Money Banking & Finance

Money Banking & Finance
Collector & Composer

Zabihullah Ahmadi
01-Jan-17
BANKING
Question NO 1: What is a commercial bank? Describe its major and minor function.
ANSWAR:
DEFINTION OF COMMERCIAL BANK
A bank is a financial institution which deals with money and credit it accepts deposits from individual,
firms those who need them. The difference between the terms at which it borrows and that at which its
lends forms the source of its profile. A bank, thus, is a profit craning institute.
(Commercial bank is financial institution that provides various financial services, such as accepting
deposit and issuing loans)
FUNCTION OF COMMERCIAL BANK
(a) BASIC FUNCTIONS
(1) ACCEPTING OF DEPOSITS:

The first important function of bank is to accept deposits from those who can save money but
cannot make a profitable use of their savings themselves. For this purpose the bank
maintains the following types of accounts.
I, CURRENT ACCOUNT:
The businessmen and traders usually maintain their funds in current account. Current is one
where money is constantly being drawn out and put in. the bank do not pay any interest on
current account.
II, SAVING ACCOUNT:
The purpose of this type of account is to encourage saving of the people. Saving account is
generally opened by persons of small income. The bank pays interest on this type of deposit.
III, FIXED DEPOSIT ACCOUNT:
Collector & Composer, Zabihullah Ahmadi (Zabihullah.ahmadi1990@gmail.com)

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Fixed deposits are kept with the banks for a specified period of time. The rate of interest on
fixed deposit is high. The longer the period of deposit, the higher is the rate of interest.
(2) ADVANCING OF MONEY:
The second major function of a commercial bank is to make loans and advance to
businessmen, traders and exporters etc… these loans are made against different type of
securities. Infect banks barrow money in order to relend it. Therefore, financing or lending is
the main source of profit for a bank. In Pakistan providing of finance or credit is being done it
the following ways.
I, LOANS AND ADVANCES:
The banks are profit making institutions. They accept deposit from their customers at
lower rate of interest and lend then at higher rate of interest. Usually all the commercial
banks grant short and long term loans to individuals, firms and companies against
securities. The amount of loan is credited to the borrower4s account who withdraws it as
per his requirement.
II, CASH CREDIT:
In cash credit, the bank allows the customer to barrow money up to a certain limit against
of assets the security pf assets. Such type of loams is mostly short term credit. The
interest is charged only on the amount of money used by the borrower.
III, BANK OVERDRAFT:
Bank allows their trusted customers to overdraw to their current accounts up to a certain
limit on providing security. Interest is charged only on the amount withdrawn by the
customer.
IV, DISCOUNTING OF BILLS:
Discounting of bills means to pay the amount of bill before its maturity. The premature
payment made is loan to the holder of the bill. Discounting of bill is considered a safe and
liquid form of bank advancing.
(b) SECONDRY FUNCTION :
I, TRANSFER OF MONEY:
A bank transfer’s money of the customers from one place to another place. If the transfer
is at one station, the bank does not charged any commission and vice versa.

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II, COLLECTION OF CHEQUES:
The collection of cheques for the sake undertakes to collect the amounts of both local
and out station cheques.
(c) ANEGCY SERVICES:
I, COLLECTION OF DIVIDEND:
The bank provides a useful service in the collection of dividends or interest earned on
debentures held by the customer.
II, PURHASE AND SALE OF SECURITIES:
Purchase and sale of securities is sell debentures, bonds and share on behalf of his
customers.
III, PAYMENTS:
A banker undertakes to make payments in respect of rents, insurance premium etc. on

behalf of his customers.
(d) MISCELLANEOU ( FUNCTION) SERVICES:
I, SAFE DEPOSITS:
Banks accept jewelry, important documents and other valuable for safe custody. These
things are usually kept in lockers.
II, ISSUING OF LETTERS:
Banks issue letter of credits for facilitating and financing foreign trade.
III, GIVING GUARNTEE:
The banker gives guarantee for loan on behalf of their customers.
IV, ISSUE OF TRAVELERS CHEQUES:
The bank also issue travelers checks for the convenience of the traveler and charges nominal
commission.

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Question NO 2: Describe the role of bank in the economic development of a country?
ANSWAR:
ROLE OF COMMERCIAL BANKS IN THE DEVELOPMENT OF A COUNTRY:
The commercial bank plays a very important role in the economic development of a country. They are the
dealers in debts. In the absence of bank the commercial and industrial revolution would not have taken
place. So the importance of commercial bank discuss as under
1. INCREASE IN PRODUCTION :
Bank use the idle funds. The lend these funds to the businessmen for production
purposes. In this way they become effective partners in the process of economic
development.
2. ROLE IN THE TRADE AND INDUSTRY:
The commercial banks provide loans to trade and industry. The various credit in
instruments is issued by each commercial bank which is useful for economic
development of a country. With the use of credit instruments, internal and external trade
has developed both in the developing and developed counties.
3. EXPANSION IN BUSINESS:
Business activity is developing with the help of banks. They provides funds to the
businessmen for the purchase of rough materials, semi-finished goods and finish goods.
The businessmen are thus able to produced more goods than they can with their own
resources.
4. PROMOTION OF SAVINGS:
Banks promote savings by offering attractive savings facilities. There are some persons
who have surplus money but can not use them in profitable manners. They banks attract
these persons by opening different type of account. They provide them not only safety of
the funds but also higher return on them. As a result, there is large increase in the total
savings of country.

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5. EFFECTIVE IMPLEMENTA OF MONETARY POLICY:
If a banking system is well developed in a country, the central bank can easily regulate
the supply of money and investment, according to the requirement of the public as well
as of the country.
6. HELP TO BASIC SECTORS:
The commercial bank provides credit to agriculture, small and big industries. These the
commercial banks service the basic sectors of economy and help in increasing economic
activity of country.
7. COLLECTION FACILITY:
The collection of the outstation trade bills, cheques and draft is also a very important
services of bank. This facility is very helpful for the development of trade and commerce.
8. LETTERS OF CREDIT:
The commercial letter of credit issued by each and every commercial banks finance and
facilities foreign trade. As a result, the foreign trade expends significantly.
9. REMITTANCES FACILITY:
Banks provide remittances facility o the public .many difficulties in respect of the payment
and receipts and receipts of the prices of the goods are removed by these facilities. As a
result, there is great expansion in economic transaction.
10. SOLIVING REGIONAL DISPARITY:
The banks help in solving the regional disparities in a country. The surplus funds of one
area are transferred to the area of deficit. The under developed area got fund put them
into profit given project and increase their output. The banks in this way help in the
balanced growth of country.

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Question NO 3: How do bank creates credit? What are the limitations on the power of
banks to create credit?
ANSWAR:
CREDIT CREATION:
Credit creation is one of the important functions of the commercial banks. Credit creation
is the multiple expansions of banks demands deposits. It is clear that banks advance a
major portion of their deposits to the barrowers and keep a smaller part of their funds to
meet withdraws. Even then the customers of the bank have full confidence that their
deposits lying in the bank are quite safe and can be withdrawn on demand. The banks
exploit this trust of their customers and expend loans by much more than the amount of
cash possessed by them. This process on the part of the banks to lend more than the
amount of cash possessed by them is called in economics as creation of credit.
IN FACT BANKS DEPOSITS ARE TWO PARTRS
(a) DIRECT / PRIMARY DEPOSITS:
They consist of the money deposited with the banks by its customers.
(b) INDIRECT / CREATED DEPOSITS:
There are the deposits which created by a banks in the process of lending of financing
activities. It is only with respect to the created deposits. We say that banks create credit.
FORMULA:
A very simple formula for calculating total expansion in bank deposit is as following:
Expansion of deposits = Original deposits X1 /cash reserve.

= 1000 X1 /20 /100
= 1000 X100 /20
= 1000 X5 /20
= 5000

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LIMITATION TO CREATE CREDIT
1. CASH RESERVE RATIO:

A banker can not lend up his all fund. It is essential for him to keep a reasonable portion
of his funds as cash reserve to meet cheques of his customer. If the central banks of the
country fixed higher ration of cash reserve, the power of the commercial bank to create
credit will be lower and vice versa.
2. MONETARY POLICY :
The central bank has the power the affect the volume of credit expansion and contraction
in the country. The use of different methods of credit controls by the central bank has
direct effect on the power of the bank to create or contract credit.
3. AVIAILABLEITY OF CASH :
Credit creation also depends on the actual cash possessed by the bank. The larger the
cash, the amount of credit that can be created by bank. Availability of cash depends on
the primary deposits.
4. AVAILABLITY OF COLLATERAL SECURITY :
Credit creation also depends on the availability of collateral security. If proper security is
not available with the customer, credit creation is not possible.
5. ECONOMIC SITUATION:
The process of credit creation also depends upon economic

Stability and favorable business situation in the country. If there is boom, there will be
more investment and businessmen will take more loans, so credit will expend. But in
depression, businessmen will not ask for loan due to lack of profits. This will badly
influence the power of credit creation.
6. CASH DRAIN:
It is assumed that all payments are made by cheques and not in cash. In case some
borrowers withdraw a part or the entire amount lend to them in cash, bank will not be able

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to create credit to the large extent. An outflow of the cash from the reserve of the banks
will reduce their ability to create credit and vice versa.
Question NO 4:What is central bank? What are the different function of central
bank?
ANSWAR:
DEFINTION OF CENTRAL BANK
The central bank is “an institution which is charged with the responsibility of managing the expansion and
contraction of the volume of money in interest of the public welfare”.
We can also define the central bank in the following words
“The central bank is an institution which is responsible for regulation the volume of money and credit in
best national interest with a view to securing monetary stability, promoting economic growth and bringing
about more purposeful and equitable distribution of credit”.
(Central bank is the bank which is control the money system of the country)
FUNCTION OF CENTRAL BANK
1. MONOPOLY OF NOTE ISSUE :
In early banking, every bank has the practice of issuing currency notes. But due to some
reasons, this right of issuing notes was given only to central bank of the country. Every
where in the world, now the central bank issue currency and maintains their value in the
country and also regulates them according to the requirement of the country.
2. BANKER TO THE STATE:
A central bank acts as a banker to the state or government. It accepts cash deposits and
cheques of the government like taxes etc. and provides cash for the payment of salaries,
wages and for other expenditure or expenses. It maintains the accounts of government.
No interest in paid on the cash balance of the government maintain by the central bank.
3. BANKER’S BANK :
Central bank performs the duty of banker for other banks of the country. All the member
banks are required to keep a certain percentage of their deposits with the state bank to

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provide financial protection to the member banks. Maintenance of cash reserve also helps
in the process of credit control in the country.
4. LENDER OF THE LAST RESORT :
Central bank also acts as the lender of the last resort. In difficult time a person can get
help from commercial bank. But in case of bank, his financial requirements are meet only
by the central bank. Central bank helps the commercial bank by advancing laon or by
rediscounting of bill of exchange.
5. CLEARING HOUSE FACILTY:
The state bank of Pakistan acts as a clearing house of the commercial banks. A clearing
house is a place where the representative of commercial banks meet twice a day to
exchange cheques drawn on each other and then settle the difference owed to each
other. Central bank thus helps the commercial banks in making payments by minimum
transactions.
Question NO 5: How a Central Bank can control credit?
ANSWAR:
THECNIQUES OF CREDIT CONTROL
1. BANK RATE POLICY :

This policy refers to the changing of the rate of interest at which the central bank
grants credit to other bans through loans a rediscount of bill of exchange. When the
amount of bank credit has to be decrease, the bank rate is raised or increased. The
causes a rise in commercial banks interest on advances. Now borrowing from
commercial banks is discouraged and as a result the amount of credit decreases. On
the other hand, when the amount of credit has to be increased the Bank rate is
decreased. This causes a fall in other banks interest on advances. Now borrowing is
encouraged and as a result the amount of credit is increased.
2. OPEN MARKET OPERATION:
Buying and selling of government securities by the central bank with a view to
changing the amount of credit is called open market operation.
If the amount of bank credit has to be decreased the central bank chooses to sell
securities in the open market. The buyers will make payments for these securities to
the central bank through their banks. So a portion of bank’s cash will move to the

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central bank. As a result, the lending power of the banks will decreased which will
lead to a decreased in credit and vice versa.
3. CHANGING LEGAL RESERVE RATIO:
The amount of money which the banks are legally required to keep with the central
bank is called legal reserve ration. In Pakistan it is 5% of the total deposits.
In case the central bank needs to decrease the amount of credit the legal reserve
ratio will increase. This will low the power of lending of the banks which will to
decrease in credit and vice versa
4. CREDIT RATIONING:
This method of credit control is applied in time of financial crises. The credit is
rationed by fixing the amount which each bank can receive by rediscounting of bills of
exchange.
5. MORAL PERSUATION:
Through moral persuasion the central bank may persuade commercial bank to
increase or decrease the amount of credit for creation purposes.
6. DIRECT ACTION:
The central bank may apply direct action if his policies are not followed by the
commercial banks. Direct action may be refused by the central bank to rediscounting
the bills of exchanging etc. If the commercial banks not following the required policies.
Question NO6:What are the main types / kinds of bank account?
ANSWAR:
FOLLOWING ARE THE MAIN KINDS OF BANK ACCOUNT
1. CURRENT ACCOUNT
2. SAVING ACCOUNT
3. FIXED DEPOSIT ACCOUNT
4. PROFIT AND LOSS SHARING SAVING ACCOUNT
5. PROFIT AND LOSS SHARING FIXED DEPOSIT ACOUNT
1. CURRENT ACCOUNT:

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The current account is the most popular account of the bank. A current account is a
running account which is continuously in operation. It is used by a customers an
withdraw their current deposits on demand. The customer can withdraw their current
deposits without previous notice to the bank. The bank has to honor the cheques
provided to them within the limits of the account. The customers who need a liquid
balance maintain current deposit in bank. The banks do not pay any interest on these
deposits. In Pakistan, the current account can be open with a minimum amount of
RS. 500
2. SAVING ACCOUNT:
Saving account is another important kind of bank account. It is opened to encourage

the people for savings. The school children workers employees and firms usually
keep their saving by opening a saving account in the banks. This account can be
opened with a minimum amount of RS. 100 the bank pay interest on saving bank
account according to balance at the end of the year. The customers are generally
allowed to withdraw a limited amount of money twice a week. If a customer wants to
withdraw a large amount of money from his account, he then had to give a previous
notice in writing to bank.
3. FIXED DEPOSIT ACCOUNT:
Fixed deposits or time deposit are those accounts which are repayable after a
creation period of time. People with sufficient funds and also wish to have a safe
investment, deposit their saving in this account.
The rate of interest on fixed accounts is greater than saving account which also varies
with the length of period and amount deposited. The longer the period of deposit,
higher will be the rate of interest the depositor can mot transfer his money because he
will have to follow the proper process of withdrawal. In this account no cheques book
n and pass book is issued to customer. Whenever fixed account is opened, the
customer is provided with a stamped with a stamped receipt showing the amount of
money deposit, period and rate of interest payable. On the presentation of this receipt
the customers can withdraw his amount at the fixed time.
4. PROFIT AND LOSS SHARING SAVING ACCOUNT:
These accounts are introduced as a step to Islamisation o banking in Pakistan in

January, 1982. These parties with minimum amount of Rs. 100. The amount
deposited is invested by the bank to earn profit in different in field. Account holders
are allowed to withdraw the money from this account up to a certain limit. Instead of
interest bank pay profit on thee account. the rate of profit is not fixed and it depends

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on the earing of the bankers investment. In this account customer are provided
cheques book and pass book.
5. PROFIT AND LOSS SHARING FIXED DEPOSIT ACOUNT:
This account Is opened 1 any commercial bank with minimum amount of Rs. 1000 for
a period of more than six months. This is also an interest free account because on
this account bank pays profit which differs with fortune of the bank’s investment.
Banks issues a receipt against the deposited in PLS term account. In this receipt
amount of money deposited and period is mentioned. This receipt is not transferable
and bank does not pay profit after the maturity.
Question NO7: Explain in brief the rights and duties of Customer and banker?
ANSWAR:
MEANING OF CUSTOMER
A customer is a person who maintains regular account with the bank without talking
into consideration is a person who maintains regular account with the bank without
talking into consideration the duration and frequency of operation of his account.
MEANING OF BANKER
According to the banking companies ordinance 1962, banking has been define as
“accepting for the purpose of lending or investment of deposits of money from the
public, repayable on demand or otherwise and withdrawals by cheques, order or
otherwise.
CUSTOMER RIGHTS AND DUTIES
A customer of the bank entitle to certain rights. He has also a few functions towards
his banker. The main rights and duties of banker’s customer are as follows
(a) RIGHTS OF A CUSTOMER :
1. It is the right of customer to draw cheques on his account up to the extent of his
credit balance.
2. It is also one of the basic rights of customer to receive statements of account from
the bank.
3. A customer can sue the bank for compensation of wrongful dishonor of his
cheque.

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4. A customer has the right to sue and demand compensation if the bank fails to
maintain the secrecy of his account.
(b) DUTIES OF A CUSTOMER :
1. It is the duty of the customer to present the cheques and other credit instruments
during the banki9s hours of the bank.
2. The instrument of credit should be presented by the customer with in due date.
3. It is the duty of a customer to keep the cheque book in safe custody. In case of
theft of loss, it is the duty of the customer to report the matter immediately to the
bank
4. A customer should fill in the bank columns of the cheque with utmost care
BANKER’S RIGHTS AND DUTIES
The main rights and duties of banker to a customer are as follows.
(a) DUTIES OF A BANKER:
1. It is the duty of a banker to honor the cheques of the customer provided the
cheques are properly drawn.
2. It is also one of the important duties of a banker to abide by the standing
orders of the customers.
3. It is an important duty of a bank that not to disclose the customer’s financial
position without his consent (willingness).
4. It is also the duty of a banker to take care of the property deposit with it by the
customer with or without charge.
(b) RIGHTS OF A BANKER:
1. It is the right of a banker to charge commission and interest on the services

performed and the loans advance to the customers.
2. The bank has the right to charge the incidental charges.
Question NO 8:Write Note on the following?
 CHEQUE
 CROSSING OF CHEQUES
 ENDORSEMENT
 REASONS FOR THE DISHONOUR OF A CHEQUE

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CHEQUE
ANSWAR: DEFINITION OF CHEQUE
“A cheque is an un conditional order drawn upon a specified banker, signed by

the maker, directing the bank to pay on demand a certain sum of money to him,
or to the order of a person or to the bearer of the instruments.”
TYPES OF CHEQUES:
FOLLOWING ARE THE MAIN THREE TYPES OF THE CHEQUES.
1. BEARER CHEQUE:
In this kind of cheque any one can get the payment of the cheque on counter
without any identification. In this cheque the words “or bearer” is written after the
name of the payee. It is payable on demand to the bearer or the presenter. It
does not required endorsement. If a bearer cheque is lost, the finder can cash it,
unless the bank is notified in time of payment. If the bearer cheque is lost or
payment is made to wrong person, bank has no responsibility.
2. ORDER CHEQUE:
In this cheque the word “Bearer” after the pay’s name is crossed out and the
word “Order” is written. Then it will be an order cheque. The payment of order
cheque is made only to the person named therein the cheque. On the production
of a valid identification. No other person can get the payment of an order cheque.
Order cheque can be transferred to another person by the act of endorsement.
3. CROSSED CHEQUE:
A cheque is “crossed” by drawing two parallel line on the face of cheque on

upper left corner and writing the word “ and Co” between them. Payment of such
cheque is not made on the counter of the bank. This cheque must be deposit in a
bank account and cashed through bank. The payment of such cheque is not
made directly.
CROSSING OF CHEQUE
By crossing of cheque means the drawing of two parallel transverse line on the
front side of a cheque on upper left corner with or without the use of the word like

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and Co. cheques may be crossed by three persons. These are the drawer,
holder, and the bankers.
TYPES OF CROSSING:
FOLLOWING ARE THE THREE KINDS OF CROSSING.
1. GENERAL CROSSING:
A general crossing consist of two parallel line drawn on the face of the cheque
with or without the word “and Co”. The effect of this crossing is that it may not be
cashed at the counter of the bank but must be deposited into a bank account for
collection.
2. SPECIAL CROSSING:
A special crossing consists on the name of particular bank written on the face of
the cheque between the two parallel transverse lines. The effect of this kind of
crossing is that it will be collected by the particular bank only.
3. RESTRICTIVE CROSSING:
This type of crossing includes the word like “a / c payee” or “a/c Ali only”
between the two parallel traverse line. The effect of such a crossing is that it
directs the collection banker that the proceeding of the cheque is to be credited
only to the account of payee named in the cheque.
ENDORSEMENT
The word endorsement is derived from the Latin word “endorsum” meaning “on
the back”. It means that act of writing one’s name on the back of a negotiable
instrument with a view to transfer its property to another. The person who signs
the cheque is called “Endorser” and to whom the cheque is transferred called
“Endorsee”. Endorsement is usually made on the back of the cheque. But if no
space is left on the back of the cheque for further endorsement, a slip of paper
may be attached to the cheque. This slip nod paper called “allonge”.
KINDS OF ENDORSEMENT

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1. CONDITIONALENDORSEMENTE:
If bill subject to the fulfillment If the endorsement makes the payment of a

condition, endorsement is called Conditional Endorsement.
2. CBLANK ENDORSEMENT:
If the endorser signs his name on the bill but dose not give the name of any other
person to whom he wishes to transfer the cheque, the endorsement is call Blank
Endorsement.
3. RESCIAL ENDORSEMENT:
An endorsement which specified the name of endorsee for the payment of the bill
is called Special Endorsement.
4. RESTRICTIVE ENDORESMENT:
A Restrictive Endorsement is one which restricts the further negotiation of the bill.
5. PARTIAL ENDORSEMENT:
If the bill endorsed for a part of the amount payable, the endorsement is called
Partial Endorsement.
REASONS FOR THE DISHONOUR OF CHEQUES
It is the duty of the bank to honor the cheque of his clients if complete or valid in
all respects. However, the bank can refuse to make the payment of a cheque on
the following grounds.
1. When the drawers instruct the bank to stop payment of a cheque, he must
reuse its payment.
2. Bank must stop the payment of a cheque if a notice of the drawer's death is
received.
3. On receiving the notice of insolvency, the bank must refuse to pay cheque.
4. If the order of the court is received regarding the account of the customer,
the bank should stop honoring (paying) his cheque.

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5. If there is insufficient balance in customer's account.
6. When the date is not entered on the cheque.
7. When the drawer has closed his account.
8. If there is any difference between words and figures.
9. Signature of the drawer's differing.
10. When the cheque is postdated or stolen cheque.
11. When the cheque is mutilated or spoiled.
12. When alteration are not signed by drawer.
Question NO9:What is meant by Bank advance what are the principles of Bank advance? Also
discuss Forms of Bank advances
ANSWAR:
MEANING OF CUSTOMER
A bank is a profit earning institution. It accepts surplus balances from the

customer at low rate interest and makes at higher rate of interest to the
customers and business firms. After keeping a portion of the total deposits, as
cash reserve, the balance amount is either invested or advanced to needy
persons. For this purpose, bank advances his balance cash using different
methods. We also know that bank deals with other’s people's money. So any
banker before making any advances will have to consider money factors for the
proper and safe return of the principal along with the profit expected.
PRINCIPLE OF ADVANCES
1. PRINCIPLE OF SAFETY:
It is the basic principle of the use of bank's funds. There should be full security
and safety of e return of the money advances. In case of loss the amount
advanced is covered by selling the security offered for loans.
2. PRINCIPLE OF LIQUIDITY:
It is in the interest of the bank to keep his money in a liquid form, convertible
easily in to cash when desired by the bank. Bank should always invest his
money in the short term financing.

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3. PRINCIPIF OF DIVFRSIFICATION:
Bank should not advance loan to a single person or industry instead the loan
should be divessephed one. And should be given to different persons and
industries for minimizing of the risk.
4. PURPOSE OF LOAN:
At the time of advancing loan bank should satisfy himself about objective use for
which loan is advanced. Far illegal objective f about the objective no advanced
should be granted.
5. FINANCIAL POSITION:
Before advancing any loan bank should satisfy himself about the financial
position of the firm or industry, which takes loans.
FROMS OF ADVANCES
Commercial bank advance loans to his customers in the following ways.
1. OVERDRAFT:
By this method, banker allow his reliable customers to draw over and above the
money actually deposited by them in their accounts. This facility is allowed
through cheques only to current account holders, This facility or overdraft is not
provided to all account holders, but only to those, who have good financial and
credit standing. These advances are given on the basis of personal securities.
Interest on overdraft is charged on the basis of daily debit balance on actual

amount drawn from the date. It is must easiest and convenient method open to
borrowers.
2. CASH CREDIT:
By cash credit, a customer is granted an advance up to certain limit, which he

can draw from time to time required by him. In this method, bank opens a loan
account on the name of the browser’s and honor the cheque drawn by him on
this loan. The interest in charged on the amount actually used. If funds remain
idle, bank losses interest and some bankers make it essential to charge interest
on some parts of cash credit from the customers whether the customer uses it or
not.

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3. FIXED LOAN:
In case of fixed loans, the bank advances in fixed amount repayable either in
fixed monthly or yearly installments or lumsum. It is usually borrowed to meet
with the long term requirements for capital, interest is charged on the full amount
of the loan sanctioned for whole of period. Whether utilized or not by the
borrower. These types of loans are granted against security. However,
unsecured loans are also provided to customers have good credit standing.
4. DISCOUNTING OF BILLS OF EXCHANGE:
Bank discount the bill of exchanging hold by the businessman, which are payable
after a certain period of time. Bank pay the holder of the bill an amount equal to
their face value after deducting interest for the period the bill has to mature. By
discounting bill of exchange bank assists his customers for short terms
requirements for cash and also earn profit for the same.
Question NO 10: Define Bank Credit? What are the uses and abuses of Bank Credit?
ANSWAR:
The term debit and credit are the same seen from different angles. Lenders
extend credit and borrowers receive it. The lender or creditor has the right to
receive payment and the borrower or debtor has the obligation to pay on
demand. So, credit can be defined as “Righto receive payment or obligation to
made payment on demand.
NEEDS ORUSES OF BANK CREDIT
The main credit needs of the country are as under
1. Credit enables the individual or business to “purchase ahead of ability” or

“desire to pay”.
2. The economic needs of agriculture, commercial and industrial sector of the

economy are met by the bank credit.
3. Bank credit boost up the process of economic development in the country by

providing loan to the industries.

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4. Goods are purchased, processed, stored and then sold at the appropriate time
and price to consumers. This process in only possible to complete, if the credit is
available.
5. The credit needed by the farmers, helps in increasing agriculture production in

the country and helps the farmers in the development of agriculture.
6. Bank credit facilities the large scale production of goods and other necessities
of life, which result in technological research and lowering the coast.
7. The need of the consumer such automobile, house and other necessaries are
also fulfilled by the commercial credit.
8. Credit instruments, like bill of exchange, greatly facilitate international trade.

Payment thus is made without the actual payment of money to any large extent.
9. From the bank credit, the transportation of commodities from one place to
another place is also made easier and economical.
10. With the help of credit, people with brilliant brain can utilize their abilities and
qualities in running a business enterprise. In the absence of credit their talents
would have gone waste.
ABUSES OF CREDIT
1. Expansion of credit, beyond the safe limit result in over production and rise in
price. The contraction of credit leads to depression. Boom and depression have
their own abuses. So over issuance of credit is a great danger.
2. In case of failure, due to careless use of borrowed money by an enterprise, the
loan will not be paid to credit institution which will create panic in the monetary
circle and the whole super structure of credit will collapse.
3. Credit may result some uneconomic enterprises that are financially week. In case
they become bankrupt, all the firm dealings with them will badly suffer.
4. If large money is given to a few persons or enterprises, then there is danger of
monopolistic exploitation. They can use unfair method in the business dealing.
5. Government may spend borrowed money in a lavish manner; this will lose the
confidence of their citizens in the credibility of state.

Page 20
Question NO 11:What are the main import and export documents? How are these
document handled in the overseas trade?
ANSWAR:
MAIN IMPORT AND EXPORT DOCUMENTS:
1. THE CUSTOMS SPECIFICATION FORM

2. THE EX CHANGE CONTROL FORM
3. THE PORT RATES SCHEDULE
4. THE SHIPPING NOTE
5. THE CERTIFICATE OF ORGION
6. THE INSUREANCE CERTIFICATE
7. THE AIR WAY BILL
8. COMMERCIAL INVOICES
HANDLING OF THE IMPORT AND EXPORT DOCUMENT
The overseas trade is mainly financed through letters of credit
1. An importer of goods after settling the terms and conditions with the foreign
seller apply to a bank in his own country for the issuance of the letter of
credit.
2. Before issuing a letter of credit, the bank will examine whether the importer is
of good financial standing, possesses import license issued by IMPORT
COMTROL AUTHORITY, the amount available covers the letter of credit
applied for, the license is valid etc. After fully satisfying the above mentioned
items, the bank will issue a letter of credit.
3. The letter of credit is sent to the exporter who now is assured that the bill will
be paid.;
4. The exporter on receiving a duplicate copy of the letter of the credit by mall
or cable makes arrangements for the supply of goods.
5. When the goods are to be shipped, the exporter prepares and obtains (a) A
bill certificates (b) A commercial invoice (c) A consular invoice (d) insurance
certificates (e) export license if any; if certificate of origin and other necessary
documents and submit them to his bank in the country along with the drafts
equal to the value of the goods exported.

Page 21
6. The exporter bank after full satisfying the reality of the documents and the
tallying with the term and conditions written down in the letter of credit, sent
the document and draft to the importer bank for payment.
7. On the arrival of shipping documents, the issuing bank will examine all the
document and if found in order will inform the importer.
8. The importer after discharging his obligations to the issuing bank obtains the
bill of lading and other relevant document.
9. If the bill of lading is endorsed in name of the bank, if will be endorsed in
favor of the importer.
10. On receipt of the bill of loading, the importer will get the goods released from
shipping company through a clearing agent.
Question NO 12: Discuss the main problems of the exporters in selling the good abroad?
ANSWAR: FOREIGN TRADE AND ITS PROBLEMS:
In the modern world all the countries of the world whether they are developed
or under developed are preoccupied with the problems of selling the goods in
the foreign countries. The government agencies provide all possible
assistance to the businessmen for selling the goods overseas.
Export of goods and service in necessary because there is no country in the
world which produces of consumes. Trade between the two countries also
arises because of economic advantages which arise due to international
specialization of labor.
An exporter is faced with many problems while selling his goods overseas.
The main problems facing the exporter are as follows.
1. LANGUAGE:
When the goods are exported to a foreign country, the labels informative,
literature, packing technical hand out etc. should be prepared in the language
of the country in which the goods are marketed. There should also be
salesman who are well worsed with that language and know the habits and
liking of the people.
2. STANDARDIZED UNITS:
In some countries of world the units of length, weight capacity voltage etc.
are not the same. The exporter therefore, shall have to see that the goods

Page 22
are prepared and supplied according to the standard specification of the
importing country.
3. SALE IN FOREIGN CURRENCY:
Every country has its own currency which is not legal tender in the other
country. Buyer abroad prefers to by the goods in his own currency, just s
seller prefer to sell the currency of his own country. The exporter, therefore,
has to calculate the selling price of the goods in the currency units of the
country where the goods are sold
.
4. LICENCE AND DOCUMENTS:
When goods are exported or imported a number of documents are to be

prepared. An exporter may have to obtain a license for the overseas trade in
a particular item or items. The exporter has also to be well versed with the
trade regulations of the importing country.
5. RISK OF EXPORT TRADE:
There are various risks which are involved in the overseas trade. They buyer
may create un necessary obstacles in the payment of money or the goods
may be stolen at the dock or the goods may be test in transit or damaged in
rain, bad weather, where the goods re insured, the profit of the exporter is
very much reduced due to heavy expanses insurance.
6. IMPORT QUOTA:
Another serious problem faced in foreign trade is the imposition of quota means the
maximum amount of a commodity that may be imported during a certain period of
time. When an export quota of a particular commodity is fixed, no exporter can sell
that commodity to that country which is under quota system.
7. IMPOSITION OF TARIFFS:
Custom duty or tax is also imposed by a government on the import or export of goods
in the country. The impositions of tax on goods raise its price and discourage
international trade.
8. USE OF CHILD LABOUR:
The advance of world has imposed restriction on the export of countries which use
child labor in their production. Our exporter particularly sport goods, surgical
instruments, handmade carpets have decreased.

Page 23
Question NO 13:Discuss the main techniques which have been developed in the modern
world for financing of exporters ?
ANSWAR: FINANCING OF EXPOTERS:
The procedure of financing overseas trade in brief is as follows.
(a) FINANCING OF EXPORTER:
When the exporter is a consumer goods and the payment is to be made by the
importer the main instruments are:-
1. OVER DRAFT AND LOAN:
The exporter can meet his cash requirement for a short period by getting loans and
overdraft from commercial banks against collateral security.
2. OPEN ACCOUNT METHOD:
If an exporter has good trade relation with the overseas buyer he may sell the goods
on an open account. The shipping documents will be mailed to the buyers without
getting any prior commitments of payments from him. The overseas buyers on receipt
of goods or the documents make payments to the exporter through the overseas
branch of the exporter’s commercial bank.
3. BILL OF EXCHANGING :
One of the oldest methods of receiving payments for exports is to draw a bill of
exchange on the overseas buyer. The exporter (drawer) directs an unconditional
order in writing to the importer (drawee) directing him to pay on demand or at some
future time a sum of money to the order or to the bearer when the importer accepts it
can be negotiable or discounted with a bank.
4. NON RECOURSE FINANCE:
The exporter can also obtain payments for exports from the finance company. The
finance company after obtaining all information about the credit standing of the
overseas buyer makes payments to the exporters generally at a lower/reduced rate.
When the bill matures, the finance company collects the payments from the foreign
buyer.

Page 24
5. LETTER OF CREDIT:
The exporter also receives payments for his overseas trade through a letter of credit.
The overseas buyer makes arrangements with a bank in his country to make payment
at the exporter’s center against delivery of shipping documents including such papers,
certificate etc. when the bill matures; the finance company collects the payment from
the foreign buyer.
6. INTERNET TRANSFER:
An importer can make payments to the exporter through his bank by sending
telegraphic or using the modern facility of internet. The importer bank will inform on
internet to its branch or a representative bank in the foreign country to pay to the
exporter a definite sum of money.
b. FINANCING OF MEDIUM TERM EXPORTER BUSINESS:
In case the export is a capital project the exporter undertakes great credit risk. The
exporter then requires safe guarantee to the credit guarantee development (ECGD)
then provides guarantee to the commercial bank even for the sound firms of the
highest credit standing which are to make overseas payments.
c. FINANCING OF LONG TERM BUSNISS:
If the exports consist of large scale capital projects such as power dam, am oil
refinery, transport system etc. then finance is provided by international organizations
like international bank of reconstruction and development (IBRD) new named as
World Bank. The responsibility of collection payments from the overseas buyers
entirely rests on the financing body.
Question NO 14:What is import license? How is it obtained ?
ANSWAR: IMPORT LICENSE:
If the balance of payment of country is unfavorable continuously, the government of

such country imposes quantities restriction on the import trade so that equilibrium is
adjusted in the balance of payments. The main steps which are taken to control
import trade are as follows.

Page 25
1. TARRIF QUOTA:
Tariff quota is method where by a certain specified quantity of a particular commodity

is permitted to enter in the country under a specified low rate of duty, but any
additional amount is free to enter at a higher rate.
2. UNILATERAL QUOTA:
When the government of a country imposes an absolute limit on the import of a

commodity during any period without prior negotiation with foreign government, it is
called unilateral or autonomous import quota.
3. BILATERAL QUOTA:
If the import is determined after negotiation among different government, it is known

as bilateral quota.
4. MIXING QUOTA:
Mixing quota refers to that type of regulation that limits the proportion of foreign
produced raw material that could be used in climatically finished goods.
5. IMPORT LICENSES :
Import licenses are also one of the important devices for controlling import trade. The
individuals and firm who desire to import goods from the foreign countries are
required to submit applications to the licensing authority. The importer can get their
merchandise cleared form the customs authorities if they have the import licenses
duly issued in their names the government thus limits the demand for foreign
exchange.
ISSUECE OF IMPORT LICENSE
Import license in Pakistan are issued on the following basis.
1. C AND F BASIS :
When goods are imported on C and F basis, the coast and freight are included in the
price of the good.
2. C.I.F :
The letters CIF stand for cost, insurance and freight. In case the gods are exported on
CIF basis, its includes cost, insurance and freight.

Page 26
3. C.I.F AND C.I:
These letters stand for cost, insurance and freight and C.I for commission and
interest. When the goods are shipped on C.I.F and C.I basis, it means the price
quoted includes cost, insurance, freight plus commission and interest.
4. F.O.B:
The letters of F.O.B stand for freight on aboard. When the freight of the goods
shipped is not realized in advance by the shipping company, it is then to be paid by
the importer on the delivery of goods at the port of destination. The goods in Pakistan
are mostly impressed on C and F basis. In case an importer prefers to import goods
on F.OB basis, there are no restrictions on him.
Question NO 15: What are the main channels of export trade?
ANSWAR:
CHANNNELS OF EXPORT TRADE
There are four main channels of exporting goods in the foreign countries
1. SELLING FROM THE COUNTRY :

A seller can export the goods overseas without himself having to go abroad. If a
country is well known regarding its high quality and low price, the buyers will
themselves create a permanent market for the products. Home producer can also
secure orders from abroad through the export houses which provide all necessary
assistance to the home manufacturer.
2. SELLING BY OVER SEAS AGENTS:
A home producer can sell his goods over seas by employing a sales agent in the
importing countries. The employment of home national as sale agent increase the
sale because the home agent can speak his language fluently and under stands the
habits of his own people and customs prevalent therein.
3. SELLING FROM AN OVER SEAS SALE BASE :

If there is large sale demand of the goods abroad then the firm should appoint full
time persons to develop overseas market to maximum extent.

Page 27
4. GIVING A LICENCE TO AN OVERSEAS PRODUCER TO MANUFACTURE:
An exporter can also increase his profit by allowing the overseas producer to
manufacture and sell the products in his country on the payment of a fixed royalty to
the home producer. The granting of permission to the foreigners to produce goods
and sell in their own market on payment of royalty.
Question NO.16: What are the various type of business finance? What are the various
sources?
Answer:
The financial requirement of a business on the basis of duration are classified under
three main heads, short , medium and long term finance. There are three types of
finance along with their sources are discussed as under.
A. SHORT TERM FINACE:
Short term finance is defined as money raised for a period less then one year. Sort
term capital is required for meeting the day to day expenses of the business such as
payment of wages, gas , electricity bills.
SOURCES OF RAISING SHORT TERM FINANCE
1. TRADE CREDIT:
Under this method, a firm purchases material, equipment etc. From a seller on a
promise to pay the bill at a later date usually from 7th to 90 days. Although trade
credit is not considered a loan but that the seller is financing the purchaser for a
period of time between the receipts of goods.
2. ADVANCE:
Advance is a part payment of the full price. The remaining amount is paid by the
purchaser on the supply of goods. These advances are not loan but they are a source
of finance for the business enterprises.
3. INSTALLMENT CREDIT:
Sometime the enterprise purchases goods on installment basis. The possession of

goods is taken but the payment is made in installments over a particular period of
time. In the result of that business is able to get some funds to meet the short term
needs of business.

Page 28
4. BANK OVERDRAFT:
It is the most popular source of raising short term finance. An overdraft I an

agreement with the bank by which the customer may draw more than his deposit in
current account up to a certain limit and for a specified period.
5. CASH CREDIT:
It is the most import method of short term borrowing by the industrial and
commercial units. The bank allows a business unit to borrow money unto a
certain limit by pledging the goods with it. The goods are released in full or in
parts on making payment.
6. DISCOUNTING OF BILLS:
Bank may give short term credit to its trusted customers by discounting their
bills of exchange. The bank purchases the bill of exchange and pays the
customer the amount of the bill less discount.
7. BILLS OF LANDING:
A bill of landing is a receipt issued by a shipping company for the goods to be

transported from the seller to the purchaser. The purchases the bill of
exchange and pays the customer the amount of the bill less discount.
B. MEDIUM TERM FINACE
Medium term finance is defined as money raised a period from 1 to 5 years.

The medium term finance is regularized by a business unit for the repair and
modernization of business.
SOURCE OF MEDIUM TERM FINACE
1. COMMERCIAL BANK:
Commercial banks are the most important sources of medium term finance.
Loans are generally give against security of assets. Usually the loan is
credited to the account of the borrower. He can withdraw the whole
amount once or in installments.
2. DEBENTURES:
A company may raise medium term finance by issuing debentures. A

debenture is an instrument issued by a company acknowledges debt under

Page 29
its common seal. The term and conditions of loan are written on the back of
the documents. Under Islamic modes of financing debenture have been
replaced by term finance certificates.
3. LOAN FORM SPECIALIZED CREDIT INSTITIONS:
Specialized credit institutions are also one of the important source of

medium term finance for example PICIC, ICP, NDFC etc.
C. LONG TERM FINACE:
Long term finance is defined as money raised for a period of more than five
years. The long term finance is mostly used by the business institutions for
purchase of fixed assets, modernization and for expansion of business.
SOURCE OF LONG TERM FINACE
1. EQUITY SHARES:
The issuing of the equity shares is the most important source of long term
capital by a company. These shares are the best source because they are
only repaid on the winding up of the company. Equity shares holders are the
real owner of the company.
2. ISSUE OF RIGHT SHARE:
A public company may increase its capital by issue of right shares. Right
shares are offered to the shareholders in proportion to their present holding
often at a price which is less than the currently quoted price on the stock
exchange.
3. DEBENTURES
A company also raises long term finance by the issue of debenture. Under
the Islamic modes of financing the debentures are replaced by a new
corporate security called T.F.C.

Page 30
4. LOANS FROM INDUSTRIAL & FINANCIAL INSTITUTION
A company also meets its long and medium term capital requirements from
the industrial & financial institutions like IDBP, PICIC, NIT, BEL etc. Such
financial institutions help in promoting new companies, expending and
development of existing companies.
5. PLOUGHING BACK OF PROFITS:
Ploughing back of profits means the use of profits of the business for its
development. Ploughing back of profit is a useful source of getting extra
capital for building and expansion business.
Question NO17: What do you know by equity and debt financing? Explain its merits and
demerits?
ANSWER: EQUITY FINANCING
A company needs investment in (1) current assets (2) Fixed assets. If a

company meets these requirements of business from the supplied by the
owners, it is called equity financing or owners financing. The profit retained
in the business is also regarded as owner finance.
ADVANTAGES OF EQUITY FINANCING
1. PERMANENT SOURCE OF CAPITAL:
The equity finance is a source of long term capital of the business. It will be
repaid when the company is winded up.
2. NO PAYMENT OF INTREST:
The business company has not to pay interest charges on equity capital.
3. ABILITY TO FACE BUSINESS RECESSION:
There is no burden of fixed interest charges on equity capital; there for, the
business concern can face a business slump better than on the uses debt.

Page 31
4. FREDOM FROM FINANCIAL WORRIES OF BORROWING:
When a business concern finance its business from own capital, it has then not
to depend upon borrowed capital which may not be available to the business at
the time of need.
5. EARNING REMAIN WITH THE FIRM :
When the funds are provided by the owner for investment in business, the
earnings of the firm remain with the owner. It is not distributed to the creditors
in the form of interest.
6. LIQUIDATION OF FUNDS:
In case a business is winded up, the assets of the business remain with the
owners.
7. REPAYMENT OF FUNDS:
A business financed by equity has no obligation to repay the funds during the
life time of a business.
8. ABILITY TO BORROW:
If a business is financed by equity finance, it is able to obtain borrowed capital

easily.
DISADVANTAGES OF EQUITY FINANCING
1. IDLE CASH BALANCES:
If a business is faced with a period of low activity (slump), than a part of the
equity capital remains unused. The business will not be earing income on
the idle or unused cash balances.

Page 32
2. OVER CAPITALIZATION:
If a company issue more equity shares then actually required by a company,

it then results in over capitalization.
a. NO AVANTAGE OF BORROWED CAPITAL:
If a company issue only equity shares and does not borrow, it then
loses the opportunity to obtain capital at low rat of interest
b. DEBT FINANCING :
The second source of raising capital is the creditor’s funds. Most of

the business concerns are not able to finance all of their business
from their own funds. Then …. They contacts with the lenders or
financial institutions and obtain capital on interest basis which is
called debt financing.
ADVANTAGES OF DEBT FINANCING
1. EXPENTION OF BUSINESS:
The business concern with the use of borrowed capital is on a position to

expand the business and thus avails the economies of large scale
production.
2. CREDITORS HAVE NO SAY:
The creditors do not have any say in the affairs of the business. Therefore,
the owner designs policies for the best utilization of the capital.
3. PROFIT:
The business concern with help of borrowed capital is able to earn profit
because the rate of return on the borrowed capital is higher than interest
charges.
DISADVANTAGES OF DEBT FINANC

Page 33
1. PAYMENT OF INTTEREST:
The business has to pay interest to the creditors regularly and the principle
amount at the data maturity without any regard to the financial condition of
the business.
a. LOSSES:
During the period of depression, the rate of interest on the borrowed

capital remains the same but the return on capital falls below the rate
interest. The business concern, therefore, suffer losses on the borrowed
capital.
2. CREDITORS CAN SUE THE BUSINESS:
If the interest on the borrowed capital and principle amount is not paid at
the maturity date the creditors may sue the business. And put it on a very
awkward position in the eyes of the competition.
3. ATRACTION OF FUNDS:
When the business activities are slow, the rate of return on borrowed
capital is low as compared to the prevailing of interest. The business
concern are, therefore, not able to attract funds from the investors.
4. DISSATISFACTION AMONG THE SHAREHOLDERS:
If a business concern decides to repay the business loan out of profit, the
payment of dividend to shareholders is reduced. It creates dissatisfaction
among shareholders.
Question NO18: What do you know about Islamic banking in Pakistan?
ANSWER: ISLAMIC BANKING IN PAKISTAN
Pakistan was created on the name of Islam on august 1947. Since then, the
interest in playing an important role in the economy of our country. The
principle of interest as the main source of economy is directly against to the
Islamic system. The previous governments except that of late president

Page 34
Ziaul-Haq could not dare to change the system based on interest due to the
following reasons.
1. Interest charged by the modern banking is not prohibited by Islam. The
term Ribah used in the Quran is for Usury and for the interest involved
in the modern banking system.
2. The oblation of interest will result in the breakdown of entire economic
system.
3. Saving will considerably decline with the elimination of interest.
4. There will be failure of banks if profit and loss sharing is introduced.
5. People would prefer depositing their savings in the branches of foreign
banks transacting in the country.
The previous government led by late president Ziaul-Haq accepts the
challenge and took revolutionary steps to Islamize the economy. The
government mentioned that Ribah implied on all types of interest and there
is no disagreement over this issue among Ulamas. As regards the fear of
reduced savings, it based on misconception. Saving, according to the
modern economist is a function of income rather than of interest. Referring
to other misgiving, the banking system will not be affected if the
investment is made in the safe projects. If the funds under the interest free
of system given more return, there will be any fear of the transfer of
accounts to foreign banks.

Page 35
The government of Pakistan has taken various steps for eliminating interest
based transactions from the economy. The main steps taken under this
direction are as follows:-
1. P.L.S DEPOSITS:
The commercial banks are accepting interest free deposits, from January 1st
1982. Under the interest free system, only PLS saving accounts and PLS
term deposits shall be accepted on profit and loss sharing basis.
2. From July 1st 1984 the commercial banks were allowed to provide finance under Islamic
modes.
3. From April 1st 1985 even in case of firms and individuals, all new financing by banks and
financial institutions were to be in accordance with the requirements of sharia.
THE END
Page 36

Money Banking &amp; Finance

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Money Banking &amp; Finance

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Money Banking & Finance

Collector & Composer

DEFINTION OF COMMERCIAL BANK

FUNCTION OF COMMERCIAL BANK

(a) BASIC FUNCTIONS

(1) ACCEPTING OF DEPOSITS:

II, SAVING ACCOUNT:

III, FIXED DEPOSIT ACCOUNT:

Collector & Composer, Zabihullah Ahmadi (Zabihullah.ahmadi1990@gmail.com)

(2) ADVANCING OF MONEY:

I, LOANS AND ADVANCES:

II, CASH CREDIT:

III, BANK OVERDRAFT:

IV, DISCOUNTING OF BILLS:

(b) SECONDRY FUNCTION :

Collector & Composer, Zabihullah Ahmadi (Zabihullah.ahmadi1990@gmail.com)

(c) ANEGCY SERVICES:

II, PURHASE AND SALE OF SECURITIES:

A banker undertakes to make payments in respect of rents, insurance premium etc. on

(d) MISCELLANEOU ( FUNCTION) SERVICES:

II, ISSUING OF LETTERS:

III, GIVING GUARNTEE:

The banker gives guarantee for loan on behalf of their customers.

IV, ISSUE OF TRAVELERS CHEQUES:

Collector & Composer, Zabihullah Ahmadi (Zabihullah.ahmadi1990@gmail.com)

ROLE OF COMMERCIAL BANKS IN THE DEVELOPMENT OF A COUNTRY:

2. ROLE IN THE TRADE AND INDUSTRY:

Collector & Composer, Zabihullah Ahmadi (Zabihullah.ahmadi1990@gmail.com)

6. HELP TO BASIC SECTORS:

10. SOLIVING REGIONAL DISPARITY:

Collector & Composer, Zabihullah Ahmadi (Zabihullah.ahmadi1990@gmail.com)

IN FACT BANKS DEPOSITS ARE TWO PARTRS

(a) DIRECT / PRIMARY DEPOSITS:

(b) INDIRECT / CREATED DEPOSITS:

Expansion of deposits = Original deposits X1 /cash reserve.

= 1000 X100 /20

Collector & Composer, Zabihullah Ahmadi (Zabihullah.ahmadi1990@gmail.com)

1. CASH RESERVE RATIO:

4. AVAILABLITY OF COLLATERAL SECURITY :

The process of credit creation also depends upon economic

Collector & Composer, Zabihullah Ahmadi (Zabihullah.ahmadi1990@gmail.com)

DEFINTION OF CENTRAL BANK

We can also define the central bank in the following words

FUNCTION OF CENTRAL BANK

1. MONOPOLY OF NOTE ISSUE :

2. BANKER TO THE STATE:

Collector & Composer, Zabihullah Ahmadi (Zabihullah.ahmadi1990@gmail.com)

4. LENDER OF THE LAST RESORT :

5. CLEARING HOUSE FACILTY:

Question NO 5: How a Central Bank can control credit?

THECNIQUES OF CREDIT CONTROL

1. BANK RATE POLICY :

2. OPEN MARKET OPERATION:

Collector & Composer, Zabihullah Ahmadi (Zabihullah.ahmadi1990@gmail.com)

3. CHANGING LEGAL RESERVE RATIO:

Question NO6:What are the main types / kinds of bank account?

FOLLOWING ARE THE MAIN KINDS OF BANK ACCOUNT

Collector & Composer, Zabihullah Ahmadi (Zabihullah.ahmadi1990@gmail.com)

Saving account is another important kind of bank account. It is opened to encourage

3. FIXED DEPOSIT ACCOUNT:

4. PROFIT AND LOSS SHARING SAVING ACCOUNT:

These accounts are introduced as a step to Islamisation o banking in Pakistan in

Collector & Composer, Zabihullah Ahmadi (Zabihullah.ahmadi1990@gmail.com)

5. PROFIT AND LOSS SHARING FIXED DEPOSIT ACOUNT:

Money Banking & Finance

Money Banking & Finance