Economics & Banking Terms Final 34

Syed Tahir Hussain Lecturer
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Economics
Classical School of Thought:
Prof. Adam Smith and his followers are called classical school of thought.
New / Neo Classical School of Thought:

Prof. Marshall and his followers are called Neo Classical Thought.
Economics:
"Economics is a science which studies human behavior as a relationship between ends and scarce
means which have alternative uses". (Prof. Robbins)
Features of Robbin’s Definition:

1: Human ends (Wants) are unlimited 2: Wants are not equally important
3: Means are limited 4: Means have alternate uses
Kinds of Economics:
1: Descriptive Economics
2: Theoretical Economics A) Positive Economics B) Normative Economics
3: Applied Economics
Descriptive Economics:
In this kind of economics, the economic facts concerned with agriculture, industry,
communication etc. are described in the form of figures. For example to describe facts and
figures concerning industry and agriculture in Pakistan is descriptive economics.
Theoretical Economics:
In this kind of economics, economic conditions or problems are studied neutrally and analysis is
made about them. The purpose of this analysis is to understand economic problem or process of
economy properly, so that limited resources may be used effectively.
A) Positive Economics:
In positive economics, the progress of economy is examined being neutral.
B) Normative Economics:
In normative economics solution of economic problems of a country is suggested. Economists
suggest a personal solution of economic problems.
Applied Economics:
On the basis of analysis given by theoretical economics, the method which is adopted to solve
the economic problems of a country, is called applied economics.
Govt. Degree College (B) Lalamusa Page 1

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Economic Law:
An economic law is a statement that a certain course of action may be expected under certain
conditions from the members of society. (Prof. Marshall)
Wealth:
In ordinary language, wealth means money, gold, silver etc. but in economics everything which
has the characteristics of utility, scarcity and transferability, is known as wealth. In this way,
house, table, car, television etc are wealth.
Characteristic of Wealth:
1: Utility 2: Scarcity 3: Transferability
Micro Economics:
In micro economics, we study the separate parts and small units of an economic system. For
example, we study the behavior of a consumer or conditions of a firm or the conditions of a
certain industry or the prices of factors of production etc.
Theories Discussed in Micro Economics:

1: Theory of Price 2: Theory of Consumer behavior
3: Theory of Behavior of Firm 4: Theory of Distribution of Wealth
Utility:
The power or ability of a good or service to satisfy human want is called utility. For example
water has the ability to satisfy thirst and pen is to write with etc.
Utility Vs Usefulness:
Utility does not mean usefulness because many goods are not useful e.g., wine, opium and heroin
etc. these goods are injurious to human health but they have utility because they satisfy human
wants. So, we can say that utility and usefulness are like two poles which stand far away from
each other.
Marginal Utility:
Utility of the last unit of a commodity consumed or utility of an additional unit consumed is
called marginal utility. Separate utility of every unit is also called marginal utility.
Total Utility:
Utility which is attained from the use of a specific number of units of a commodity is called total
utility.
Relationship between Total and Marginal Utility:
1: As long as marginal utility is positive, total utility is increasing
2: When marginal utility is zero, total utility is maximum.

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3: When marginal utility is negative, total utility starts to decrease
Law of Diminishing Marginal Utility:

"The additional benefit which a person derives from an increase of his stock of goods diminishes
with every increase in the stock that he already has". (Prof. Marshall)
Law of Equi Marginal Utility:

Total utility from a given amount is maximum when it is spent on various goods in such a way
that marginal utility of all goods becomes equal.
Consumer Equilibrium:
When a consumer spends his limited income on the purchase of different commodities in such a
way that his total utility from those commodities is maximum. The situation is called consumer
equilibrium.
Demand:
Demand means the quantity of a commodity which a consumer is ready to purchase at different
prices.
Law of Demand:
Other things remaining constant, when the price of a commodity decreases, it's demand increases
and when it's price increase, it's demand decrease.
Tendency or Slope of Demand Curve:

The demand curve has always tendency to move from the left to the right. It means that demand
curve has always negative slope.
Why Demand Curve has Negative Slope?

 Increase in number of consumers due to the fall in price.
 Due to the fall in Price of a commodity real income of the consumer increases and they
purchase more of the commodity.
 When the price of a particular commodity falls, it becomes relatively cheaper than its
substitute, so people increase its demand.
Extension Vs Contraction:
According to law of demand, when price of a commodity decreases, it's demand increases. It is
called extension of demand. On the other hand when price of a commodity increases, its demand
decreases. It is called contraction of demand.
Differentiate Between Rise and Fall of Demand:

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 If the price of a commodity remains constant, but demand for it increases due to some
other causes, it is called rise of demand.
 If the price of a commodity remains constant, but demand for it decreases due to some
other causes, it is called fall of demand.
Elasticity of Demand:
Elasticity of demand is the rate of change in quantity demanded of a commodity to a change in
its price.
Supply:
Supply means the quantity of a commodity offered for sale in a market at certain price during a
given period of time.
Supply Vs Stock:
The total quality of a commodity available in the market or in the possession of the seller at some
period of time is called stock, whereas supply is the quantity which is offered for sale at a certain
price out of the present stock.
Law of Supply:
Other things remaining constant, the quantity supplied of a commodity increases as a result of an
increase in its price and vice versa.
Tendency of Supply Curve:

Supply curve has a tendency to move from left to the right upward. It means its slope is positive.
Why is slope of Supply Curve Positive?

 Due to the increase in price, profit of the sellers increases so they increase the supply.
 In future there is a chance of fall in price, so at the current increase in price, the seller
increases the supply.
 In order to cover the increase in per unit cost of production, it is necessary to offer more
quantity of the commodity to sell in the market.
Extension Vs Contraction:
According to the law of supply, when the price of a commodity increases, its supply increases. It
is called extension of supply. Conversely, when the price decreases, its supply also decreases. It
is called contraction of supply.
Rise and Fall of Supply:

When supply of a commodity increases owing to other factors rather than price, it is called rise
of supply. When supply of a commodity decreases owing to other factors rather than price, it is
called fall of supply.

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Elasticity of Supply:
Elasticity of supply is the degree of responsiveness of supply of a commodity to a change in its
price.
Market Equilibrium:
Market equilibrium occurs when quantity demanded becomes equal to quantity supplied in the
market.
Equilibrium Price:
The price at which both demand and supply become equal is called equilibrium price and how
much quantity is Purchased and sold at this price is called equilibrium quantity.
Market Price:
Market price lasts for a day or a period bit more or less than a day. Market price is the price
which is settled by the equilibrium of demand and supply within a day.
Reserve Price:
Reserve price is the minimum price below which a seller does not want to sell any quantity of his
commodity.
Factors of Production:
2: Land 2: Labor 3: Capital 4: Organization
Land:
Land is the first basic factor of land. It does not mean the surface of land on which we walk or
live. It includes everything which is gifted to us free by nature e.g., mountains, forests, rivers,
oceans, climate, rain and minerals, such as iron, coal, Petrol etc.
Labor:
Labor is second factor of production. Labor means mental or physical work undertaken for
reward. The condition for labor is that it is done for wages whether they are in the form of
money, grains or goods.
Capital:
Capital is third factor of production. It means that part of income or wealth which is spent to
produce more wealth or increase income. E.g. machines, equipments, raw material, factories,
roads, railway lines, dams and grid stations etc.
Organization:
The factor which is needed to produce goods by the combination of land labor and capital is
called organization or entrepreneur. An entrepreneur organizes the system of whole business. He

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combines other factors to do work, pays them reward and earns profit by selling goods.
Marginal Product:
The increase in total output by employing an additional unit of a factor is called marginal
product.
Marginal Cost:
Addition to total cost occurring due to production of an additional unit of output is called
marginal cost.
Law of Increasing Return:
In production process, when marginal product increases with the increase in units of variable
factors along with fixed factors, it is called law of increasing return.
Why Law of Increasing Return is called Law of Decreasing Cost?

When marginal product increases, per unit marginal cost also decreases. This is why law of
increasing return is also called law of decreasing cost.
Law of Constant Return:

If in a production process, along with the fixed factors of production, by increasing United of
variable factors, marginal product remains constant, then this tendency of change in production
is called law of constant return.
Why is law of constant return called law of constant cost?

When marginal product remains constant then per unit marginal cost also remains constant. That
is why law of constant return is also called law of constant cost.
Law of Diminishing Return:

In production process, when units of variable factors along with fixed factors of production are
increased and increase in total production is less than units and as a result marginal product goes
on falling. This tendency of fall in marginal product is called law of diminishing return.
Why is law of diminishing return called law of increasing cost?

When marginal product falls, the per unit marginal cost increases, that is why, law of
diminishing return is also called law of increasing cost.
Fixed Costs:
Fixed costs mean the costs which a firm has to bear in every condition. Fixed costs are also
called supplementary costs or indirect costs. E.g. rent of building of the factory, interest of
capital, wages of permanent staff etc.
Variable Costs:

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The costs which depend on the quantity of output and they increase with the increase in output
and decrease with the decrease in output, are called variable costs.
Explicit Costs:
Payments made by the firm for the hired factors or the amounts paid for the various purchased
materials and other resources are called explicit costs. E.g. Wages paid to the workers, rent paid
for the hired building payment made for purchase of raw material etc.
Implicitly Costs:
Implicit Costs are the costs of firm's self owned and self employed factors. Remuneration
included in implicit costs is not paid by the firm to any other person. In implicit costs, wages of
labor of firm's owner, interest of his own capital, rent of his own building, and depreciation
allowance of capital etc. are included.
Opportunity Costs:
Opportunity costs means the amount of money which are necessarily paid to shift a factor of
production from an alternative use to a specific use. For example an engineer charges 20
thousand rupees monthly for his services from a firm. If some other firm wants to hire his
services l, it has to pay at least 20 thousand rupees because at low wages he would not leave the
first firm. Therefore 20 thousand rupees will be opportunity cost.
Short Period (Short Run):

Short period means the period of time in which a firm cannot change its size. In other words firm
cannot change the size of its factory and number of installed machines. We can say that its
productive capacity is fixed.
Long Period (Long Run):

Long period means the period of time in which a firm can change its Size. Firm can change its
fixed factors of production also. In other words, all factors of production are variable factors.
Pure Vs Perfect Competition:

If In a market following two conditions exist, then it is said that there exists pure competition.
 There are large numbers of buyer and seller in the market and no buyer or seller can
influence the price by his individual action.
 All the units of the commodity are homogeneous.
If in a market, in addition to the above mentioned conditions, the following conditions also exist,
then it is said that there exists perfect competition in that market.
 There is free entry and exit of the firms in the market.
 Buyers and sellers are having perfect knowledge about the conditions of the market.

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 Factors of production are perfectly mobile
Firm:
Firm is an organizing unit which controls a business. Firm's functions expand from establishing
business to getting profit.
Industry:
The sum of all the firms producing the same commodity is called industry. For example all the
firms which produce sugar form a sugar industry and all firms which produce cloth form a cloth
industry.
Monopoly:
Monopoly is that situation of market, in which a certain good is being produced by a single firm
and no close substitute of this good is available in the market. For example WAPDA has
monopoly over the production and supply of electricity in Pakistan.
Firm's Equilibrium:
A firm is said to be in equilibrium when it's marginal cost is equal to its marginal revenue I.e.
MC = MR. In this situation firm's profit is maximum.
Equilibrium of an Industry:
When in an industry all the existing firms earn just normal profit. There is no possibility of any
existing firms to leave the industry and no new firm will like to enter that industry. Then it is
called equilibrium of an industry.
Marginal Productivity Theory:

If the state of perfect completion prevails in the economy, reward to each factor of production
will be equal to its respective marginal product.
Macro Economics:
Macroeconomics is a branch of the economics that studies how the aggregate economy behaves.
In macroeconomics, a variety of economy-wide phenomena is thoroughly examined such as,
inflation, price levels, rate of growth, national income, gross domestic product and changes in
unemployment.
Theories Discussed in Macro Economics:

1: Theory of National Income and Employment 2: Theory of Trade Cycle
3: Theory of Money 4: Theory of International Trade
5: Theory of Public Finance
National Income:

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Quantity of goods and services which is consumed during a year is called national income. (Prof.
Fisher)
Various Concepts of National Income:

1. Gross National Product (G.N.P) 2. Net National Product (N.N.P)
3. Gross Domestic Product (G.D.P) 4. National Income (N.I)
5. Personal Income (P.I) 6. Disposable Personal Income (D.P.I)
7. Per Capita Income (P.C.I)
Gross National Product:

Gross national product of a country is the total market value of all final goods and services
produced during a period of one year. All agricultural goods, industrial goods, mineral goods and
services of individuals, government and semi government institutions are included in it.
Net National Product:
If we subtract depreciation allowance or replacement cost of machines from gross national
product (G.N.P), we get Net National Product.
Net National Income = Gross National Product - Depreciation
Gross Domestic Product:

Total market value of all final goods and services produced within a country during a year is
called gross domestic product. Thus when we subtract net foreign income from gross national
product, we get gross domestic product.
G.D.P = G.N.P - F.I
National Income:
If indirect taxes are subtracted from Net National Product (N.N.P) and subsidies are added in
N.N.P, we get national income (N.I). It is the income which is the aggregate of net rewards of
four factors of production e.g., rents + wages + interest + profits
National Income = Net National Product - Indirect taxes + subsidies
Subsidy:
Sometimes government wants to provide some goods to the public at a lower price than market
price. The government purchases them at higher price and sells at a low price to the public at
utility stores and cooperative stores. It means some part of the price of these goods is paid by the
government, it is called subsidy.
Personal Income:
It is the income which a person individually earns in a year. For example, a lawyer earns 10
Million in a year, it is his personal income. Transfer payments and indirect taxes are included in
personal income.

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Transfer Payments:
Transfer payments are the amounts of money which a person gets without labor. These are
donations, alms, pensions, unemployment allowance, scholarship and gift etc.
Disposable Personal Income:

The income in the possession of an individual after the payment of indirect taxes is called
disposable personal income. It is at the disposal of the person and he can spend it according to
his own free will.
Disposable Personal Income = Personal Income - Direct Taxes
Monetary Policy:
The measures that central bank takes to control the supply of money are called monetary policy.
Fiscal Policy:
Government policy of income and expenditure is called fiscal policy.
International Monetary Fund (I.M.F) :
An international organization has been established to maintain the balance of payments of
different countries which is called International Monetary Fund.
Public Finance:
The study of nature and principles of government's expenditure and revenue is called public
finance. (Prof. Armitage Smith)
Private Finance:
The study of the nature of an individual's income, expenditure and their related principles is
called private finance.
Parts of Public Finance:

1. Public Revenue 2. Public Expenditure 3. Public Debt
Main sources of Public Revenue:

1. Taxes 2. Fee 3. Price 4. Special Assessment
5. Productive Works of the Government 6. Government Property
7. Fines 8. Confiscation of Securities 9. Receipt of Loans and Interest
10. Gifts and Aid 11. Proprieties of Heirless 12. Local Rate
Sources of Public Expenditure:
1. Defense 2. Police 3. Civil Administration 4. Courts
5. Public Health 6. Means of Transportation 7. Irrigation
8. Interest on Loan 9. Subsidies 10. Foreign Affairs 11. Social Welfare
Tax:

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Tax is a compulsory payment made by the people to government treasury to meet the
expenditure of the government, for the common benefit of the people.
Kinds of Taxes:
1. Direct Tax 2. Indirect Tax 3. Proportional Tax
4. Progressive Tax 5. Regressive Tax 6. Value Added Tax (VAT)
Direct Tax:
Direct tax means the tax which is paid from the pocket of the person when it is levied. E.g.
Income tax, property tax, wealth tax etc.
Indirect Tax:
Indirect tax means the tax which is not paid from the pocket of the person on which it is levied,
rather the burden of the tax is shifted to another person. E.g. Sales tax, custom tax and excise
duty etc.
Progressive Tax:
A tax in which rate of tax increases with the increase of level of income is called progressive tax.
In Pakistan income tax is progressive tax.
Proportional Tax:
A tax in which the rate of tax is the same on every level of income is called proportional tax.
Regressive Tax:
Regressive tax is opposite to progressive tax. The lower income level is, the more rate of tax will
be and the higher income level is, the less rate of tax will be. It means the rate of tax decreases
with the increase in income and vice versa.
Value added Tax (VAT):

This is a kind of tax which is imposed on every stage of production of good. For example VAT
for a bread, will be received first from farmer on wheat, then after grinding when it becomes
flour but on the difference of value between wheat and flour, then after baking the bread, on the
difference of value between flour and bread and finally the retail seller on selling the bread.
Cannons of Tax:
First four cannons are presented by Prof. Adam Smith
1. Cannon of Equality 2. Cannon of Certainty 3. Cannon of Convenience
4. Cannon of Economy 5. Cannon of Productivity 6. Canon of Simplicity
7. Cannon of Diversity

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Zakat:
Zakat is a compulsory payment on a sahib-e-nisab Muslim. He pays it as a religious duty at a
given rate on open and secret wealth himself or through Islamic state to the deserving people.
Difference Between Zakat and Tax:

1. Difference in objectives 2. Exemption 3. Rate 4. Personally or through state
Budget:
An account of income and expenditure is called budget
Surplus Budget:
When the revenues of the government is more than its expenditures, then it is called surplus
budget.
Deficit Budget:
When the revenues of the government are less than its expenditures then it is called difficult
budget.
Barter:
The direct exchange of goods or services for goods or services is called barter system.
Money:
"Anything, which is commonly used and generally accepted as medium of exchange and at the
as a standard of value".
Features of Money:
1: General acceptability 2: Medium of exchange 3: Standard of value 4: Store of value
Stages of Evolution of Money:

1: Commodity Money 2: Metallic Money 3: Paper Money 4: Credit Money
Forms of Money:
1: Commodity Money
2: Metallic Money
a) Full bodied Money b) Token Money
3: Paper Money
a) Representative b) Convertible c) Inconvertible
4: Near Money
5: Credit Money
a) Cheque b) Bank Draft c) Bills of Exchange d) Plastic Money
6: Legal Tender Money

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a) Limited b) Unlimited
7: Money of Account
Commodity Money:
In the earliest stages of human civilization, different commodities or species were used as money
or medium of exchange. E.g. leather, animal skins, salt, wheat etc
Metallic Money:
Metallic money consists of coins made of gold, silver or nickel. It varies in weight, fineness and
value.
A) Full Bodied Money:

It consists of those coins the metallic value of which is equal to their face value. They are also
called "Standard money or natural money". These are made of gold and silver. Now such money
is not used anywhere in the world.
B) Token Money:
The coins whose face value is higher than their intrinsic value are token money. They are usually
made of silver, copper or nickel.
Paper Money:
Money made of paper is called paper money. It consists of notes issued by the government or its
central bank. It is also called folded money.
A) Representative Money:
Representative paper money is that money which is fully backed by equivalent metallic or other
reserves.
B) Convertible Paper Money:

Paper money which can be converted into gold or metallic money on demand but all the notes
issued are not fully backed by gold is called convertible paper money.
C) Inconvertible Paper Money:

Inconvertible paper money is that form of paper money which is not convertible into gold or
silver on demand. It is acceptable because it has been declared legal tender by the issuing
authority. It is also known as "Fiat Money".
Near Money:
Number of assets, which are liquid in nature but cannot be used directly as a medium of
exchange, are considered as near money. For example time deposits, shares, government bonds
and securities. Near money can be easily converted into cash without any delay or loss in

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value.
Credit / Bank Money:

Bank money occupies a very predominant position as a medium of exchange in the advance
countries of the world today. The term bank money applies to that near money, which consists of
cheques, bills of exchange and drafts.
A) Cheques:
A Cheque is merely an order in a bank by its client to pay specified sum of money to him or to a
third party on demand.
B) Bills of Exchange:
An instrument in writing, containing an unconditional order signed by the maker, 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 instrument.
C) Bank Draft:
A draft is a Cheque drawn by a bank on its own branch at a different place requesting it to pay on
demand a specified amount to the person named in it.
D) Plastic Money:
Plastic money means the credit cards, debit or smart cards, which have silicon chips and a
specially printed set of characters. These cards are used for making payments for the purchase of
goods or services locally and internationally.
Legal Tender Money:

The money which creditors must accept in settlement of their claims by law is called legal tender
money.
A) Limited Tender Money:

It can be accepted only up to a specific limit. In Pakistan, coins of small denominations value up
to Rs. 1, 2 and 5 are limited legal tender money because coins are token money which are used in
payments.
B) Unlimited Tender Money:

These can be paid up to any amount to the creditors for the settlement of claims or dues. Notes of
Rs. 10, 20, 50, 100, 500, 1000 and 5000 are unlimited legal tender in Pakistan.
Money Account:
It means the unit of money by which the value of goods or services is expressed. Money of
account in Pakistan is rupee because all people count their money in rupees.

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Value of Money:
Value of money is a relative concept which expresses the relationship between a unit of money
and the goods or services that can be purchased with it.
Types of Value of Money

Internal Value of Money:
The internal value of money refers to the purchasing power of money over domestic goods and
services.
External Value of Money:

The external value of money refers to the purchasing power of money over foreign goods and
services.
Quantity Theory of Money:

"Other things remaining unchanged, as the quantity of money in circulation increases, the price
level also increases in direct proportion and the value of money decreases and vice Versa".
Index Number:
An index number is a measure of relative change occurring in a series of values compared with
base year.
Devaluation:
A decrease in the official price of a nation's currency in terms of gold is called devaluation.
Inflation:
"Inflation is a state in which the value of money is falling and prices are rising".
Degrees of Inflation
1. Creeping Inflation:
A slowly rising price level (less than 5% per year) is termed as "Creeping or Mild Inflation".
2. Walking Inflation:
If the prices rise between 5% and 10% annually then it called "Walking or Trotting Inflation".
3. Running Inflation:
When the level of prices rises 10% or above annually, it is named as "Running Inflation".
4. Galloping / Hyper Inflation:

If the prices shoot ip so sharply (i.e., 100% and above) and the value of money falls so rapidly, it
is called hyper inflation.

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Types of Inflation
1.open Inflation:
Inflation is considered open when prices are permitted to rise without being checked by the
government price control committees.
2 .Suppressed Inflation:
Suppressed inflation refers to a situation in which government price control committees hold
prices down or maintain the price level.
3. Gross Inflation:
If rising prices encourage expansion in output by using unemployed productive resources then
this situation is termed as gross inflation.
4. Pure Inflation:
Once the level of full utilization of idle resources and productive capacity is reached, the rising
prices cannot bring additional output. Now inflationary spiral starts. This is termed as "Pure
Inflation".
5. Demand Pull Inflation:
If there is increase in prices due to increase in demand of goods then it is called demand pull
inflation.
6. Cost Push Inflation:

If there is increase in prices of goods due to increase in cost of production (material cost and
labor cost etc.) then it is called cost push inflation.
Deflation:
"A state in which the value of money is rising and prices are falling".
Disinflation:
"Disinflation is the planned reduction in the general price level so administered that economy is
benefited by increase purchasing power and not harmed by drastic deflation". It is a situation
when prices are reduced deliberately but output and employment remain unaffected.
Stagflation:
"Stagflation is the combination of stagnation or recession and inflation in the economy".
Reflation:
"Reflation means an inflation deliberately created to relieve the depression".
Foreign Exchange Rate:

"The means and methods by which rights to wealth expressed in terms of the currency of one

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country are converted into rights to wealth in terms of the currency of another country are known
as foreign exchange".
Methods of Making Foreign Payments:

1: Letter of Credit 2: Foreign Bills of Exchange
3: Foreign Bank Draft 4: Mail Transfer (M.T.)
5: Telegraphic Transfer (T.T.) 6: Traveler’s Cheque
7: International Money Order (IMO) 8: Dealers of Foreign Exchange
Exchange Control:
Exchange control refers to the measures, which the government of a country takes for
influencing the foreign exchange rate or the steps of the government to check the free movement
of foreign exchange.
Foreign Exchange Rate:

The foreign exchange rate or exchange rate is a rate at which the one currency is exchanged for
another.
Kinds of Exchange Rate

1. Spot Rate:
It means the rate of the moment prevailing in the market. For example, if you go to currency
dealer and ask him about exchange rate, the rate told by currency dealer is called spot rate.
2. Forward Rate:
Forward rate is related to future transactions or deliveries.
3. Selling / Buying Rate:

Selling rate is a rate at which the currency dealers sell the foreign currency and buying rate is a
rate at which one is willing to buy foreign currency.
4. Inter Bank Rate:

The rate at which the central and commercial banks sell and buy foreign currency to each other is
called interbank rate.
5. Official Rate:
The rate, which is officially issued by central bank to exchange foreign currency is called official
rate.
Financial Market:
Financial market is a market for the exchange of capital and credit including the money markets
and capital markets.

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Money Market:
A money market is a market for short-term loans. "A market consisting of financial institutions
and dealers in money and credit that either have to lend, or want to borrow money". (Milton
Friedman)
Instruments of Money Market:

1: Bills of Exchange 2: Promissory Note 3: Treasury Bill
Institutions of Money Market:

1: Central Bank 2: Commercial Bank 3: Acceptance Houses
4: Non-Bank Intermediaries 5: Discount Houses and Bill Brokers
6: Specialized Financial Institutions
Capital Market:
"Capital market is a market in which financial resources (bonds and stocks etc.) are traded. These
along with financial intermediaries are institutions through which savings in the economy are
transferred to investors". (Paul A. Samuelson)
Instruments of Capital Market:

1: Bond Market 2: Mutual Funds 3: Modarabas 4: Leasing Companies
5: National Saving Centers 6: Specialized Financial Institutions
Trade Cycle:
"A trade cycle is composed of periods of good trade characterized by rising prices and low
unemployment percentages, alternating with periods of bad trade characterized by falling prices
and high unemployment percentages". (Keynes)
Phases of Trade Cycle

1: Expansion Or Boom
In this phase economic activities increase production, prices, employment, wages, interest rate,
profit volume of credit and investment
2: Recession / Contraction
In this phase the costs begin to increase than the prices because the less efficient factors are
employed at higher costs. The profit begins to disappear. There is a fall in production, investment
and employment. The recession phase comes to an end and goes into depression.
3: Depression of Contraction:
In the period of depression economic activities are low and there is a fall in national income,
employment, and production. The costs are relatively higher than Prices. Profit falls and there is

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a reduction in the consumer and capital goods.
Recovery or Revival:
During this period depression is removed and there is the beginning of boom and expansion.
There is complete harmony between cost and price. Profit begins to reappear in the business.
There is a gradual reemployment of labor. The commercial banks also star to expand the
credit.
Characteristics of Trade Cycle:

1. Identical in duration 2. International in nature
3. Difference in the degree 4. Regular intervals

" Business conditions never stand still prosperity is followed by panic". (Samuelson)
Bank:
"Bank is an institution which deals in money. It accepts deposits from its clients and makes loans
and advances to them for productive and non-productive purposes in need". It accepts deposits at
low rate of interest and lends at high rate to earn profit.
Kinds of Banks
1: According to Incorporation
A) Chartered Bank B) Statutory Bank
2: According to Registration
A) Scheduled Banks B) Non-scheduled Banks
3: Money Creative Banks

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A) Central Banks B) Commercial Banks
4: According to Ownership
A) Govt. Banks B) Private Banks
5: Development Banks
A) Agricultural Banks B) Industrial Development Banks
C) Regional Development Banks D) International Development Banks
6: According to Domicile
A) Home Bank B) Foreign Banks
7: According to Functions
A) Mortgage Banks B) Consumer Banks C) cooperative Banks
D) Saving Banks E) Investment Banks F) Exchange Banks
G) Micro Finance Banks
8: Other Banks
A) School Banks B) Labor Banks
C) Consortium Banks D) Islamic Banks
Banking Systems
1: Branch Banking System 2: Unit Banking System 3: Hybrid Banking System
Branch Banking System:

Under this system, a banking company is created with a large number of branches in various
cities, towns, villages or even various parts of a city or town. This system is applicable in
Pakistan and England.
Unit Banking System:

Under this system, a bank conducts all its business at one location without having branches. This
system of banking is followed in some states of USA because in certain states law does not allow
branch banking.
Hybrid Banking System:

Hybrid means combination of two systems. The countries where both the unit system of banking
and branch system of banking exist side by side are known to be following the hybrid system.
West Germany, France, Italy and India follow the hybrid model.
Commercial Bank:
"Banking means accepting, for the purpose of lending or investing, the deposit of money from
public, repayable on demand or withdraw able by Cheque, draft, order or otherwise".
Functions of Commercial Bank:

Primary Function:
1: Receiving of Deposits
A) Fixed Deposit Account B) Current Account

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C) Saving Account D) Foreign Currency Account
2: Advancing Loans
A) By Overdraft B) Cash Credit
C) Discounting of Bill of Exchange D) By Mortgage E) By Opening Loan Account
Secondary Functions:
1: Agency Services
A) Collection of Cheques B) Collection of Dividends
C) Purchase & Sale of Security D) Agent E) Standing Orders
F) Transfer of Funds G) Trustee
2: Utility Services
A) Credit Instrument B) Foreign Exchange C) Precious Articles
D) Under Writing E) Arbitrator F) Information
G) Acceptance of B/E H) Information I) Medium of Exchange
J) Special Services K) Automated Teller Machine
L) Credit Cards M) Cash deposit Machines.
Cash Reserve:
"The Part of total capital of any trading bank, financial corporation or institution which is
essential to deposit with central bank or to keep with it in cash form is called reserve". (D.G
Locket)
Forms of Cash Reserve:

1: Cash with central bank
2: Cash in hand in form of coins and currency
3: Balances with other banks
Credit Creation:
"The important work of bank is to provide easy medium of exchange for the 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 the creator of credit".
Central Bank:
"The guiding principle of a central bank is that it should act only in the public interest for the
welfare of the country as a whole and without regard to profits as a primary consideration".
(Dekock)
Functions of Central Bank

1: Sole Authority of Note Issue
2: Banker to Government
A) Keeping Deposits B) Keeping of Accounts C) Fiscal Agent
D) Financial Advisor E) Foreign Loans F) Transfer of Capital

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G) Govt. Securities
3: Banker's Bank
A) Custodian of Cash Reserve
B) Clearing House C) Lender of Last Resort D) New Banks
E) Advances Policy F) Growth of Banks G) Rediscounting
4: Controller of Foreign Exchange
5: Custodian of Metallic Reserves
6: Leader of Capital Market
7: Exchange Rate Stability
8: Representative of Foreign Trade
9: Additional Functions
A) Staff Training B) Growth to Saving C) International Trade
D) Membership Fee E) Financial Reports
F) Industrial and Agricultural Development
Principles of Note Issue:

1. Currency Principle 2. Banking Principal
Currency Principle:
According to this principle paper money in circulation should be backed by 100% gold reserves.
So there will always be availability of gold for the redemption of notes when presented which
creates stability in price level and exchange rates, because every note issued is covered by gold
reserve. (Lord Overstone)
Banking Principle:
According to Mr. Tooke there is no need to have the reserve of gold and silver for the issuance of
notes.
Methods of Note Issue:

1: Fixed Fiduciary System 2: Proportional Reserve System 3: Minimum Reserve System
Fixed Fiduciary Method:

According to this system, the government fixes a fixed amount of notes without keeping any
metallic reserve. But this portion of currency must be backed by government securities, which is
called fiduciary limit. The notes issued other than fiduciary limit must be fully backed by gold or
silver reserves.
Proportional Reserve System:

Under this system the central bank is required to keep only a certain percentage of notes issued
in the form of gold or silver. The reserve proportion is usually from 30% to 40%.
Minimum Reserve System:

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Fixed minimum reserve system allows the central bank to keep only a fixed amount of reserve
against whatever the amount of notes issue. The reserve is in the form of gold, silver and foreign
exchange or in the form of any of these types of things. This method has been adopted by
Pakistan since 1965.
Clearing House:
"Clearing house provides a process by which the counterclaims of member banks are offset and
balanced are settled".
National Institutional Facilitation Technologies (NIFT) is providing the facility of Clearinghouse

in Pakistan since 1995.
Bank Account:
Bank account is a sort of agreement between bank and the account holder in which not only the
amount but also the valuables and documents can be deposited into the bank.
Procedure of Opening an Account:

1: Selection of Bank and Branch 2: Selection of Account 3: Contact with Bank
4: Getting Form 5: Documents Attached 6: Specimen Signature Card
7: Issuance of Account Number 8: Deposit of Amount and Documents
Types of Bank Account

1: Profit & loss sharing saving account. 2: Profit & loss sharing term deposit.
3: Current account. 4: Foreign currency account.
Banker:
"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". (J.W.
Gilbert)
Customer:
"A customer is one who has an account with a banker or for whom a banker habitually
undertakes to act as such".
Types of Relationship Between Banker and Customer

Basic Relation:
A) Bank (Debtor) & Customer (Creditor)
B) Bank (Creditor) & Customer (Debtor)
Other Relations:
A) Bailor & Bailee B) Mortgager & Mortgagee C) Principal & Agent
D) Aamal & Zarib E) Purchaser & Seller F) Lesser & Lessee

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G) Trustee & Beneficiary H) Pledger & Pledgee I) Hirer & Owner
J) Cordial Relation
Bailor and Bailee:

When a banker takes charge of his customer's valuable goods, he becomes a Bailee. The
customer who deposits property in this way is a Bailor.
Principal and Agent:

When a baker acts according to the directions or on the behalf of its customer then their
relationship of principal (Customer) and agent (Bank) exists. For example when a bank collects
cheques, drafts and other instruments and pays fees, rent etc. on behalf of customer, it acts as his
agent.
Modarib and Zarib:

When a banker provides finance to customer under the agreement of Modaraba, the relationship
becomes that of Zarib and Modarib. The banker being a financier is Zarib (Rab-ul-Mal) and the
customer having skill is Modarib (Aamal).
Purchaser and Seller:

Under deferred payment sale on mark up mode of financing, the banker is the seller of goods
financed and the customer is purchaser of the same.
Lesser and Lessee:

When a banker provides finance to a customer on the basis of lease financing the relationship
becomes that if a lessee and lesser. In this case the banker is lesser and the customer is lessee.
Truster and Trustee:

When a bank receives securities and valuable goods for custody, the banker's position is that of a
trustee and the customer becomes the truster. E.g., locker facility provided by the bank etc.
Pledger and Pledgee:

When a customer pledges an article (goods and documents) with the banker as a security for
payment of debts or performance of promise the relation between customer and banker exists.
The customer becomes Pledger (Owner) and the banker becomes pledgee (Pawnee).
Hirer and Owner:

In case of hire purchase financing the banker is the owner of the asset and the customer is hirer
of the same. Under this system, the bank purchases the required good at the request of client and
hires those goods to the client.
Cordial Relation:

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Sometimes the banker is in a position to establish cordial relation with his customer by providing
reliable and confidential information about the general standing of people.
Rights and Duties of Customer

Rights:
1: To draw a Cheque 2: To receive Pass Book 3: Correction
4: To Sue 5: Receiving Deposit 6: Receiving Profit
Duties:
1: Banking Hours 2: Outdated Cheques 3: Unauthorized Cheques
4: Warning 5: Careful Draw of Cheque
Rights and Duties of Banker

Rights:
1: Compound Interest 2: To Claim Charges 3: Lien
4: Adjustment of Balance
Duties:
1: Secrecy 2: Payments 3: Collection
4: Trustee 5: Securities 6: Opening LC
7: Safe Deposits 8: Foreign Exchange
Termination of Relationship
By Banker:
1: Death of Customer 2: Customer's Insanity 3: Customer's Insolvency
4: Order of Court 5: Insufficient Balance 6: Notice of Assignment
7: Non Profitable
By Customer:
1: Change in Residence 2: Lack of Confidence 3: Unsatisfactory Performance
4: Low Profit / Interest
Kinds of Customers
1: Individual Customer
A) Married Women B) Parda Nasheen Women C) Minor Customer
2: Joint Customer
3: Trustee
4: Business Organizations
A) Sole Proprietorship B) Partnership C) Joint Stock Company
5: Non-trading Concerns
6: Government Organizations

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Credit:
A promise to pay in future is called 'credit'.
Kinds of Credit Instruments

1: Negotiable Instruments:
These are such credit instruments whose rights can be transferred to any other person. The rights
of these instruments may be transferred by endorsement or delivery. E.g. Cheque, promissory
note, bills of exchange and bank draft etc.
2: Non-negotiable Instruments:
These are such instruments whose rights cannot be transferred to any other person, e.g. Banker's
letter of credit, money order and postal order etc.
Negotiable Instruments
Cheques:
"A Cheque is an unconditional order in writing, drawn on a specified bank, signed by drawer,
directing the bank to pay him on demand a certain sum of money or to a certain person". (Dr.
Hart)
Parties of Cheque:
1: Drawer 2: Drawee 3: Payee
4: Other Parties
A) Holder B) Endorser C) Endorsee
Elements of Cheque:
1: Name of Bank 2: Date 3: Nature of Account 4: Cheque Number
5: Account Number 6: Payee 7: Word 'Bearer' or 'Order' 8: Amount in Words
9: Amount in Figures 10: Signature of Depositor
Kinds of Cheques
1: Bearer Cheque:
It is a Cheque, which involves no restrictions and any person can withdraw money from the bank
without giving his identification.
2: Order Cheque:
For the payment of this cheque, the bank demands identification from the payee to certify the
name written on the Cheque. No other person Except payee can withdraw money from the bank.
3: Crossed Cheque:
It is a type of Cheque on which the drawer draws two transverse parallel lines. These lines stand
for some instructions. These Cheques are much safer as compared to the order or bearer Cheques

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bt he amount of this Cheque cannot be collected at bank's counter because the amount of this
Cheque can only be deposited in the A/C of a particular person.
4: Other Types
A) Lost Cheque
B) Fraudulent / Forged Cheque:
If a person who has no account in the bank issues a Cheque or the Cheque is issued in a closed
account, then the Cheque will be considered as forged Cheque and the bank will not accept it.
C) Post Dated Cheque:

It is a Cheque, which bears a date later than the date of issue.
D) Out Dated / Stale Cheques:

After the expiry of 6 months from the date of issue, the Cheque will be considered as out dated
Cheque.
E) Traveller's Cheque:
These Cheques are issued by the banks on which a specified amount is written. The holder of this
Cheque can withdraw money from any branch of specified bank up to the amount written on the
Cheque.
F) Blank Cheque:
The Cheque on which there is no description of any date or amount. It means the drawer of the
Cheque only signs the Cheque. These Cheques are issued only to those persons who are
dependable.
G) Open Cheque:
The Cheque which is not crossed, is called open Cheque, it may be bearer or order.
H) Marked Cheque:
If there is a spot of ink or color on the Cheque then the Cheque will be considered marked. If
these marks are light only then the bank will make the payment.
I) Dishonored Cheques
J) Honored Cheque
K) Mutilated Cheques:
If a Cheque is torn into pieces or seems to have been torn will not be acceptable. However, it can
be paid after getting confirmation in writing from drawer.
L) Washed Cheques:
If the description of amount, date or signature is not clear on Cheque due to wash them it is
called washed Cheque. Such Cheque will not be honored.
M) Plain Cheque:

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A Cheque on which no particular / information is written or given is called plain Cheque.
N) Local Cheques
O) Foreign Cheques
Endorsement of Cheque:
When the drawer of a Cheque transfers the Cheque to another person, he signs on the back of
Cheque, this process is called "Endorsement of Cheque". The rights of receiving the amount of
Cheque are transferred to that person whose name is written on the back of the Cheque by this
process.
Types of Endorsement
1: General Endorsement:
If owner of the Cheque only signs on the back of Cheque in order to transfer then it is called
general endorsement. In this endorsement the name of the person to whom Cheque is transferred,
is not written. If a crossed or ordered Cheque is endorsed then it becomes a bearer Cheque.
2: Special Or Complete Endorsement:

While transferring the Cheque to a person, if the owner or holder writes the name of Endorsee
before his signature then the endorsement is said to be "complete". E.g. "Pay the amount of this
Cheque to Waqar".
3: Conditional Endorsement:
If endorser of the Cheque puts a condition for the transfer of Cheque then it is called conditional
endorsement. The process of endorsement completes after the fulfillment of that condition
Bausch endorsement has no legal value. "The amount of this Cheque is paid to Adnan when he
completes the construction of this house".
4: Partial Endorsement:
It means, endorsement of a part of the amount mentioned on the Cheque. Such endorsement has
also no legal value, endorsement is always done for the full amount of the Cheque. "Pay Rs. 500
to Ameen from the amount of this Cheque".
5: Restricted Endorsement:
It means the endorsement after which the Cheque cannot be endorsed further. So, only that
person can receive the amount in whose favor endorsement is made. "Pay the amount of this
Cheque only to Rahim".
6: Facultative Endorsement:
In case of dishonor of Cheque, a notice is given to the endorser to bear the responsibility of loss.
However, in case of facultative endorsement, if notice is not given even then the endorser cannot
be exonerated. "Pay the amount of this Cheque to Mr. Khurram, notice of dishonor not required".

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Crossing of Cheque:
" A Cheque is said to be crossed when two transverse parallel lines are drawn on its face with or
without some words".
Parties Who can Cross the Cheque:

1: Drawer of Cheque 2: Holder of Cheque 3: Bank
Types of Crossing
1: General Crossing:
Where a Cheque Bears across its face addition of the words "& Co.", "A/C Payee Only" or "Not
Negotiable" or without these words between two transverse parallel lines. This Cheque shall be
deemed to be crossed generally. This type of crossing is used when the name of payee's banker is
not known.
2: Special Crossing:
Where a Cheque bears across its face with addition of the name of banker with or without the
word 'Not Negotiable' then the Cheque shall be deemed crossed specially.
Terms Used in Crossing

1: Name of Bank:
If the name of any bank is written between traverse parallel lines on the face of Cheque then the
payee can receive the amount only by depositing the Cheque in the same bank.
2: A/C Payee Only:

If the words "A/C Payee Only" are written between two transverse parallel lines on the Cheque
then the payee can encase the Cheque by depositing it in his account in any bank.
3: Not Negotiable:
If the drawer of Cheque writes words "Not Negotiable" while crossing it then the payee cannot
transfer his rights of receiving amount to any other person.
4: & Company (OR) & Co.:

If the drawer of Cheque does not know the name of payee's bank then he writes the words "&
Company" OR "& Co." Between the two transverse parallel lines. The nature of crossing does
not change by writing these words.
Termination of Crossing:
Only the drawer can terminate the crossing of a Cheque. It would be called a material change of
a Cheque. So, the drawer should put his signature with the words "Crossing Terminated". The

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main cause of terminating the crossing of a Cheque is that the payee does not have any bank
account.
Bills of Exchange:
"An instrument in writing containing an unconditional order, signed by the maker, 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 instrument, on demand or at a fixed future time".
Parties of Bills of Exchange:

1: Drawer 2: Drawee 3: Payee
Types of Bills of Exchange:

According to Place
A) Inland Bills (Sight Bills & Time Bills) B) Foreign Bills (Sight Bills & Time Bills)
According to Object
A) Trade Bills B) Accommodation Bills
Promissory Note:
“A promissory note is an instrument in writing (not being the 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”.
Parties:
Drawer (Maker) Drawee (Payee)
Types of Promissory Note:

1: Inland Promissory Note
A) Individual Promissory Note B) Joint Promissory Note
2: Foreign Promissory Note
A) Individual Promissory Note B) Joint Promissory Note
Bank Draft:
Bank draft is a document drawn by one bank upon another bank or its other office. Which
contains an order for the payment of specified amount.
Parties:
Sender:
A person who sends the amount
Drawer:
It is that branch of the bank, which issues or makes the draft.
Drawee:
It is that branch of the bank on which the draft is issued/ drawn (which pays the amount of the

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draft).
Payee:
He is a person who receives the amount of the draft.
Types of Bank Draft
Order Bank Draft:
A) Inland bank draft B) Foreign bank draft
Crossed Bank draft
A) Inland bank draft B) Foreign bank draft
Non-Negotiable Instruments
Letter of Credit:
"The letter of credit is a commitment on the part of the buyer's bank to pay or accept draft drawn
upon it provided such drafts do not exceed a specified amount".
Parties of Letter of Credit:

1: Importer 2: Importer's Bank 3: Exporter 4: Exporter's Bank
Opening of Letter of Credit:

1: Agreement 2: Preparation of Documents 3: Contact with Bank
4: Import License 5: Application Form 6: Scrutiny of Application
7: Undertaking 8: Margin Requirement 9: Issuance of L.C
10: Confirmation 11: Delivery of Goods 12: Payment
Kinds of Commercial Letter of Credit:

1: Clean L.C 2: Documentary L.C 3: Confirmed L.C
4: Un-confirmed L.C 5: Recoverable L.C 6: Irrecoverable L.C
7: Fixed L.C 8: Revolving L.C 9: Special L.C
10: Freely Negotiable L.C 11: Transferable L.C 12: Red Clause L.C
13: Green Clause L.C 14: Back to Back L.C
Clean L.C:
It is that L.C. In which no condition is attached to the bill and the exporter has no need to deposit
the bill of lading, Invoice and the papers of insurance.
Documentary L.C:
A documentary L.C. Provides that the draft drawn under it are to be accompanied by different
documents relating to the merchandise. E.g. Bill of lading, invoice and insurance policy etc.
Confirmed L.C:
A confirmed L.C. Is the one under which bank binds itself by giving undertaking to honor the
drafts drawn under it.

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Un-confirmed L.C:
In case of this L.C. Intermediary bank forwards the L.C. (Advises or notifies the L.C.) to the
beneficiary but does not assume any liability in this regard.
Recoverable L.C:
The payment of this L.C. Is not confirmed because the bank or importer may cancel or alter its
contents at any time due to any reason. Therefore the use of recoverable L.C is very less in
international markets.
Irrecoverable L.C:
The payment of this L.C. Is confirmed because bank or trader cannot cancel or alter it before
payment. So this L.C. Is more reliable in international trade.
Fixed L.C:
This L.C. Is issued for a particular transaction or for the payment of fixed amount and it is
automatically cancelled at the completion of transaction or payment.
Revolving L.C:
Although this L.C. is issued for the payment of a specific amount, but at the competition of all
the transactions it is automatically renewed for the same specific amount.
Special L.C:
This L.C. Is restricted in its operation to a particular intermediary bank, named in L.C. this bank
acts as advising as well as negotiating bank.
Freely Negotiable L.C:

Under this L.C. the exporter can get the money by showing concerned documents to any bank.
This bank may be different from the information or advising bank.
Transferable L.C:
The L.C. Whose receiver has full right to endorse it is called transferable L.C. He can instruct his
bank to endorse it completely or partially in the favor of any person.
Red Clause L.C:

In this L.C. the intermediary bank can provide loan to exporter for packing and transportation of
goods before the shipment of goods. The statement containing the detail of order is specially
written with red ink.
Green Clause L.C:

It is the developed form of red clause L.C. in which the exporter can get loan not only for
packing or transportation but also for storage as well. The statement containing the detail of the

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order is specially written with green ink.
Back to Back L.C:

In this L.C. the receiver of money is not the sender of goods. It means the beneficiary is not the
actual supplier. He produces or opens his own L.C. to his bank and on the strength of it gets
opened another L.C. In the favor of the actually suppliers. Thus the beneficiary buys the goods
from the actual supplier and supplies the same to the buyer.
Sources of Bank Funds:

1: Bank's Own Capital 2: Deposits
3: Loan from other Banks 4: Reserve Fund (Cash Reserve)
Use of Banker's Fund:

1: Advancing Loan 2: Direct Investment 3: Purchase of Shares & Debentures
Principles of Advancing:
1: Principal of Safety 2: Principal of Security 3: Principal of Income
4: Principal of Diversification 5: Principal of Liquidity 6: Principal of Repayment
Security:
"A bank, before granting loan to a person/party demands personal guarantee or any valuable
asset as collateral, which is known as security".
Kinds of Security:
1: Personal Guarantee
2: Guarantee
A) Specific B) Continuing
3: Marketable Securities
a) Shares and debentures of companies
b) Government securities (Bonds, Certificates etc.)
4: Document of title to goods
a) Bill of Lading b) Dock Warrant c) Delivery Order d) Railway Receipt
5: Immoveable Property
6: Life Insurance
7: Miscellaneous Goods
a) Term Deposit Receipt (TDR) b) National Saving Certificates
c) Defense Saving Certificates d) Gold or Jewelry
e) Diamond and Ornaments
Important Terms of Loan

Lien:
Lien means the legal or equitable right of lender (Bank) on the borrower's property, which has
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been kept as security against a certain loan. The lender has this right until the Loan is paid back.
An ordinary creditor cannot sell the security under lien to recover his amount. But a banker lien
is different from an ordinary lien. Banker's lien is an implied pledge and so the banker can sell
the security to recover his amount after giving a notice to the borrower.
Pledge:
Pledge is an actual delivery of rights (Documents) as well as the possession of the
goods/property to the bank against certain loan. The ownership of the property remains with the
pledger (Customer). In case of non-payment the banker served a notice for the fact and
afterwards can sell the goods.
Hypothecation:
In case of Hypothecation goods are made available as security for debts without transferring
them to the lender (Bank). It means the possession and ownership of goods remains with the
borrower. In case of non-payment the bank approaches the court of law to receive full rights of
selling the hypothecated property.
Mortgage:
Mortgage is a written agreement between borrower (mortgager) and the lender (Mortgagee) for
obtaining loan against Immoveable property. In this type of security borrower (mortgager)
provides assurance to the creditor (bank) of legal right in property as security for the discharge of
debts. In case of mortgage, legal rights (Documents) are transferred to the bank and the property
remains in the possession of the borrower.
Types of Mortgage
1: Legal Mortgage:
In case of legal mortgage, the mortgager transfers legal title of mortgaged property in the name
of mortgagee by an agreement. On the repayment of loan the title of mortgaged property is
retransferred to the mortgager. It is also called registered mortgage.
2: Equitable Mortgage:
In case of equitable mortgage, the legal title of the property is not transferred to the mortgagee.
The mortgagee can apply to the court to convert equitable mortgage into a legal mortgage if the
borrower fails to pay the amount of loan on specified date. It is also called unregistered
mortgage.
E-Banking:
E-banking can be defined as the automatic delivery of banking products and services to
customers through interactive electronic communications".
Products of E-Banking:
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1: Debit Cards 2: Credit Cards 3: ATMs 4: Online Banking
5: Mobile Phone / Phone Banking
Debit Card:
"A plastic card issued by a bank to a depositor, encoded so that it maybe used in A.T.Ms or in
POS (Point of Sale) systems, like swapping machines".
Credit Card:
"A credit card is part of System of payments, issued to users of the system. It is a small plastic
card entitling its holders to buy goods and services based on the holder's promise to pay for these
goods and services".
Automated Teller Machine:

"It is an unattended computer terminal that performs basic teller functions when a card holder
inserts a card into A.T.M and enters the correct pin code on 24 hours basis".
Online Banking:
"Online banking/internet banking allows customers to conduct financial transactions on a secure
website operated by their retail of virtual bank credit union or building society".
Mobile Phone / Phone Banking:

Under e-banking, the customers can deal or pass orders to their banks through mobile phones /
phones without visiting the bank. The customers can check their account balances, make various
payments by sending SMS (few require the voice) through mobile phones. Mobile phones /
phones banking services are available to customers round the clock.
Riba:
Riba is an Arabic word. It means increase, addition, expansion or growth. In banking scenario, it
means the additional amount, which a lender recovers from the borrower according to the fixed
rate over and above the principal sum.
Interest:
"Interest is the charge for the use of money". American Encyclopedia "Interest is the price paid
for the use of credit or money". (Britain Encyclopedia)
It may be worth noting that an amount can be called interest when it fulfills following two
characteristics:
1. It has been calculated on the basis of pre-determined rate.
2. It has no relationship with the risk of profit or loss that an enterprise ordinarily faces.
Interest Free Modes of Financing

1: Financing by Lending:

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A) Interest Free Loan B) Qarze-E-Hasna C) Istisna
2: Trade Related Financing
A) Mark Up B) Mark Down C) Leasing (Ijra)
D) Hire Purchase E) Development Charges F) Salam
3: Investment Related Financing
A) Musharika B) Modaraba C) PTC's
D) Equity Participation E) Rent Sharing

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Economics &amp; Banking Terms Final 34

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Syed Tahir Hussain Lecturer

New / Neo Classical School of Thought:

Features of Robbin’s Definition:

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Theories Discussed in Micro Economics:

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Law of Diminishing Marginal Utility:

Law of Equi Marginal Utility:

Tendency or Slope of Demand Curve:

Why Demand Curve has Negative Slope?

Differentiate Between Rise and Fall of Demand:

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Tendency of Supply Curve:

Why is slope of Supply Curve Positive?

Rise and Fall of Supply:

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Why Law of Increasing Return is called Law of Decreasing Cost?

Law of Constant Return:

Why is law of constant return called law of constant cost?

Law of Diminishing Return:

Why is law of diminishing return called law of increasing cost?

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Short Period (Short Run):

Long Period (Long Run):

Pure Vs Perfect Competition:

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Marginal Productivity Theory:

Theories Discussed in Macro Economics:

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Various Concepts of National Income:

Gross National Product:

Gross Domestic Product:

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Disposable Personal Income:

Parts of Public Finance:

Main sources of Public Revenue:

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Value added Tax (VAT):

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Difference Between Zakat and Tax:

Stages of Evolution of Money:

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A) Full Bodied Money:

B) Convertible Paper Money:

C) Inconvertible Paper Money:

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Credit / Bank Money:

Legal Tender Money:

A) Limited Tender Money:

B) Unlimited Tender Money:

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Types of Value of Money

External Value of Money:

Quantity Theory of Money:

4. Galloping / Hyper Inflation:

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6. Cost Push Inflation:

Foreign Exchange Rate:

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Methods of Making Foreign Payments:

Foreign Exchange Rate:

Kinds of Exchange Rate

Economics & Banking Terms Final 34

Economics & Banking Terms Final 34