step of implementation MCB and ABP were privatized. Further more UBL, HBL, NBP has also been enlisted for privatization.
CONCLUSION
EDUCATION FOR ALL
94
Q12 (A) DEFINE CHEQUE & BILLS OF EXCHANGE? DISCUSS ITS FEATURES? ALSO POINT OUT THE DISTINCTION BETWEEN THE TWO:
ANSWER: DEFINITION: CHEQUE: (ACCORDING TO N.I ACT 1881.)
UNDER SECTION 6 CHEQUE HAS BEEN DEFINED AS A CHEQUE IS A BILL OF EXCHANGE DRAWN ON A SPECIFIED BANK AND NOT EXPRESSED TO BE PAYABLE OTHERWISE THAN ON DEMAND.
BILLS OF EXCHANGE:
Under Section 5 Bills Of Exchange Has Been Defined: In Instrument In Writing Containing An Unconditional Order, Signed By The Marker Directing A Certain Person To Pay A Certain Sum Of Money Only To Or To The Order Of A Certain Person Or To The Bearer Of The Instruments.
DISTINCTION BETWEEN CHEQUE & BILL OF EXCHANGE: CHEQUE 1. DRAWEE:

A cheque is always drawn on a bank.
BILLS OF EXCHANGE
Bills of exchange can be drawn on any person. A B/E must be accepted by the drawee before it is presented for payment.
2. ACCEPTANCE:
A cheque does not require any acceptance.
Payment of cheque can be cancelled by the Payment of bills of exchange can be cancelled. notices of customer. A cheque can be crossed for the purpose of Bills of exchange cannot be crossed. safety.
3. CANCELLATION: 4. CROSSED: 5. circulation:
A Cheque is not intended for circulation.
A B/E circulates from hand to hand freely. A B/E can be discounted.
6. DISCOUNT:
A cheque con not be discounted from any bank
Cheque is always payable on demand, so there is A grace days allowed in this case is of 3 days. no question of allowing grace days.
7. GRACE DAYS:
8. IN SETS:
A cheque is never drawn is sets.
A B/E, specially a foreign bill is drawn in sets.
There is no system of noting or protest in case of There is a system of noting or protest in case of dishonor of a bill. cheque
9. NOTING OR PROTEST:
The main purpose of a cheque is to minimize the A B.E is drawn for the purpose of receiving & giving credit. use of metallic money.
10. PURPOSE:
11. PAYABLE ON DEMAND:

A cheque is always payable on demand
A B/E may be drawn payable on demand or at a fixed time.
95
A cheque drawn payable to bearer on demand is A B/E can be drawn to bearer on demand is void valid.
12. PAYABLE TO BEARER ON.
It must be drawn in printed form, issued by the A B/E can be drawn on any person and there is no printed from. particular bank.
13. PRINTED FORM: 14. STAMP.
A cheque does not require any stamp.
A B/E must be stamped.
The drawer of a cheque is discharged only if he The drawer of bill is discharged, if it is not suffers any damage by delay in presentiment for presented for payment. payment.
15. CONDITION OF DISCHARGE.
16. NOTICE OF DISHONOUR:

Notice of dishonor is not required in cheque.
The notice of dishonor is required in bill.
CONCLUSION
===============================================================
96 Q12 (B) DEFINE CHEQUE & PROMISSORY NOTE? EXPLAIN ITS FEATURES? ALSO POINT OUT THE DISTINCTION BETWEEN THE TWO?
ANSWER: DEFINITION
Cheque: UNDER SECTION 6 OF NEGOTIABLE INSTRUMENT ACT: A CHEQUE IS A BILL OF EXCHANGE DRAWN ON A SPECIFIED BANK AND NOT EXPRESSED TO BE PAYABLE OTHERWISE THAN ON DEMAND.
PROMISSORY NOTE:
ACCORDING TO SECTION 4 OF N.I. ACT 1881: A Promissory Note Is An Instrument In Writing (Not Being A Bank Note Or A Currency Note) Containing An Unconditional Undertaking, Signed By The Maker, To Pay A Certain Sum Of Money Only To, Or To The Order Of A Certain Person, Or To The Bearer Of The Instrument.
DISTINCTION:
CHEQUE 1. PARTIES. 2. PRINTED FORM:
It is drawn on a printed form, provided by bank.
PROMISSORY NOTE.
There are three parties in cheque i.e. drawer, There are two parties in promissory note i.e. marker and payee. drawee, & payee. It can be drawn on any paper and does not need any printed form. MAKER: Maker is payable of certain amount Crossing is not allowed in pro-note. Payment is not stopped in case of pro-note Payment is not stopped in case of pro-note. It can not be drawn Payable to Maker It is an unconditional promise. Maker of note cannot be payee.
3. DRAWER:
Drawer is the receiver of payment.
4. CROSSING:
Crossing is allowed in cheque
5. STAMPING DUTY:
No stamp duty is to be payable.
6. STOPPING OF PAYMENT:
Drawer can stop the payment.
7. PAYABLE TO MAKER:
Cheque can be drawn PAYABLE TO MAKER.
8. PROMISE AND ORDER:

It is an unconditional order.
9. MAKER AND PAYEE:

Drawer of cheque can be payee.
Drawer of cheque stands in an immediate relation The liability of maker of promissory note is primary. with drawee not payee.
10. MAKERS POSITION:
The liability of drawer of cheque is secondary. He The liability of maker of promissory note is is liable only when the drawee. Does not honor the primary. cheque.
11. NATURE OF LIABILITY.
12. PAYABLE TO BEARER:

Cheque can be drawn payable to bearer.
Promissory note cannot be draw Payable to Bearer
97
Cheque can only be drawn promissory note can be Promissory note can be drawn on any person including bank. drawn on any person inducing bank.
13. ISSUANCE OF INSTRUMENT:
Where a cheque has been dishonored then drawer A promissory note need not be protested. can protest on solid grounds.
14. protest:
15. NOT OF CONTRACTS:

There are three contracts i.e. B/W drawer & Drawee B/W Drawee & payee B/W payee & Drawer.
There is only one contract i.e. B/W. Maker & Payee.
CONCLUSION
===============================================================
Q12 (C) DEFINES PROMISSORY NOTE AND BILLS OF EXCHANGE? DISTINCTION BETWEEN PROMISSORY NOTE AND BILLS OF EXCHANGE? 2001. ANSWER: Definition:
According to section 4 of N.I. Act 1881: ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
98 A promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of a certain person, ort o the bearer of the instruments.
DISTINCTION BETWEEN BILLS OF EXCHANGE & PROMISSORY NOTE: PROMISSORY NOTE 1. NUMBER OF PARTIES.
There are two parties in a promissory note name the maker and the payee.
BILLS OF EXCHANGE.
In a bill there may be three parties, the drawer, the drawee, and the payee.
A promissory note is written by principal debtor But a bill of exchange is written by the creditor who has to receive payment. who has to make payment of the note. A promissory note is an unconditional promise to But a bill of exchange is an unconditional order by the drawer to the drawee. pay. The liability of marker of a promissory note is The liability of drawer of a bill is secondary and unconditional. The drawer is liable only when the primary. acceptor does not honor it. A note requires no acceptance as it is signed by The bill must be accepted by the drawee before it is presented for payment. the person who is liable to pay. In case of promissory note, no notice is necessary In bill of exchange notice of dishonor must be given by holder to all prior parties who are liable to the maker in case of dishonor. to pay. In a promissory note the marker can not be the In a bill the drawer and payee may be the same payee because the same person cannot be both the person when bill is drawn pay to me or my order. promisor and promise. In a promissory note there is a promise to make In a bill of exchange there is an order for making the payment. the payment. The maker of a pro-note stands in immediate The drawer of an accepted bill stands in an immediate relation with the acceptor and not the relation with the payee. payee. A bill can be so drawn provided it is not drawn 10. PAYABLE TO BEARER: payable to bearer on demand. A pro-note cannot be drawn payable to bearer.
2. MAKER.
3. NATURE OF CONTROL
4. NATURE OF LIABILITY:
5. ACCEPTANCE:
6. NOTICE OF DISHONOUR:
7. MARKER AND PAYEE:
8. PROMISE AND ORDER: 9. MAKERS POSITION:
11. COPIES:
A note cannot be drawn in sets.
12. PROTEST:
A note need not be protested.
A foreign bill can be drawn in sets. A foreign bill must be protested for dishonor, when it is required by law.
A note cannot be made payable to the marker A bill can be made payable to the maker himself as one person may become both drawer & payee. himself. The provisions relating to presentment for These provisions are applicable to a bill of acceptance, or acceptance for honor are not exchange. applicable. 15. POSSIBILITY OF CONDITIONAL: The acceptance of a B/E may be conditional with the consent of the holder. A pro-note cannot be made conditional.
13. PAYABLE TO MAKER:
14. CERTAIN PROVISIONS:
CONCLUSION
99 ===============================================================
Q12 (D) WHAT IS DIFFERENCE BETWEEN PROMISSORY NOTE, BILL OF EXCHANGE & CHEQUE? 2001(A) ANSWER:
PROMISSORY BILL OF EXCHANGE CHEQUE
100
A promissory note is written A bill of exchange is written A cheque is written by the by the creditor. person who has account in the by debtor. bank. 2. NUMBER OF There are three parties i.e. the In cheque also the drawer and PARTIES: payee may be the same person. There are two parties in the drawer, the drawee and payee promissory note i.e. the maker and the payee.
1. MAKER:
The drawer and payee may be In cheque also the drawer and payee may be the same person. The maker and payee are the same person. different persons in promissory note. There is no drawee of a Drawee of a bill of exchange Drawee of a cheque is always may be anyone including bank. a bank. promissory note.
3. MAKER PAYEE:
&
4. DRAWEE:
A promise or order contains an A bill of exchange contains an A cheque also contains an unconditional order to pay. unconditional promise to pay. unconditional order to pay.
5. PROMISE ORDER:
OF
6. ACCEPTANCE:
A promissory note needs no acceptance as it written and signed by the person who is liable to pay. 7. NATURE OF RESPONSIBILITY:. The responsibility of a maker of a promissory note
A bill must be accepted by the A cheque does not require drawee. acceptance of the drawee before its payment. The responsibility of a drawer The responsibility of of bill of exchange drawer of a cheque to the the
CONCLUSION
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101
Q13: WHAT DO YOU MEAN BY NATIONALIZATION? EXPLAIN THE CAUSES OF NATIONALIZATION? EXPLAIN ITS MERITS & DEMERITS? (2000, 2002)
ANSWER:
INTRODUCTION:
Nationalization means the transfer of any property or institution from private to state ownership. It refers to the process where by through legal and legislative approach, the private institutions are taken up by state or government. The government then manages and controls such institutions. A private commercial bank is opened by private persons. The ownership and control remains in their hands. But sometimes the ownership of private bank is taken over by the government. It is called nationalization of commercial banks.
DEFINITION: BY ROBERT MILLARD:

Nationalization is the act of converting a privately owned resource into one owned by central government.
BY ALAN ISAACS:
Nationalization is the process of bringing the assets of a company into the ownership of the state. Govt. of Pakistan nationalized all commercial bank on 1st January 1974. There were 23 scheduled banks in the country that time with 2942 braches. The banks which were nationalized are SBP, all commercial banks, IDBP, the government set up Pakistan banking council (PBC) to run the administration of all commercial banks.
CAUSES OF NATIONALIZATION OF BANKS:

1. CONCENTRATION OF WEALTH:
According to one estimate 200 families borrowed 75% of total loans and advances. A few people were using national saving in their interest. Many small producers and artisans were unable to get loans facility. The result was concentration of wealth in few hands.
2. USE OF LOANS:
Commercial bank used to give loans to those persons who were in a position to repay the loans and was little bothered about use of loans. So loans were used for black marketing hoarding & speculations etc.
3. UNBALANCED DISTRIBUTION OF CREDIT:

There was unbalanced distribution of credit for sectors of the economy a lot of credit was given to industrial sector and agriculture sector was ignored badly. Only 10% credit was given to agriculture.
4. PROTECTION OF BLACK MONEY:

Private Banks protected black money in their account because the govt. was not legally allowed to know the deposit figure of these banks. More over these banks. More over these people also obtained credit facilities to increase their wealth.
5. PROFIT MOTIVE:
The banks changed their priorities and preferences. In spite of aiming at the macro economic growth, development, and prosperity, they aimed to maximize profit. The saving of the people was utilized according to the personal interests and not the national interest.
6. WASTEFUL COMPETITION:
102 Banks engaged themselves in a wasteful competition race. This badly hampered the pace of economic growth. Heavy expenditures were made by all banks for wide scale advertisement and publicity.
7. NO UNIFORMITY IN SERVICE RULES:

There was no uniform and consistent pattern of services rules. The promotions and increment were given on the personal discretion of bosses or directors and there was no security of service.
8. EXPLOITATION OF BANK EMPLOYEES:

Commercial banks exploited their employees in different ways. The employment and promotion in banks was due to deposits. The hard labor, devotion was useless.
9. CREATION OF CREDIT:
Credit up to a certain limit is fruitful for the economy but in those days commercial banks were creating credit just for the sake of their profit.
10. FAVORITISM:
Bank owners used to appoint their own relatives to high portion in banks and gave them heavy salaries.
11. LOW EFFICIENCY OF BANK BRANCHES ABROAD:

A few Pakistani banks had opened their branches in foreign countries. The working efficiency of those banks was very low and most of them were running loss.
12. INEFFECTIVE MONETARY POLICY OF SBP.

Although commercial banks were working under SBP as scheduled banks, yet they did not co-operate with SBP in implementation of monetary policy.
ADVANTAGES OF NATIONALIZATION:
1. FAIR DISTRIBUTION OF WEALTH:
Commercial banks give loans in accordance with the credit policy of SBP. Along with big industrialist, small businessmen can get credit facilities.
2. PROPER DISTRIBUTION OF LOANS:

There is a proper distribution of loans. And credit is given for agriculture sector, construction of houses, small business. Distribution is more balanced.
3. BETTER ADMINISTRATION OF BANKS:

Govt. has setup an executive board for each commercial bank to run the administration of banks. On top of it there is Pakistan banking council which is responsible for general supervision of these banks.
4. GROWTH OF THE LEVEL OF THE EMPLOYMENT:

After nationalization many vacancies were announced and new jobs were created by opening new branches of banks.
5. BENEFITS TO BANK EMPLOYEES.

After nationalization the employees yet many monetary benefits. Their jobs were protected, salaries were increased and allowances were raised.
6. DEVELOPMENT OF AGRICULTURAL.
Commercial banks gave special attention to agricultural sector. Now more tan Rs. 10 billion is given to agriculture to purchase inputs e.g. fertilizers, seeds, machinery etc.
103
7. PROTECTION OF NATIONAL INTEREST:

Banks are big commercial organizations which earn a lot of profit, every year. Now a huge amount of money is being spent on development projects to benefits the whole nation.
8. BETTER WORKING OF FOREIGN BANK BRANCHES:

Now only the most experienced bankers are transferred to foreign bank branches on merit due to which the working of these branches has improved. As well as opening of new branches.
9. EFFECTIVE MONETARY POLICY:

The SBP has now an effective control over commercial banks. There is a uniform credit policy for all banks. Commercial banks are bound to cooperate with SBP for the effective implementation of its monetary policy.
DISADVANTAGES:
1. UNBALANCED DISTRIBUTION OF CREDIT:
In spite of the claim that more credit facilities would be provided to farmers, it has not been done so far. The distribution of credit is still unbalanced. According to statistics industrial and agricultural sectors get 45% and 9% respectively, which shows that agriculture sector is still neglected.
2. LOW EFFICIENCY OF THE EMPLOYEES:

Bank officers have now become govt. officers so they are not very commercial minded these days. They do not take pains to launch deposit campaigns to promote the level of saving in the country. Thus their working efficiency is less than before.
3. FAVORITISM:
Employment in banks is now provided by Ministry of Finance under rules formed by the government. Govt. officials in the ministry favour their kith and Kin for job in the banks promotion in bank is largely depends on Push & pull for the officers and not on merit. So a lot of people are being deprived of them job opportunities.
CRUX:
The objectives of nationalization have not been achieved yet. Favoritism, Nepotism, and malpractices have destroyed the commercial banks. The total amount of stuck up loans of banks and DFIs is standing at Rs. 260 billion by the end of 2000. ===============================================================
104
Q14: WHAT IS THE IMPORTANCE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF A COUNTRY? ALSO DISCUSS THE ROLE OF BANKS FOR THE DEVELOPMENT OF A COUNTRY? ANSWER: IMPORTANCE OF COMMERCIAL BANKS:
Commercial banks are considered as the back bone for the economic development of a country. They are the dealer in debts. They operate as lenders and deposit administrators. The economic significance of the commercial banks is given below:-
1. INCREASE IN SAVINGS:
Saving is necessary for increasing the national income and employment. The bank offer reasonable rate of profit on deposits. The people are motivated to increase their savings. The amount so saved becomes a source of income for depositors.
2. INCREASE IN INVESTMENTS:
The banks collect small savings from the people, the amount collected is lend to businessmen for increasing the rate of investment. The result is that there is increase in production of goods and services. The increased production leads to higher national income and employments.
3. TRANSFER OF MONEY:
The bank transfer money from one place to another, it helps to make business receipts and payment. There is increase in dealing and mobility of goods. There is increase in demand and supply of goods.
4.INDUSTRIAL DEVELOPMENTS;
the banks are important for industrial development. They provide short term as well as long term loans. The businessmen are encouraged; they take the business risk and use latest technology. The economic development.
5. FOREIGN TRADE;
The banks provide facilities in foreign trade. They provide guarantee to honor the bills of exchange of their customers. They deal in foreign exchange; they pay for imports in foreign currency and receive export from abroad. Therefore, the commercial banks promote foreign trade.
6. LOCAL TRADE:
The banks provide financial advice to their customers. They arrange to buy and sell, shares & certificates, they also provide business expansion loans. Thus the banks play an important role for the development of local trade.
7. LOANS TO GOVERNMENT:
The bank provides loans to the govt. by purchasing bills and bonds. The government collects money to complete public works program.
8. EMPLOYMENT LEVEL:
A large part of money supplied in the economy is the credit money, created by commercial banks. The credit money is used for production purposes. More people are hired at reasonable wage rate. Therefore, employment level moves upward.
9. NEW PRODUCERS:
The commercial bank provides business start loans to the people who have technical skill and experience but no funds. The bank offers credit facility to put the creative mind on work. The new factories are established for increasing production and national income.
ROLE OF BANKS:
The role of banks for the development of a country is as under: (a) Out put increase. (b) Income increase. (c) Change.
(A) OUTPUT INCREASE: ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554

105
1. AGRICULTURAL PRODUCTIONS:
The banks increase level of agricultural production. The bank loans are granted to purchase seeds, fertilizers, and payment of other expenses. The agricultural sector provides raw material to industrial units.
2. INDUSTRIAL PRODUCTION:
The banks increase industrial production. The loans are granted for raising level of production. During peak season funds position of every business is tight. At such times banks plays their part in prosperity of nation.
3. LOCAL TRADE INCREASE:

The banks increase volume of local trade. The banks provide short term loans to businessman and traders. They loans are required to meet current obligations. They failure to meet running expenses means the failure of business.
4. FOREIGN TRADE
The banks raise level of foreign trade. The banks open letter of credit for import goods. Foreign trade is possible though banks only.
(B). INCOME INCREASES:

1. GOVERNMENT INCOME:
The governments income increases due to banks. The banks pay tax on their profit. The credit expansion of banks allows funds for business sector, which is able to generate income for government.
2. INVESTORS INCOME:
Income of investors goes up due to banks. The stock exchange provides investment opportunities to holders of money. The banks play their part for raising income of investor.
3. OWNERS INCOME:
The owners increase their income due to effective working of banks. The owners earn more profit due to better performance.
(C) CHANGE:
1. USE OF COMPUTER:
There is structural change due to use machines and computers. The banks prepare their accounts through computers. Moreover banks can sell their time on computers for preparing accounts of people who can not buy computers.
2. TECHNOLOGY TRANSFER:
The banks play their role in transferring of technology. The banks make payments for purchase of technology. Automatic machines provide quality products. The banks can grant loans to such people who have courage to lead the business world
3. SPECIALIZATION:
The banks play their role for specialization. The increase in activities is possible due to loans and advances. The increased work requires division of work or placement of workers on the basic of their abilities. There is maximum output with minimum cost due to specialization or division of labor.
4. MOBILITY OF LABOUR:
The banks play their role in the development of the economy. The banks provide funds for raising value of production. The mobility of labor may be vertical and horizontal. The establishment of new businesses attracts people who want better pay and other benefits. The work is provided according to their qualification and training. CONCLUSION
106
Q1: WHAT DO YOU MEANS BY BUSINESS FINANCE AND WHAT IS THE IMPORTANCE OF BUSINESS FINANCE?
ANSWER: INTRODUCTION: Finance is the lifeblood of every business. It flows in mostly form sale of goods & services. It flows out for meeting various types of expenditures. The activating element in any business which may be an industrial or commercial undertaking is FINANCE. FINANCE IS NEEDED FOR TWO PURPOSES: 1. For initial expenditure such as land, building, plant, machinery, fixed assets. 2. for carrying out the current transactions i.e. WORKING CAPITAL
DEFINITION:
ACCORDING TO B.O. WHEELER:
Business finance is that business activity which is concerned with the acquisition and conservation of capital funds in meeting the financial needs and overall objectives of the business enterprise.
ACCORDING TO C.A DAUTON:

All those activities which have to do with the provisions and management of funds for satisfactory conduct of business operation.
ACCORDING TO KRIZ AND DUGGER:

Business Finance is the flow of capital and credit that makes business possible.
IMPORTANCE:
The success and failure of a business in the private sector is linked with finance. Business without finance is just like a fish without water.
1. PURCHASE OF ASSETS:
When business is set up many assts such as land, building, plant & machinery etc are purchased. The purchase of these assets is possible with finance.
2. MAINTENANCE OF ASSTS:
For the proper working of assets repair, renewal and maintenance is necessary. This work cannot be done with out finance. So importance of finance cannot be over looked.
3. BUSINESS EXPANSION:
The increase in the size of business is due to finance. It puts the men, machinery and material on work. The large amount of finance can produce desired results.
4. CHANGE IN BUSINESS:
The businessmen can change the nature of the business. The finance helps to complete the sale of old assts and purchase of new assets.
5. PURCHASE OF GOODS:
107 The purchase of goods, raw material, import of goods, stock of stationary and many other items are necessary for doing the business. The purchase of these items are made by means of finance.
6. COMMUNICATION:
The business manager use telephone & telegraphic facilities, medium of advertisement like radio, T.V, newspaper as a tool for increasing sales. The importance of finance is increased during these days.
7. INSURANCE:
The businessmen are not free from risks, there are chances of loss due to theft, fire, flood, war, earthquake. But the finance helps the people to cover the risk of loss through insurance.
8. INCOME:
The finance in excess of business need becomes the source of income to the business. There are many way to employ extra funds for short period.
9. DAILY EXPENSES:
The business dealing is carried on though out the business life. These expenses include salaries, wages, carriage, rent, repair, interest, commission. The payment of these expenses is possible with Finance
10. TAXATION:
The claims of the govt. in the shape of sales tax, income tax, excise duty are to be paid in money. Finance is needed to adjust these dues.
11. LIQUIDITY POSITION:

The Financial position of a business is due to its working capital. The current assets must be double than its current liabilities. The finance helps to maintain this position.
12. PROFESSIONAL SERVICES:

The business must in the hands of experts and experienced professionals. The larger the finance the greater the services of trained management force.
13. PENSION FUNDS:

The employees of the company need financial help after retirement. The company needs finance to set up pension fund for their workers.
14. TECHNOLOGY:
The finance helps to start research work to search for new knowledge. The innovation and technological changes are possible with finance.
15. SELLING ON CREDIT:

Goods are mostly sold on credit in the market since the expenditure on producing the goods is usually on cash basis where as the sale is mostly credit, therefore the funds are required to over the time period.
16. COST OF INTANGIBLE ASSETS:

108 Capital is required for spending on purchasing patent rights or goods will etc.
17. EMERGENCY PAYMENTS:

The businessmen need finance to make emergency payments. There are many unforeseen circumstances that require emergency payments. The survival of boniness depends upon early payments.
18. BUSINESS OPPORTUNITIES:

There are ups and downs in business markets the businessmen can avail market opportunities if sufficient finance is available these opportunities are not available for long period of time. There may be increase or decrease in prices of goods.
CONCLUSION
=============================================
EDUCATION FOR ALL
109
Q2: WHAT ARE THE DIFFERENT TYPES/ KINDS COMPONENT OF BUSINESS FINANCE? DISCUSS THE FACTORS: WHICH AFFECT THE SIZE OF WORKING CAPITAL?
ANSWER: KINDS OF BUSINESS FINANCE:
Following are the important kinds of business finance: a) Short term financing. b) Medium term financing c) Long term financing The tree types of finance along with their sources are now discussed in brief.
A) SHORT TERM FINANCE:
Short term financing have maturity period of less than one year. Short term capital is needed for meeting the day-to-day expenses of business such as payment of wages, gas electricity bills, seasonal peaks of business etc.
SOURCES OF SHORT TERM FINANCE:

The best known and most popular sources of raising short term finance are as follows.
Commercial banks receive the savings of people and lend it as short term finance to the businessmen. The bank advance loans in shape of cash or overdraft.
2. DISCOUNTING OF BILLS:
Banks may also give credit on short term to its trusted customer by discounting their bills of exchange.
3. FOREIGN EXCHANGE BANKS;

These banks advance loans to large scale foreign businessmen according to nationality.
4. FEDERAL GOVERNMENT AGENCIES.

Many agencies of central bank provide loans to private business industries. Generally, central bank authorizes them to advance loans during emergencies.
5. TRADE CREDITORS:
Trade creditors including wholesalers, retailers, manufactures, supply their goods to customers on credit basis. Trade credit is usually granted for 7-90 days.
6. FRIENDS & RELATIVES:

Many people obtain loans from friends and relatives at the time of need.
7. FINANCE COMPANIES:
110 These are the specialized financial institutions whose primary reason for existence is to lend money for short period.
8. PRIVATE MONEY LENDERS:

Private money lenders like land lords, shakier also lend money but their rate of interest is very high.
9. COOPERATIVE SOCIETIES:
These societies also provide short term funds to rural businessmen against some security.
MEDIUM TERM FINANCE:

Medium term loans are granted for a period from one to five years. The medium term funds are required by a business mostly for the repair and modernization of the machinery.
SOURCES OF MEDIUM TERM FINANCE:

Commercial banks also provides medium term loans in a variety of ways i.e. overdraft or cash credit.
2. LIFE INSURANCE COMPANIES:

These have a steady income of premium, which is supplied for medium term as loans.
3. LOANS FROM SPECIALIZED:

Medium term loans are also provided by this institutions: i. INDUSTRIAL DEVELOPMENT BANK OF PAKISTAN (IDBP) ii. PAKISTAN INDUSTRIAL FINANCE CORPORATION (PIFC) iii. INVESTMENT CORPORATION OF PAKISTAN (ICP) iv. PICIC.
(4) PARTIAL PAYMENT METHOD:

Some manufacturers sell their goods on cash and installment basis. Some portion of the price is paid at the time of goods purchased and the balance is paid on installment basis. This method is known as partial payment method.
(5) DEBENTURES:
A company may raise a part of medium term capital by issuing debentures. Under Islamic mode of financing, debentures have been replaced by TFC. (Term finance certificate)
(C) LONG TERM FINANCE:

Long-term finance is defined as money raised for a period in excess of five years. It is the basic source of business financing which is utilized on capital expenditure i.e. for purchase of machinery, equipment and modernization.
SOURCES OF LONG TERM FINANCE:

1. FINANCIAL INSTITUTIONS:
These institutions play a very important role in providing long term finances to industries and businessmen.
2. BONDS:
111 This is an important source of long-term finance. Under this system large size business issue secured & unsecured bonds. These bonds may be disposed off directly or though agents.
3. EQUITY SHARES:
The issuing of equity shares is the most important source for raising the long term capital by a company.
4. TFCS:
Term finance certificates are also issued by the companies for increasing long term capital.
5. INSURANCE COMPANIES:
Insurance companies invest a portion of their funds in providing loans for long period to industries.
6. INVESTMENT TRUST:
These trust are specialized in the field of investment at first they sell their own shares in the open market and then the amount collected is utilized to purchase the securities of other companies.
7. INCORPORATE SAVINGS.
A company does not distribute its entries profit among the shareholders. Instead, some portion of the profit is transferred to reserve funds every year, which can be used as capital, when needed.
8. NEW PARTNERS:
The capital volume of a business may be increased by admitting new partners in business.
9. PTCS:
A company is authorized, under companies ordinance to issue participation term certificate to scheduled banks and financial institution.
10. MUSHARIKA & MUDARBA CERTIFICATE:

The capital requirements of a business are also met by musharika and mudarba certificate which may be for specific or multiple purpose.
FACTORS AFFECTING WORKING CAPITAL:

The working capital requirement of business depends upon a number of factors which in brief are as:
1. NATURE OF BUSINESS:
The working capital requirement of an business basically depends upon the nature of its business. A trading concern requires large amount of working capital for investment in stocks, receivables and cash etc. it requirement less amount in fixed assets. A business where the proportion of cost of production is high, he amount of working capital required is large.
2. SIZE OF THE BUSINESS:

The amount of working capital needed depends upon the scale of operation of the business. The larger the size of the business, the larger is the requirement of working capital.
3. LENGTH OF PERIOD OF MANUFACTURE:

112 If the goods are tied up for a longer period of time in production process, it requires a large amour of working capital to complete the manufacturing process i.e. Aero planes, heavy armaments.
4. METHODS OF PURCHASE & SALE OF COMMODITIES:

If a business is able to purchase the raw material and other allied products on credit and is able to sell the good on cash. It will need less amount of working capital and vice versa.
5. CONVERTING WORKING ASSETS INTO CASH:

If the assets of a business have liquidity i.e. they are readily saleable for cash, then less amount will be set aside for working capital and vice versa.
6. SEASONAL VARIATION IN BUSINESS:

There are certain industries which purchase raw material in the off season for the manufacturing of working capital.
7. RISK IN BUSINESS:
A business involve great risk needs huge amount of working capital i.e. oil exploration etc.
8. SIZE OF LABOUR FORCE:

If the size of labour force employed in the manufacture of a products will need a great amount of working capital.
9. PRICE LEVEL CHANGES:

If the prices are rising very rapidly in the country the business require great amount of working capital.
10. RATE OF TURNOVER:

If in a business, the sale is faster i.e. the business has rapid turn over then the amount of working capital required may be small.
11. STATE OF BUSINESS ACTIVITY:

If the business is prosperous, it needs more working capital for increasing the volume of business.
12. BUSINESS POLICY:

If a business set aside funds at the end of year for deprecation, payment of loans in the business. It requires less amount of working capital.
CONCLUSION
113
Q3: WHAT ARE THE INTERESTS BASED MODES OF FINANCING? EXPLAIN ITS ADVANTAGES & DISADVANTAGES?
OR WHAT ARE THE SOURCES OF BUSINESS FUNDS? OR WHAT DO YOU MEAN BY EQUITY FINANCING AND DEBT FINANCING? ALSO EXPLAIN SOURCES OF EQUITY FINANCING AND DEBT FINANCING. EXPLAIN ITS MERITS AND DEMERITS? (1998, 1999, 2003, 2004, (S) , 2004 (A).
ANSWER: SOURCES OF BUSINESS FUNDS:

Sole proprietorship and partnerships forms of organization are run on small scale basis. They no doubt, need funds but are mostly financed from the proprietors or partners owned capital. It is the only company organization, which is managed on a large scale basis. It requires vast amount of funds for fixed assets, as well as working capital. There are two main sources from which a company raises funds. 1. Equity financing. 2. Debt financing.
1. EQUITY FINANCING:
The finance provided by the owners is called equity financing. Or we can say that: The finance provided by the man who plans for business and makes permanent investment in the form of land, building, machinery etc. is called owners finance or equity finance. This finance provides a base to the capital structure of the enterprise. Normally the owner does not withdraw his investment unless the business flopped.
SOURCES OF EQUITY FINANCING:

A. ISSUE OF EQUITY SHARES:
Company can raise owned capital in following ways:
A company can raise owned capital by issue of ordinary shares called equity shares. The equity shares are a goods source of long term finance.
B. PLOUGHED BACK CAPITAL:

A good running company retain some of the profit in the business at the end of the year. The portion of profit retained every year and accumulated in the form of reserves.
C. PROVISION FOR DEPRECIATION:

A business also set aside funds for wear & tear of machinery and replacing the fixed assets. In the intervening periods, the reserves kept under the head Depreciation can be utilized in business.
D. PROVISION FOR TAX:

Similarly the amount set aside for payment of tax can be used by a business for meeting the day to day requirement of the business.
114
MERITS OF EQUITY FINANCING.

1. NO BURDEN OF INTEREST:
In case of equity financing the business has not to bear the burden of interest changes.
2. SOUND FINANCIAL STRUCTURE:

Equity financing keeps the business away from a lot of financial worries. So a business established by equity financing enjoys the benefits of sound financial structure.
3. ELIMINATION OF FINANCIAL WORRIES:

Business has not to depend upon the borrowed capital, which may or may not be available at the time of need. So business has freedom from financial worries.
4. BENEFIT OF WHOLE PROFIT.

In equity finance, owner of the business enjoys the benefits of whole profit, because there is no say of creditors in the business.
5. NO FEAR OF REPAYMENT:
A business having equity financing has no obligation to repay or return during the life of business.
6. INCREASED BORROWING:
Equity finance enables the business to raise its funds by borrowing because it easily offers its assets as security against loans.
7. CLAIM ON ASSETS AT LIQUIDATION:

At the time of liquidation of bossiness assets remain with the owner and other person can not claim it.
8. FREE & SOUND MANAGEMENT:

Having equity financing the owner is in a position to act freely as with out any mental confliction. So having free and mind he can control the business soundly.
9. REEDUCATION IN COST PRICE:

The cost of production will be low, as there in no burden of interest.
DEMERITS OF EQUITY FINANCING:

1. NON-AVAILABILITY OF REQUIRED CAPITAL:
If a business is depending upon the owner capital only, it may not be able to obtain sufficient capital for the expansions of business as and when the need arises.
2. SURPLUS OR IDLE CASH BALANCES:

The owners have to keep all their capital working. If a business at any time is faced with low period of activity, a part of the capital remains surplus in cash balances.
3. DIFFICULTIES IN PAYMENTS OF EXPENSE:

During recession a business having equity financing only may not be in a position to pay its day to day expenses.
4. HIGH TAX RATES:

115 In case of equity financing the borrower pay more tax because no interest is deducted from profit.
5. LESS RISK UNDERTAKING:

Business, which uses equity financing, avoids risky decision.
6. NO ADVANTAGES OF LARGE SCALE PRODUCTION:

A large scale production cant be availed by a business depending on equity financing. So it is not in a position to maximize its profits.
2. DEBT FINANCING:
The borrowed funds for business needs are known as debt financing Debt financing is obtaining of funds by borrowing. If the owned capital of an enterprise is not sufficient to meet the financing requirement of business, it is the forced to borrowing. Borrowing is also adopted for covering period of peak operations of business, meet urgent current expenses, gaining tax advantage and saving the business from dissolution. Or the object of the business is achieved.
SOURCES OF DEBT FINANCING:
The main sources of debt financing are creditors, investors of financial institution. The loans are obtained from the creditors for: i. ii. iii. Short-term financing. Medium-term financing. Long-term financing.
1. SHORT TERM FINANCING:

Short term debt financing includes debts have a maturity date of less than one year. Short term loans are obtained from the creditors to meet the current expenses like payments for gas, electricity, telephone bills, salaries, rent, insurance etc. i. ii. iii. iv. Trade creditors. Bank credit. Customers advances. Installment credit.
2. MEDIUM TERM FINANCING:

Medium term debt includes the loans, which fall in the period between 15 years. The loans are usually taken for expansion of fixed assets and for modernizing the machinery. The sources of medium term finance are: i. Debentures. ii. Commercial banks. iii. Insurance companies. iv. Hire purchase. INSTITUTE LIKE. a. PICIC. b. IDBP. c. NIB.
3. LONG TERM FINANCING:

116 This loan is usually for long term or derangement basis that mature in more than 05 years. Long term loans are obtained for acquiring fixed assets and making extension and improvement in the business. The main long-term sources of a company organization are: i. Debentures. ii. Mortgagee. iii. leasing
INSTITUTE LIKE:
a) IDBP b) ICP c) NIB etc.
MERITS OF DEBT FINANCING:

1. MORE CAPITAL AVAILABILITY:
Debt financing enables the business to get more capital. Therefore a businessman can expand it and enjoys the economies of large scale.
2. HIGHER PROFIT:
Large capital due to debt financing enables the enterpriser to operate at a high profit.
3. LOW TAXATION:
Interest is paid on debt financing, which is deducted from profits. Therefore profit reduces and business enjoys the low taxation.
4. PAYMENTS OF URGENT EXPENSES:

In order to pay urgent expenses a business can take short-term loan from commercial banks.
5. SAFETY AGAINST DISSOLUTION:

Debt financing helps the business at the time when there is shortage of funds. So it can safe the business from the dissolution.
6. CREDITORS HAVE NO SAY:

The creditors do not have any say in the affairs of business. The owners, therefore, design and chalk out policies for the best utilization of the capital resources.
7. HELPFUL FOR SICK BUSINESS:

The debt is helpful for cure the disease of the sick industries. The sick businesses can contribute towered the national income through increased efficiency.
DEMERITS OF DEBT FINANCING:

1. BURDEN OF REPAYMENT:
Whether there is good period of trade or bad, the business has to be ready for the repayments of debts.
2. PAYMENT OF INTEREST:
Another drawback of debt finance is that interest is to be paid on it. At is an additional expense.
3. FEAR OF LEGAL ACTION:

117 If a business is not in a position to repay its loans on time then creditors can file suit against. The result is harmful for the reputation of the business.
4. LOSSES:
During depression period a business having de financing will not be in a position to bear the burden of interest. So its losses increased.
5. NON-AVAILABILITY OF FUNDS IN DEPRESSION:

In times of slack business, the rate of return borrowed capital is normally low compared to the rate of interest. Therefore funds are not available from the investors.
6. PROBLEM IN FURTHER INVESTMENT:

Interest on loans decreases the profits so prospective investors will be reluctant to invest in business due to lower rates of profits.
7. DISADVANTAGE OF REINVESTMENT OF PROFIT:

If a business reinvests profit in the business to meet it credit obligation it creates dissatisfaction among the shareholder, partners in the business.
CONCLUSION
118
Q4: ISLAMIC MODES OF FINANCING: (1999, 2000, 2002, 2006, 2005)

There are 12 Islamic modes of financing. These have been approved by State Bank of Pakistan from July, 1985. a brief description of Islamic instruments of financing is as under: A: Loans financing by lending. B: Trade Related modes of financing. C: Investment Related Modes of Financing.
A: LOANS FINANCING BY LENDING:

There are two instrument of lending: I: Interest free Loans. II: Qard-e-Hasana.
I: INTEREST FREE LOANS WITH SERVICE CHARGES:

It is a new concept of lending based on Ijtihad the banks are permitted to lend funds free of interest. They are to cover only the service charges. This mode is being used to finance exports, agriculture inputs and provision of funds to salaried persons.
II: QARD-E-HASANA:
Under this scheme, interest free loans are granted to students who do not sufficient funds to continue their education. Qard-e-Hasana is given to the students who are less than 35 years of age and available for post intermediate studies in engineering, medicine, agriculture, Economics, Commerce etc. Loans given will be in the name of student (Principal Debtor) and secured by guarantee of parents, guardians, for repayment of loans a grace period of two years is granted after completion of studies.
B. TRADE RELATED MODES OF FINANCING:

There are five trade related modes of financing: i. Mark up. ii. Mark down. iii. Leasing. iv. Hire purchase. v. Development charges.
I. MARK UP:
The mark up or Bai Muajjal is a purchase of goods by banks and their sale to clients at an appropriate mark up in price on deferred payment basis. The mechanism is as follow: i. The customer contacts the bank for financing the purchase of goods. ii. The bank purchases the required goods and sells these to him on a price mutually agreed between the bank and the customer. The price is based on the banks cost plus profit margin of the bank (mark up) iii. Payment can be made in installments or lump sum over a specified period of time.
119
II. MARK DOWN:

It is a purchase of moveable or immoveable property by the bank with {Buy back Agreement. According to this mode, the customer sells the moveable or immoveable property to the bank with a promise to buy back the same from the bank on future date. The payment can be made in installment or lump sum. The difference between the purchase price to customer is the profit of the bank.
III. LEASING:
Leasing also called IJARA is a medium and long term financing mode. In this mode the Lessee acquires the use of an asset from the Lessor for fixed period of time on payment of specified the title of property remains with the Lessor and asset is given back to the Lessor after specified period of time.
IV. HIRE-PURCHASE:
The state bank of Pakistan (SBP) has allowed the commercial banks to provide finance for the purchase of machinery to their clients in trade and industry on the basis of hire purchase. In this deal, the purchases the specified goods at eh request of customer and hires them to the client, on the payment in periodical installments. The bank charges fair return from the goods.
V. DEVELOPMENT CHARGES:
It is a very useful mode of trade financing. The bank makes advances to customers for the development of land or property. It then shares in value addition of property. This share is known as development charges.
C. INVESTMENT MODE OF FINANCING:

Investment related modes of financing are five. i. Musharika. ii. Modaraba. iii. Participation term certificate (PTC). iv. Rent sharing. v. Equity participation.
I. MUSHARIKA:
It is an agreement between the bank and the client to participate in a business as temporary partner by providing agreed amounts of funds for sharing profit and losses during a specified period of time. i. Business is run by the client but the bank will examine the feasibility and profit projection so as to monitor and supervise the business transactions. ii. Profits are to be shared as agreed. iii. Losses will be shared strictly in the ration of their respective investment. iv. This mode is applicable to finance working capital needs of a business.
II. MODARABA:
Modaraba means the business in which the subscriber participates with money and manager with knowledge and skill. The features are: i. It is an agreement in which one party invests funds and other part with managerial efforts.
120 ii. iii. iv. v. vi. Modaraba must be registered under the modaraba ordinance 1980. As per rule, the partner who puts in managerial skills must have at least 10% share in modaraba. Profit is shared in agreed ratio. Modaraba certificates are transferable. It may be perpetual or for a specified time.
III. PARTICIPATION TERM CERTIFICATES: (PTC)

PTC is an instrument of finance issued by company for meeting medium and long term capital needs. A company is authorized to issue the PTCS to schedule banks, and financial institutions. The features are as under: i. PTC is an investment of medium and long-term financing. ii. It is transferable. iii. Profit is shared in agreed ratio. iv. Losses are shared in the ratio of banks and companys investments. v. Only joint stock companies can issue PTCs. vi. Short term PTCs are issued to meet working capital needs of a business. vii. Long term PTCs are issued in order to meet the fixed capital needs.
IV: INVESTMENT ON THE BASIS OF EQUITY PARTICIPATION:

Equity participation means sharing of risks and rewards of ownership. ---- Under this scheme the financer (Bank) purchase the shares of the company at market price or at an agreed price. --- Profit will be shared in the form of interim or annual dividend. --- Loss will be borne in the form of reduction in the market price of shares purchased.
V: INVESTMENT ON THE BASIS OF RENT SHARING:

Rent sharing is applicable to finance the construction of houses. --- The bank and the client will contribute funds as agreed. --- Rent of building will be calculated area wise. --- Rent may be revised after three years.
CONCLUSION
EDUCATION FOR ALL

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MONEY BANKING FINANCE

EDUCATION FOR ALL

Q1: What is barter s

Q5: What is paper m paper money? ------Q6: Describe the pr

ANSWER: BARTER SYSTEM:

2. LACK OF COMMON MEASURE:

3. INDIVISIBILITY OF GOODS (SUB DIVISION):

4. LACK OF STORE OF VALUE:

8. DIFFICULTIES OF TRANSFER OF WEALTH:

10. COMPARISON OF LIVING STANDARD:

11. ECONOMIC MEASUREMENT:

13. EXIT AT SMALL SCALE:

14. NO INVESTMENT, NO SAVING:

ELIMINATION (Removal) OF INCONVENIENCES OF BARTER:

1. MONEY AS A MEDIUM OF EXCHANGE:

2. MONEY AS A COMMON MEASURE OF VALUE:

3. MONEY AS A STANDARD OF FUTURE PAYMENT:

4. MONEY AS A STORE OF VALUE:

5. MONEY IS AN INSTRUMENT OF MAKING LOANS:

7. ESTABLISHMENT OF FINANCIAL INSTITUTIONS.

8. INFLUENCE OF INCOME AND CONSUMPTION.

9. INSTRUMENT OF ECONOMIC POLICY:

10. AIDS TO SPECIALIZATION, PRODUCTION, AND TRADE:

11. CIRCULAR FLOW OF MONEY.

12. MONEY AND PROBLEM OF SUBDIVISION:

13. MONEY AS A TOOL OF MONETARY MANAGEMENT:

14. EXIST AT LARGE SCALE:

Q2: EXPLAIN THE EVAULTION OF MONEY? OR

(II) PROF KNAP SAYS:

(III) G.D.H. COLES:

(IV) ACCORDING TO ROBERTSON:

DIFFERENT VIEWS OF MONEY:

II. Monetarist view (M2): (broader scope)

III. LIQUIDITY VIEW: M3):

VARIOUS FORMS OF MONEY:

(I) Commodity Money

(II) METALLIC MONEY:

EVOLUTION OF METALLIC MONEY:

Metallic money has two kinds:

(I) FULL BODIED COINS:

(II) TOKEN COINS:

EVOLUTION OF PAPER MONEY.

THREE TYPES OF PAPER MONEY. 1. REPRESENTATIVE PAPER MONEY.

2. CONVERTIBLE PAPER MONEY:

3. INCONVERTIBLE PAPER MONEY: (Fiat Money).

EVOLUTION OF BANK MONEY

b. BILL OF EXCHANGE: (B/E)

SOME CONCEPT REGARDING MONEY:

(i). PLASTIC MONEY: It is made of plastic e.g. credit cards are

1. TRADE AND TRADERS:

2. MONEY AND PRODUCTION:

3. MONEY AND CONSUMPTION:

4. MONEY AND DISTRIBUTION:

5. MONEY AS THE BASIS OF CREDIT:

6. MONEY AND EMPLOYMENT:

7. MONEY AND PUBLIC FINANCE:

8. SAVING AND INVESTMENT:

9. IMPORTANCE FOR GOVERNMENT:

10. IMPORTANCE FOR BANKS:

11. PRICING FOR ENVIRONMENTAL FACTORS:

12. SOCIAL IMPORTANCE OF MONEY:

13. IMPORTANCE FOR LABOUR.

14. IMPORTANCE FOR INDUSTRIES: