+5 OF CREDIT er money and metallic coing INSTRUMEN i t pap The mar .et ordinarily thinks thal fu . main Medan GHeeRaRGe! I i that creat playing @ dominant ro, nd then subse modern business by transferring money to the CNT salt can bo extern ba the lenders. There are numerous ways by which INE TO Cte Si them involve the use of credit instruments and in Gehan’ Ti eS ete, without any written contract. The main instruments and (3) AWetien inatru re, Clase under three heads: (1) Pay roll credit; (2) Book credit te ments (1) Pay roll credit. Pay roll credit is also called oral SO eto se advance developing countries of the world, some credit IS Ex individual, ig businesses associates without keeping any record oF tate 's. The agreeme, pay back the money is purely oral. If a borrower refvSes © Pay the money creditor cannot prove the existence of any obligation. Oral agreements are p, confined to small loans. (2) Open Book Accounts or Book Credits. Open book account merely consi entries on the books of business concerns. These entries appear as an acc receivable on the books of lender and as an account payable on the book; the borrower. The main advantage claimed for the book account is that itis, simple and speedy way of carrying on the business transaction. The drawback , this method is that the payments are normally slow. There are also chances of amount advanced becoming a bad debt (3) Documentary Credit Instruments. However, most of the credit is evidenced » written contract. The instruments of credit or debit exhibit the existence and term, debt, the identity of the debtor, the amount of the debt, the rate of interest, the i of the maturity of the loan, etc., etc. When the instruments of credit or debt evidenced by records and documents, they eliminate doubts about the nature ¢ terms of loans. They also facilitate recovery and make the ‘instruments m negotiable. The main negotiable instruments are: (1) Promissory Note (2) Bill Exchange and (3) Cheque: fe WHAT IS NEGOTIABLE INSTRUMENT? Meaning The term negotiable instrument means a written document which entitles a person receive a sum of money. A negotiable instrument is transferable by delivery of endorsement and delivery. The mere transfer entitles a person to the sum of mr mentioned therein. A person who takes the negotiable instrument in good faith becar the true owner even if he has not received it from true owner, The Negotiable Insttun' thus is a document which is legally recognized by custom of trade or law, transferadle delivery or by endorsement. The Negotiable instrument Act 1881, recognizes instruments (i) promissory note (ii) Bill of exchange and (iii) Cheque payable 00% or to bearer as negotiable instruments. Characteristics of negotiability ‘An instrument is negotiable by virtue of the following features. (1) Transferable by delivery. It is transferable from one person to another by delvet! by endorsement and delivery. —<errr $$ to rev g Ent eniioned in Toney: The legal holder of the instrument is entitled fo receive ahis it. The holder of 3) Filing a su ler of a negotiable instrument has the right to file a sul F name for payment from all or any of the concerned parties. feree is not affected by i th (a) Trans y defective title. If the transferee has accepted the negotiable instrument in good faith, then he is not affected by the defective title of the transferer in any way. In other words, he is protected against all defects of title of persons from whom he receives the payment The three negotiable instruments promisson d_ cheque i y note, bill of exchange and cheq! payable either to order or bearer are called negotiable because they possess the Essential features of negotiable instrument i.e. (i) transferable by delivery (ii) transfer is not affected by defective title (iii) the holder of the instrument has the right to file a suit for payment and (iv) the holder is free from all equities. Kinds of Negotiable Instruments The kinds of negotiable instruments are (1) Promissory Note, (2) Bill of Exchange and (3) Cheque. (1) Promissory Note ‘APromissory note is the simplest and earliest kind of credit instrument. It is an unconditional written promise by one person to another in which the maker (payer) promises to pay on demand of at a fixed or determinable date in the future, a stated sum of money to or to the order of a specified person or to the bearer of the instrument. A promissory note in order to be negotiable must fulfil the following conditions. z Essential Features. The following are the essential features of a promissory note. (1) The promise to pay must be in writing (2) The promise to pay must be signed by the maker or payer. (@) The promise to pay must be unconditional. An instrument containing a promise to pay a sum after deducting necessary expenses or imposing any other condition is not a promissory note. | promise to pay B or order Rs.5000 (promissory note). | promise to pay Mr. B. Rs.5000 seven days after my marriage with C (Not a promissory note). (4) The amount to be paid must be definite in terms of money. must be payable on demand or at a fixed or determinable future (5) The promissory note date. (6) The promissory note must be payable to a definite person. The payee must be certain. The promissory note can not be made payable to the maker himself. (7) It must bear stamp at the rate prescribed by law of the country. (8) There are two parties to a promissory note (i) Maker. He is the person who draws and signs the promissory note, and promises to pay the ‘amount. (In the specimen of promissory note given below Rafiq Ahmad is the maker).amount of the promissory note ig nto whom the re is promised payment. He (il) Payee. He is the perso! Mr. Akram (In the specimen below Payee) Advantages The main advantages or the u! (i) Promissory note is an easy and simp! (ii) Itis an acknowledgemel jebt whic! out of commercial tray (ii) 1t helps in quick settlement of indebtedness arising Seton, Specimen of a Promissory Note Paya Sty se of promissory note are:- le method of borrowing and repaying a dep, h is duly stamped, Lahore Rs. 20,000 July 1, 2010 Stamp Sixty days after for value received, | promise to pay, Mr. Akram Khan or order the sum of Rs. twenty thousand only, g Aa OO te. Akram Khan I . 106. Gulberg, Rafiq Ahmad KS” Lahore Signaluen, 2 (2) Bill of Exchange ‘A bill of exchange is playing an important part in the commercial life of the county. The need for it arises where the buyer of goods needs a period of credit before paying, It is drawn by the creditor and is accepted by the debtor. According to F.W. Muller, a bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whomit is addressed to pay on demand or at a fixed or determinable futur time, a SunT cEItanFinene}te-oF tc tie orderotreertain persen-orto-beare: Tr. Features or Characteristics of the bill. The main characteristics or features of a bill of exchange are as follow: (1) A bill of exchange must be in writing. (2) It must contain an order to pay. (3) The order to pay must be unconditional. If it is subject to the happening of S07? events, it will not be a bill-of exchange. (4) It must be signed by the drawer and properly stamped (5) The parties to the bill, the drawer, the drawee and payee must be certain and defiit individuals. (6) The amount payable must be certain (7) The payment must be made in money and not in kind, (8) The bill payable may be either on demand or after a specified period (9) The bill may be payable either to the bearer or to the order of payeeries to the bill ‘According to the definition, there are three parties involved to a bill of exchange. 0 Drawer. The drawer is the person who draws the bill. He is the person who orders to ‘a certain sum of money. (In the low Mr figmid Zafar is the drawer bei ths specimen of BM of exchange gen. be ( Drawee. He is the person on whom the bill is drawn. He is the person who is ordered to make payment of the bill. (In the specimen of the bill. Mr. Rashid Ahmad is the drawee). Payee. He is the person to whom the money is directed to be paid. He gets the payment of the bill. (In the specimen of a bill, Mr. Kamal Akmal is the payee of the bill) Specimen of a bill of exchange Rs. 30,000 e Lahore November 30, 2010 ‘Two months after date pay to Mr. kamal Akmal or his order the sum of Rs, thirty thousand only, for value received. To Mr. Rashid Ahmad Sd 13-Egerton Road Mr. Hamid Zafar Karachi Cassification of bills Bills of exchange are classified on several bases. The main classification in brief are asunder. (1) Classification of Bil . If one bank orders the_other bank to pay, it is called If the order to pay is drawn on any other type of drawee (individual or firm) it is named ae tage dao tae trade bill is drawn either by a seller on a buyer or by a creditor on debtor. When we talk of a bill of exchange, we mean by it a trade bill. (2) Classification on the Basic of Maturity. A bill of exchange is also classified on the basis of period of time required for payment. A rin Qn de sightis:called.sight bill. A bill ordering payment paedine Or (}) Classifications of Bills on the Basis of security. If the bill is fully supported by documents for payments, it is called Documentary Bill. In case no security or document is provided with the bill, it is called a Clean Bill. Wj Classification on the basis of place. A bill of exchange is either inland or foreign bill of exchange. Inland bills are those which are drawn and payable within one country. Foreign bills are those which arise out of trade transactions between different parties in different countries. They are, therefore, drawn on a person or firm ina foreign country. It the drawee enjoys a good reputation in the market and excellent credit standing, he area of circulation of bill of exchange will be very wide. In order to make the bill of ttchange convenient and highly negotiable, people get their bills accepted by reputed ‘mms (acceptance houses) which specialize in this business. vantages of a bill of exchange. ig, Ihe bil of exchange is a very important and useful document in modern commerce 'smain advantages are summarized below.ed bill of exchange shows the f 3m ‘owned by a person and the exact date of payment. In case of delay or non, Baym is the payment can be enforced on him in the court of av en (@Negottabte instrument. The bill of exchange is bla instrument Bey, transferable, it enables increase in commercial Wans0e Oe ti (3) Discounting facility. The bill of exchange being nee aa Ent enabieg | ‘payee or holder to obtain prompt cash by disco” oie ete The bane consider the discounting of bills of exchange as @ ey ules lent. p (4) Easy transfer of money. With the help of bill of excl ri Bad — Can be ess, transferred merely by signing and delivery of the bill volved in the any transfer of money is thus avoided. (8) Self liquidating credit. A businessman can easily Surease, goods by Promising pay a specified sum al a determined future time to the seller. Before the matuny the bill, he can arrange to sell the goods in the market and the proceeds CAN be uses for meeting the obligation. A bill of exchange is thus a self liquidating creqi, (6) Facilitates foreign trade. The bill of exchange facilitates settlement of inter, J Chiaatons. It thus hetps in promoting trade between nations. Qa “A cheque may be defined as a written order of a depositor upon a bank to a) to or to the order of a designated party or to bearer, a specified sum of ‘Money cn} demand. The person who draws the cheque is called drawer, the bank on which cheque is drawn in called drawee and the person to whom payment is to be mats called payee. The main characteristics of a cheque are as follows:- (1) Itis an order of the customer without condition. (2) It is drawn upon a certain bank in writing. (3) The banker has always to pay it on demand. (4) Itis payable to a certain person or to his nominee or to the bearer of the instrument (1) Written verification of debt. The acceP’ tong AMOUNT IN CHEQUE PAYEE DRAWEE FIGURES DATE NUMBER ABC Bank (Pvt. Ltd. aasaae Se eesaer we 30 May, 2010 ___Nadeem Azam _ cases rupces_Ten Thousand Only re. |10,000/ a MSAe™ soareno00s Mes eb 45 2808 30h0 soap 268000 seo00" COUNTER FOIL ACCOUNT NUMBER AMOUNTIN CODE NUMBER — SIGNATUREOF worDs DRAWER |sypes of cheques The cheques are of two types. (i) Open cheques and (i) crossed cheques. () Open Cheques. Open cheques are those cheques which are paid across the counter ofthe bank. Open cheques may be bearer or order chequesancQ-. (a) Bearer cheques. If a drawer orders the bank t f_money. (0) the bearer, iL ay pe cauesses 8 s 2 ‘sheque- Any person who lawfully possesses a— bearer cheque is entitled to receive payment of that cheque. (b) Order cheque. If a cheque is to the order of a person in whose favour the Cheque is drawn, it is called order cheque. The order cheque is paid by the bank only when the bank is satisfied about the identity of the payee. (i) Crossed Cheques. If a cheque is crossed by drawing two parallel lines across the face of the cheque, with or without the words & Co or Alc payee only, it is called a grossed cheques. The crossed cheque cannot be paid on the counter of the drawee bank. It will be deposited in the account of a person in whose order or favour it is drawn.