Mount of Olives College Kakiri: Instructions

MOUNT OF OLIVES COLLEGE KAKIRI
SENIOR FIVE ECONOMICS

INSTRUCTIONS: COPY THE NOTES TO YOUR BOOK AND ATTEMPT THE
QUESTIONS FOLLOWING
TOPIC; MONEY AND BANKING
Money refers to anything which is generally acceptable in the payment for goods
and services or in the settlement of debts.
Legal tender, this refers to money which by law must be accepted in the
settlement of debts or payment for goods and services within the country
concerned.
Currency, this refers to the notes and coins in circulation in a given time period.
Money in circulation
This consists of notes and coins in circulation plus facilities which perform the
functions of money but which are not money e.g. bank drafts, cheques, treasury
bills.
Without money, all the economic transactions could take place on the basis of the
barter system which existed before the invention of money. The need for money
therefore arose out of the short comings of the barter system of exchange.
Barter system
This refers to the exchange of goods for goods, services for services or goods for
services. It was the earliest method of commercial exchange.
Disadvantages of the barter system:
1. The double co- incidence of wants (reciprocity)
2. The problem of measure of value where it was difficult to decide how much
of a commodity is to be exchanged for a specific quantity of another.
3. Indivisibility of commodities, at times certain goods may not be divisible
and therefore it becomes difficult for exchange to take place.
4. Perishability of products hence storage problems.
5. Problem of portability which results into transport problem because of
bulkiness.
6. Large scale production is limited since the demand for goods is not certain.
Economies of scale are therefore not enjoyed.
7. Credit transactions cannot be easily made i.e. retards lending and
borrowing.
Types and evolution of money

1. Barter trade , this was the earliest method of exchange before money came
into existence
MR. LUBYAYI G 0705949295

2. Commodities of high value, Valuable commodities such as salt, gold, etc were
then used to determine the value of other commodities. Such commodities
were used because of the utility derived from them.
3. Durable commodities, later on, long lasting commodities such as copper,
beads and iron were used as a medium of exchange. But, there were problems
with these commodities because they were in plenty.
4. Rare metals, for instance gold and silver were used for commercial
transactions because they were scarce and durable.
5. Token money, its one whose metallic value is less than the face value.
6. Paper money, then people used to deposit their gold with the gold smith (the
custodians of gold who were acting as bankers of that time).In turn the gold
smith could give them receipts which they were to use to get back their gold.
Such receipts were then used to exchange goods and settle debts
Deposit money; this refers to money created by banks during the process of
credit creation.
Fiduciary issue, this refers to money issued by the central bank which is not backed up by
gold reserves.
Fiat money, this refers to money issued on the directives of the government irrespective
of the level of economic activities.
Credit cards are those that authorize the holders to get goods and services on credit at
specific points.
X-tics of good money

1. It must be generally acceptable, good money must be generally accepted as a medium
of exchange by all people in the country concerned.
2. It must be portable; it should be relatively light and easy to carry from one place to
another.
3. It must be divisible into smaller units/denominations to enable the purchase of goods
without getting problems of change.
4. It should be stable in value to avoid inflation and deflation.
5. Homogeneity, money should be uniform to avoid confusion especially to the rural
people. This also avoids fake money.
6. It should be relatively scarce otherwise it would lose its value.
7. Durability, it should not perish within a short time therefore it should last longer.
8. Good money should be difficult to imitate to avoid counterfeits / forgery.
9. Cognizability, it should be easy to recognize whether it is pure money or not.
10. Malleability, It must be cheap and convenient to print or write something on that
material.
Functions of money (2016-P.1)
1. It is a medium of exchange. Money makes it possible for people to specialize

knowing well that they will sell what they are producing and acquire with ease
what they do not produce.

2. It is a standard measure of value/ unit of account, Money provides the basis for
determining the value of all goods, services and assets. It provides the exchange
rates which are quoted as prices of the goods and services that are on sale.
3. Store of wealth/value, it saves people the costs and inconveniences of storing
value in terms of goods and services and provides a possibility of storing the
value of services rendered in one period to be utilized in a future period.
4. It is a standard of deferred payment, it makes it possible for one to agree to sell
on credit with the assurance that he will get whatever need he will have in future
using the money got then.
5. It is a unit of account, since all transactions are recorded in monetary terms.
6. Money acts as a transfer of wealth, since it enables the movement of immovable
assets.
Value of money: (2009-p.1)

This is the purchasing power of money in a given time period.
It refers to the quantity of any commodity which can be exchanged for any given unit of
money. It depends basically on the level of prices of goods and services. The higher the
price levels, the lower the money value and the lower the price levels, the higher the
money value.
Factors that determine money value:

 Price levels/Rate of inflation.
 Demand for goods and services, a high demand for goods and services
influence prices upwards hence lowering the money value. A low demand
for goods influence prices downwards thus increasing the money value.
 Demand for money, high money demand can influence prices upwards
especially for transaction and speculative purposes there by lowering
money value and low demand for money tend to influence prices
downwards.
 Government policy of expansionary or restrictive monetary policy.
 The velocity of circulation of money
Explain the quantity theory of money. (Irving Fisher) (2013-p.1)
What are the limitations of the quantity theory of money?
The quantity theory of money states that, the general price level is determined by the
quantity of money in circulation assuming that the velocity of circulation (V) and the level
of transactions (T) are constant.
Equation P= MV/T
Where
P= General Price level
M= Quantity of money
V= Velocity of circulation
T= Level of transactions

Assumptions of the Quantity theory of money.

- He assumed a general price level.
- He assumed that the level of transactions and velocity of circulation are
constant.
- The theory assumes that all transactions are effected through the use of
money.
- The theory assumes that money is only held for transaction motive.
State Irving Fishers equation of exchange. (2012-p.1)
How is the value of money determined in Fishers equation of exchange?
Limitations of the Quantity theory of money.

1) There is no general price level as the theory assumes but a series of price
levels.
2) The theory does not take into account the demand for money since it only
considers money supply.
3) It only attempts to explain changes in the value of money but does not
show how the value of money is determined.
4) It does not take into account other causes of price increases such as
demand pull inflation, cost push inflation, (increase in the cost of
production).
5) It considers only the transaction motive of holding money and therefore
ignores the precautionary and speculative motives.
6) The theory ignores the influence of the rate of interest in determining
money supply. The higher the interest rate (on loans), the lower the prices
since there will be less money in circulation and the lower the interest rate
(on loans), the higher the prices due to increased money in circulation.
7) Haggling between buyers and sellers to reach an agreeable price is not
taken into account.
8) The theory also ignores government control of prices through the setting
of both minimum and maximum prices.
9) An increase in money supply may result into higher savings if the MPS is
high.
10) -The velocity of circulation (V) and the levels of transaction (T) are not
constant as the theory assumes but these always change in real life.
11) The theory does not put barter system of exchange into consideration/it
assumes all transactions are settled by money yet barter trade also
prevails.
12) If a country has many unemployed resources, the increase in money supply
leads to increase in output of goods and services which makes prices to fall
or not change at all.
13) The four variables i.e. M, V, P and T are not independent of one another
because a change in one leads to a change in others.
14) The theory is not a theory but just a truism which shows that the four
variables i.e. M, V, P and T are related.

Supply of money: (2005-p.1)

This refers to the total quantity of money in circulation plus money on demand deposits
in commercial banks.
It excludes the currency in the treasury of the central bank and commercial banks’
deposits in the central bank, OR money supply refers to the quantity of money which is in
circulation in a particular country at a particular time.
Determinants of money supply.
 The interest rate (on loans), a high interest rate on loans makes borrowing
expensive and this discourages borrowers hence low money supply while a low
interest rate on loans makes borrowing cheap and this encourages borrowers
hence high money supply.
 The central bank’s monetary policy, a restrictive monetary policy leads to low
money supply through tightening the tools of credit control while an expansionary
monetary policy leads to high money supply through relaxing the tools of credit
control.
 The level of monetization of the economy, money supply is high in an economy
which is highly monetized since there is commercial exchange and it is low in an
economy which is highly subsistence since there is no commercial exchange.
 Level of Investment, a high level of investment leads to high money supply since
there are many economic activities which require money and a low level of
investment leads to low money supply because of few economic activities which
require money.
 The level of government borrowing/ degree of financial accommodation, a high
level of government borrowing from the central bank leads to high money supply
due to a high level of printing and issuance of currency while a low level of
government borrowing from the central bank leads to low money supply due to a
low level of printing and issuance of currency.
 Level of taxation, high direct taxes lead to low disposable income and this limits
the ability of people to consume which implies that low incomes are generated in
the economy hence low money supply. On the other hand, low direct taxes lead
to high disposable income and this stimulates people to consume which implies
high incomes are generated in the economy hence high money supply.
 Balance of payment position, a B.O.P surplus leads to high money supply since the
foreign exchange earnings are converted into local currency. While the B.O.P
deficit leads to low money supply since there is high expenditure abroad.
 Foreign capital inflow and out flow, foreign exchange inflow leads to high money
supply due to a high level of investment while foreign exchange outflow leads to
low money supply due to high expenditure abroad which implies low level of
investment.

 Level of liquidity preference, a high liquidity preference leads to high money

supply as people hold large cash balances to cater for their different needs and a
low level of liquidity preference leads to low money supply because people hold
small cash balances to cater for their needs.
THE DEMAND FOR MONEY:

(Liquidity Preference)
Liquidity preference is the desire to hold wealth/assets in cash or near cash form.
Lord Keynes identified 3 motives for holding money and they include:
- The transaction motive, it is where money is demanded to finance the day

to day expenditure e.g. buying food, transport.
- Precautionary motive, this is where money is demanded to cater for
unexpected or unforeseen events e.g. sickness, un-expected visitors,
accidents etc.
- The speculative motive, people hold money to earn income through
speculation. The amount of money held under this motive depends on the
level of interest. At a high rate of interest, people demand less money and
hold securities to earn high interest, at a low rate of interest, people
demand more money by selling off their securities because of the fear to
incur losses.
LIQUIDITY TRAP
It refers to the point below which the interest rate is too low to encourage
speculators to invest in securities. OR It is a point below which the interest rate is
too low to break the liquidity preference.
(Leave space for the diagram)
When the interest rate is high at R3, liquidity preference is low at M3 and when the
interest rate is low at R1, liquidity preference is high at M1.
The finance motive, people hold money to finance the on-going investment where
money has been sunk. The amount of money held under this motive depends on
marginal efficiency of capital.
Determinants of Liquidity Preference:

1. Level of transactions. A high level of anticipated transactions leads to high liquidity
preference since it would be an inconvenience to constantly liquidate assets in
order to get money but a low level of anticipated transactions leads to low liquidity

preference since people have a low need to hold large money balances to cater
for transactions.
2. The interest rates, high interest rates lead to low liquidity preference due to the
desire for households and firms to earn additional income from their existing
wealth. However low interest rates make it less worthwhile to invest in interest
earning assets and thus people prefer to hold their wealth in cash form.
3. Price levels/rate of inflation. High price levels tend to force households to hold
large amounts of money to cater for their planned and unplanned requirements
but low price levels force households to hold less money balances for transactions
due to stability of the currency.
4. Income levels. High income earners have a high liquidity preference because as
their incomes rise, their needs and requirements also increase, but low income
earners have a low liquidity preference because of having limited needs and
requirements.
5. Degree of uncertainty. A high degree of economic uncertainties leads to high
liquidity preference because people need to cater for the unforeseen incidents
but a low degree of uncertainties leads to low liquidity preference because of
being certain about the future.
6. Knowledge of banking facilities. A low degree of knowledge about banking
facilities leads to high liquidity preference because people may not trust anyone
to keep for them their money, however a high degree of knowledge about banking
facilities leads to low liquidity preference because of use of banking services.
7. Distribution of banks, liquidity preference is high mostly in rural areas because use
of banks is limited in such areas, however, people in urban areas have low liquidity
preference because they are in position to use banks and even understand the
systems of investing in income earning assets.
Give three reasons for liquidity preference in your country. (Motives)
Mention any three determinants of liquidity preference in your country. (Neutral)
Give four reasons for high liquidity preference in your country (2014-P.2) (Biased)
INTEREST RATE
Interest rate is the rate which is paid for the use of money.
Bank rate/discount rate is the rate at which commercial banks borrow money
from the central bank
Interest refers to the monetary reward/payment/ for the use of capital as a factor
of production. OR It is payment by a borrower for the use of a sum of
money for a period of time. OR It is the cost of borrowing and price for lending.
DETERMINANTS OF INTEREST RATE IN UGANDA:
 Period of loan repayment.
 Supply of liquid/Investment capital.
 Demand for loanable funds/investment capital.
 Government’s monetary policy.

 Economic situation- deflation/Inflation/boom/recession/general price

level.
 Number of banking institutions/level of development of the banking
sector.
 Policy of individual lenders i.e. liberal or hard.
FINANCIAL INTERMEDIARIES
These are financial institutions which bring together the deficit spending units
(borrowers) and the surplus spending units (lenders) i.e. they are a link between the
borrowers and the lenders. There are mainly two types of financial institutions,
Non-banking financial institutions, (2012-p.2) these are financial institutions that

receive deposits from the public, give loans but do not create new deposits (credit
creation) e.g. building societies, insurance companies, post office savings bank, housing
finance, development banks, NSSF, credit and saving societies, investment trusts etc.
Banking financial intermediaries, (2012-p.2) these are financial institutions that receive
deposits from the public, give loans and create new deposits e.g. commercial banks.
DIFFERENCES BETWEEN BANKING AND NON BANKING FINANCIAL

INSTITUTIONS/INTERMEDIARIES
1. BFI create deposit money through the process of credit creation while NBFI only
lend out money collected as surplus from the various spending units.
2. BFI essentially lend on short term basis while non-banking financial intermediaries
lend on relatively long term basis.
3. BFI invest in less risky projects while NBFI under take investment in risky projects.
4. In BFI, the rate of interest charged is lower due to fewer risks involved while NBFI
always charge a higher interest rate because of greater risks involved.
5. In BFI there is investment in financial assets such as treasury bills, bonds while in
NBFI there is investment in real assets.
6. BFI engage in money markets while NBFI engage in capital markets.
Similarities between BFI and NBFI

 They both deal in credit.
 They are both financial institutions.
N.B: It should be noted that some institutions that started as NBFIs are transforming
themselves to become BFIs e.g. Housing finance bank.
WHAT IS A BANK?

A bank is a financial institution whose main activities are receiving, lending and
safe guarding money.
COMMERCIAL BANKS.
These are financial institutions which accept deposits from the public and also
extend credit to those who need it.
Examples in Uganda include, DFCU, Barclays, Centenary, Stanbic, KCB, etc
FUNCTIONS OF COMMERCIAL BANKS: (2012-p.2)

1. They accept and safeguard money from the public inform of deposits and they
make such funds available to the owners on demand. The money is kept under
safe custody on savings, current or fixed deposit accounts.
2. They offer credit facilities to those who are in financial need. They lend to
borrowers at an interest which is higher than that offered to the depositors.
3. They facilitate the transfer of money from one person/firm to another. They
therefore save their clients the burden and risk of transferring money from one
place to another. Money transfer can be in form of bank drafts, standing orders,
credit transfers etc.
4. They provide facilities for keeping valuable items for their customers such as land
titles, wills. This helps clients to feel safe since they are sure that their valuables
are in good hands.
5. They offer financial advice to their customers on matters concerning their
businesses and their money. This helps clients to put their money in areas that are
more suitable and profitable.
6. They assist traders who are engaged in international trade, by providing foreign
exchange to them and exchanging their currencies.
7. They act as trustees, executers and administrators of wills to their deceased
customers. They help in the distribution of the property of the deceased according
to the will.
8. Banks act as referees to their customers i.e. they can give confidential reports
about the financial status and credit worthiness of their customers.
9. They issue travelers cheques in various currencies. This facilitates payment to the
bearer of the cheque in the country of the traveler’s destination
10. They act as agents of the stock exchange by buying and selling shares and
securities on behalf of their customers.
11. They assist the central bank in implementing the monetary policy through
effecting monetary policy tools in order to regulate the amount of money in
circulation.
12. They receive payments for their customers in form of salaries, utilities etc.
13. They discount bills of exchange, by making payment to the creditor whose debtor
has promised to pay at a future period.

N.B Standing order is an instruction by a bank customer to his bank to pay a specified
amount of money to a named person or firm at regular and specified intervals for a given
period of time until the arrangement is cancelled.
Credit transfer, it is a system of money transfer by which a bank customer instructs his
bank to pay a number of people by transferring money from his account to the respective
accounts of named people in the same bank or in another bank.
Liquidity is the ease with which an asset can be converted into cash e.g. land.
Role of commercial banks in economic development.

1. They provide more employment opportunities. This is through setting up a variety
of branches which hire people as managers, accountants, supervisors etc.
2. They facilitate the process of capital formation, by promoting savings and

investment.
3. They facilitate the implementation of government programs such as currency

reform, prosperity for all, selective credit control etc.
4. They generate revenue to the government through paying taxes.
5. They promote economic growth, through advancing loans to sectors such as
agriculture and industry which increases the productive activities in such sectors.
6. They promote a savings culture among the population, through mobilizing savings.
7. They facilitate monetization of the economy through the transformation of the
economy from subsistence to a commercial economy since exchange is based on
the use of money.
8. They facilitate international trade, by giving letters of reference to their customers
and also through the provision of traveler’s cheques.
9. They finance community projects as part of corporate social responsibility such as
sponsoring sports, blood donation drives etc.
PROBLEMS FACED BY COMMERCIAL BANKS:
1. High bank rate charged by the central bank. This forces commercial banks to
charge a high interest rate on loans and this scares away prospective borrowers
hence leaving commercial banks with excessive liquidity.
2. Poor attitude towards banking sector. This is due to the conservative nature of
some people, in this case, people prefer to keep their money at home which limits
the amount of money in commercial banks.
3. Stiff competition with other financial services providers’ e.g. Mobile money
services which reduce the profits of commercial banks. In addition, most of the
commercial banks are concentrated in urban areas, so they compete for
customers hence reducing their profit levels.

4. Limited credit worthiness of borrowers, many people fail to pay back the
borrowed money and this implies high operational cost on the part of commercial
banks thus incurring losses.
5. High levels of poverty, this reduces the level of savings and deposits in commercial
banks.
6. Ignorance of the public about banking facilities, many people keep their money in
their houses and this reduces the level of deposits in the commercial banks.
7. High costs of operation e.g. insurance cover, heavy wage bill etc. This reduces the
profits of commercial banks.
8. Increasing rates of inflation, this reduces people’s desire and willingness to keep
their money in commercial banks due to increasing cost of living.
9. Limited collateral security to back up people’s demand for loans. This reduces the
demand for loans and therefore leaves commercial banks’ with excessive liquidity.
10. Insecurity in some areas. Sometimes, banks are invaded by robbers. This leads to
losses and it affects their operations hence low profit levels.
11. Corruption and embezzlement of funds by bank officials. This leads to diversion of
funds thus losses and also reduces people’s confidence in the banking sector.
12. Limited skilled personnel due to shortage of funds for technological and
manpower development. Banks also incur high cost of training workers.
FOREIGN COMMERCIAL BANKS:

These are banking institutions established and operated by foreigners in a country e.g.
Barclays, Stanbic, Equity, KCB, Baroda etc.
Role of foreign commercial banks in development:
1. They provide more job opportunities to the local people because of an increase in
investment which implies hiring of more workers.
2. They increase government revenue through paying taxes. This promotes
developmental programmes.
3. They promote a spirit of competition in the banking industry and this creates
efficiency and provision of better services.
4. They facilitate capital inflow in form of foreign investment from abroad and also
foreign currency is got through these banks.
5. They provide means for technological transfer by bringing into the country
modern banking techniques, e.g. use of Automated Teller Machines.
6. They offer credit facilities to the private sector and this accelerates development
of private enterprises by way of increasing investment.
7. They enhance the development of the banking sector through the mobilization of
savings and credit provision.
8. They facilitate the monetization of the economy through credit creation; this
reduces the extent of the subsistence sector.
9. They improve local skills through training local manpower. This leads to greater
efficiency.
10. They promote international relations with other countries, hence generating
benefits like increased volume of trade.

11. They facilitate trade through providing means of payment. Financial transactions
to other countries are also made easier through the activities of foreign
commercial banks.
12. They increase economic growth rate/GDP through the provision of more banking
services.
Negative role of foreign commercial banks:
1. They increase capital outflow/flight in terms of profit repatriation since their
ownership is foreign based. This undermines development in the country.
2. They have a tendency of outcompeting local financial institutions, because of their
heavy capital investment and greater efficiency.
3. They have discriminating policies in terms of employment, because they mostly
prefer foreign manpower thus leading to unemployment of the local manpower.
4. There is little or no government control over such banks, since they get financial
support from their countries of origin and this makes it difficult to implement the
monetary policy.
5. They have discriminating policies in terms of lending, since they mostly prefer to
give loans to the foreign investors while neglecting the local investors and this
retards investment by local investors.
6. Setting up their activities is mainly urban based because of many economic
activities that require banking services compared to those in rural areas, this limits
the mobilization of savings from rural areas.
7. They accelerate foreign domination of the economy since they have more capital
compared to the local banks and they are in position to expand the level of
banking activities.
QUESTION:
1(a) Assess the role of foreign commercial banks in your country.
(b)Explain the role of foreign commercial banks in economic development of your
country.
“CREDIT CREATION”
This is a process through which commercial banks advance loans and create more credit
out of the initial amount of money deposited.
Commercial banks realized that, not all customers would need their money at a given
period of time. They always keep a small percentage of money from their total deposits
in cash form that can satisfy the daily withdraw requirements of their customers and they
lend out the rest.
The percentage of the commercial banks’ total deposits that is kept in cash form to meet
the daily withdraw requirements of customers is known as the cash ratio.
The credit creation process is based on the following assumptions;
 There are many banks in the system or one bank with many branches.
 The banks must be willing to lend and the public must be willing to borrow.
 The cash ratio is given and it is constant.
Cash ratio is the fraction/percentage of commercial bank deposits which is kept in cash
form to cater for the daily withdraw requirements of the customers (depositors).

Liquidity ratio (2014-p.2) is the proportion/ percentage of commercial bank total

deposits that is kept in cash or near cash form.
 The public must have confidence in the banking system in order to encourage
savings.
 There must be a high demand for loans.
 There must be frequent deposits.
 There must be a bigger number of current account holders to facilitate the use of
cheques.
STEPS THROUGH WHICH COMMERCIAL BANKS CREATE CREDIT: (2015-p.1, 2010-p.2)
Illustrated description of how commercial banks create credit: (EITHER)
 Banks create credit by receiving deposits from customers and lending part of it.
 They keep a percentage of deposits in cash form to meet the daily withdraw
requirements of customers.
 Process of receipt and lending. After removing the cash ratio, the rest of the
customers’ deposits are lent out to borrowers. (Descriptive table)……
 They accept money lent out as new deposits, commercial banks accept the
borrower to deposit his money in the same bank.
 They retain a percentage as cash ratio and lend part of it (new deposits again).
 Process continues till amount to be lent is negligible…………………
 Total amount created= Initial deposit x bank multiplier…………….
 Computed figure given/final answer……………………
OR (A better option)
 By receiving deposits and lending part of it………….
 Receiving of deposits by a commercial bank, for example bank A receives shs

100,000 as deposit………………
 Keeping of a percentage of the deposit as cash ratio for example bank A keeping
20% or shs 20,000 as reserves……………
 Giving out a percentage of the deposit in the bank to borrowers (for example,
loans= Deposit- cash ratio; that is, loans= shs 100,000-shs 20,000=shs 80,000……

 Receiving of loans by bank A as new deposit in another bank- say, bank B. For
example shs 80,000 becomes new deposit in bank B, a percentage of the deposit
in bank B is kept as cash reserve; for example 20% of shs 80,000 or shs 16,000 is
kept as cash ratio…..
 The process goes on till the initial deposit defuses in the system……..
 At the end of the process, final deposit is equal to
Initial deposit x 1/cr or credit multiplier…………

That is final deposit= shs 100,000 x 1/20/100 = shs 500,000………
NB A candidate could as well use a hypothetical table which should be awarded (04
marks) plus the opening paragraph and the last three paragraphs totaling to
(08 marks) e.g. of a hypothetical table.
Customer/Bank Initial deposit (shs) Cash ratio/Reserve New loan

(20%)
A 100,000 20,000 80,000
B 80,000 16,000 64000
C 64,000 12,800 51,200
D 51,200 10,240 40,960
Total credit created = Initial deposit x 1/cr

=shs 100, 000 x 1/20/100
= shs100, 000 x 5
= shs. 500, 000
New loan = Total credit created – initial deposit
Shs.500, 000 – shs. 100,000
= shs. 400, 000
Credit multiplier (2017-p.1, 2011-p.2) is the number of times by which an initial bank
deposit multiplies its self to generate a final change in the total deposit. OR
It is the number of times initial deposit in a bank is multiplied to give total credit
created/total deposit.
Credit multiplier = 1/cr = 1/20/100 = 5 times.
Revision questions:
1. Explain the steps through which commercial banks create credit.
2. Given an initial deposit of shs. 10,000 and a cash ratio of 20%, explain how more
credit can be created by 5 banks.
3. With the cash ratio of 30% and initial bank deposit of shs. 20 million show how 5
banks will create credit and determine the maximum deposits that will be created.

4. Assuming there are many banks in an economy and people are willing to borrow,
the banks are willing to lend and the initial deposit is shs. 1 million and 10% as
cash ratio,
a) Illustrate the process of credit creation in the economy.
b) Calculate the total deposits that will be created.
FACTORS THAT INFLUENCE THE PROCESS OF CREDIT CREATION IN UGANDA

1. The level of interest on loans, a high rate of interest on loans discourages
borrowing and this leads to low credit creation. However, a low interest rate on
loans makes borrowing cheap and this leads to high credit creation.
2. Size of the initial bank deposit, a big size of the initial bank deposits leads to high
credit creation because the bank has a lot of money to give out as loans, however,
a small size of the initial bank deposits leads to low credit creation because the
bank has little money to give out as loans.
3. The monetary policy of the central bank, an expansionary monetary policy by the
central bank leads to high credit creation since commercial banks are encouraged
to give out loans, on the other hand, a restrictive monetary policy by the central
bank leads to low credit creation since the central bank limits commercial banks
to give out loans.
4. Size of the cash ratio, a high cash ratio leads to low credit creation because
commercial banks have limited money to give out as loans, while a low cash ratio
leads to high credit creation because commercial banks have a lot of money to
give out as loans.
5. Level of investment, ahigh the level of investment leads to high credit creation
due to a high demand for loans by investors but a low level of investment leads
to low credit creation due to a low demand for loans by investors.
6. Level of liquidity preference, a high liquidity preference leads to low credit
creation due to low deposits in the commercial banks which limit lending, but a
low liquidity preference leads to high credit creation because of a high volume of
deposits in the commercial banks which encourage lending.
7. Distribution of commercial banks, existence of few and mainly urban based
commercial banks limit the volume of deposits in the commercial banks and this
discourages lending hence low credit creation. However, even spread of
commercial banks leads to high volume of deposits which encourages lending
hence high credit creation.
8. Availability of credit worthy clients, existence of many credit worthy borrowers
leads to high credit creation because people are in position to pay back the loans
and existence of few credit worthy borrowers leads to low credit creation
because it limits the amount of money to be lent out by commercial banks.
9. Possession of collateral security, presence of collateral security leads to high
credit creation because people are able to back up their demand for loans,
however, absence of collateral security leads to low credit creation because
people are limited from borrowing.

10. Rate of inflation, a high rate of inflation leads to low credit creation because it
discourages banks from lending due to fear of incurring losses, however, a low
rate of inflation leads to high credit creation because commercial banks are
encouraged to lend out money to the public due to desire to maximize profits.
11. Degree of accountability, a high level of accountability in a particular bank leads
to high volume of deposits for lending and this leads to high credit creation.
However, a low level of accountability leads to low credit creation because bank
officials only lend to those who bribe them and this limits the volume of deposits
for lending.
12. People’s knowledge and popularity of loans, a high level of awareness of the
public about banking facilities encourages borrowing from the bank hence high
credit creation, however a low level of awareness of the public about banking
facilities discourages borrowing from the bank hence low credit creation.
13. Income level of the population, a high income level of the population leads to a
high level of deposits in the commercial banks and this encourages lending hence
high credit creation. However, a low income level of the population limits the
deposits in the commercial banks and this discourages lending hence low credit
creation.
14. Size of the subsistence sector, a large subsistence sector leads to low incomes
and this leads to low savings and bank deposits which limits money for lending
hence low credit creation, while a small subsistence sector leads to high incomes
and this leads to high savings and bank deposits which encourages lending hence
high credit creation.
15. Political atmosphere, poor political atmosphere discourages savings and
investment due to fear of risks, this leads to low bank deposits which limits the
amount of money to be lent out hence low credit creation, however conducive
political atmosphere encourages savings and investment due to assurance of
safety, this leads to large bank deposits and a large amount of money to be lent
out hence high credit creation.
N.B. Liquidity ratio is the proportion of commercial bank total deposits that is kept
in cash or near cash form. (2014-P.2)
2005-p.1
QUIZ: 1(a) Given that in the banking system, the initial deposit is US dollars 10,000 and
cash ratio is 25%. Determine the maximum credit that can be created. (04 marks)
(b) Examine the factors that influence the level of credit creation in an economy.
(16 marks)
(c) What is the relationship between cash ratio and credit creation?(02 marks)
(2) Explain the factors that limit credit creation in your country. (2010-P.2)/ What factors
limit the ability of commercial banks to create credit in an economy? (2015-
P.1)(Negatively biased question with words such as small, low, few, large, big, absence,
limited, poor, high e.t.c)
(b) The factors which limit credit creation by commercial banks in my countryare:

1. Absence of collateral security. This limits credit creation because commercial

banks are discouraged from lending out money to the public.
2. Small initial bank deposits. This leads to low credit creation because commercial
banks have limited money for lending.
3. Few credit worthy borrowers. This implies that people fail to pay back the
borrowed money which limits amount of money available for lending hence low
credit creation.
4. High cash ratio. This limits credit creation because commercial banks have
limited money to give out as loans.
5. High interest rate on loans, this makes borrowing expensive thus low credit
creation.
6. Corruption by bank officials. This limits the volume of deposits for lending thus
low credit creation.
7. High liquidity preference. This limits the amount of deposits in commercial banks
which limits lending hence low credit creation.
8. Restrictive monetary policy. This limits commercial banks from giving out loans
hence low credit creation.
9. High rate of inflation, this discourages banks from lending due to fear of
incurring losses hence low credit creation.
10. Limited knowledge about banking services. This discourages the public from
borrowing money from banks thus low credit creation.
11. Few and mainly urban based commercial banks/poorly distributed commercial
banks. This limits the volume of deposits in the commercial banks and this
discourages lending hence low credit creation
12. Low income level of the population. This limits the amount of deposits in
commercial banks which limits lending thus low credit creation.
13. High rate of inflation. This discourages banks from lending due to fear of
incurring losses hence low credit creation.
14. Low level of investment. This limits the demand for loans hence low credit
creation.

15. Large subsistence sector. This limits savings hence low deposits in commercial
banks which limit lending hence low credit creation.
16. Poor political atmosphere. This discourages savings and investment due to fear
of risks, this leads to low bank deposits which limits the amount of money to be
lent out hence low credit creation,
ASSETS AND LIABILITIES OF COMMERCIAL BANKS:
Assets of commercial banks are possessions of a bank plus its claims on other financial
institutions and customers. These assets of commercial banks include:
- Cash reserve which includes notes and coins in both local and other currencies.
- Deposits in the central bank and other financial institutions.
- Loans and advances inform of overdrafts to customers.
- Fixed assets such as buildings, machinery owned by the bank.
- Retained profits of commercial banks after taxation.
- Interests received on loans.
- Commercial banks investment in short term and long term securities e.g.
treasury bills and bonds.
- Investment in other business ventures such as rental houses etc.
Liabilities of commercial banks refer to what they owe their customers and other
financial institutions. They include:
- Reserves payable to the central bank.
- Customers’ deposits in the bank, customers may be individuals, government or

other banks.
- Interest payable to deposits.
- Unpaid dividends to shareholders.
- Valuables kept by the commercial banks on behalf of their clients e.g. land tittles.

- Bills discounted by the central bank, this is where the central bank offsets a debt
of the commercial bank before the maturity period and the commercial bank
pays the central bank later.
WAYS THROUGH WHICH COMMERCIAL BANKS ADVANCE LOANS TO CUSTOMERS:
A loan is a fixed amount of money that commercial banks and other financial institutions
lend out to borrowers/customers. It is usually given for a specific time and purpose.
Commercial banks therefore advance loans to customers in two major ways:
 Discounting bills of exchange, this is where a document or a security is sold by

the holder to the bank at a lower value than the maturity value.
 Offering bank overdraft facilities, an overdraft is a system of bank lending in

which the borrower is allowed to draw money beyond his credit balance up to a
certain limit and pay interest on the overdrawn money.
FACTORS CONSIDERED BY COMMERCIAL BANKS BEFORE GIVING OUT LOANS:
 Nature of the business and returns expected to be made from the business.
 The applicants particulars (background), this is aimed at establishing the

applicants reputation and usually reliable people are considered for loans.
 The objective for which the loan is got/to be used for.
 The payment ability of the borrower i.e. the borrower should be able to pay the
principle and the interest.
 The collateral security, a borrower should have security when requesting for a
loan in that, if he fails to pay, the bank can sell the security to recover the
money.
 The integrity of the borrower i.e. personal relations as far as credit worthiness is
concerned.
 The probation period of the customer e.g. the borrower must operate an
account with the bank for at least 6 months before he can be given a loan.(due
to competition, the probation period vary with different banks in Uganda).
 The level of business activity in the economy, it is easier to get a loan during a
period of an economic boom than during a period of a depression.

 Period of the loan repayment, the longer the period for which the loan is
required, the harder it becomes to get a loan, this is because commercial banks
are mostly interested in giving out short term loans.
 The government policy or directives regarding credit creation. It is easier to get a

loan in periods when the government is undertaking an expansionary monetary
policy than a restrictive monetary policy.
Explain how commercial banks reconcile the conflicting objectives of liquidity,

profitability and security.
A. How commercial banks achieve liquidity:
 By maintaining the cash ratio, they usually keep a percentage of the total
deposits in cash form to meet the daily withdrawal requirements of customers.
 By maintaining near liquid assets which can easily be turned into cash e.g.
treasury bills.
 By adopting short term lending policies to ensure that all the time they have
cash.
 By regulating withdraw periods for various accounts.
 Through credit squeeze, this refers to the policy of limiting lending in order to
ensure that, at a particular time there is cash.
 By maintaining a high minimum balance, this is a special deposit kept by the

central bank to ensure liquidity of the commercial banks.
 By continuously receiving deposits from members of the public through

operating different types of accounts.
B. How commercial banks achieve profitability:
 By charging interest on loans and over drafts to borrowers at a higher rate than
the one offered to depositors.
 By charging fees for certain services rendered to customers such as keeping

customers valuables.
 Through investment in profitable projects.

 By discounting bills of exchange before the maturity date e.g. charges on post-
dated cheques and promissory notes.
 By selling government securities like treasury bills and bonds where they earn
interest.
C. How commercial banks ensure security:
 By demanding for collateral security that has more value than the loan to be
advanced.
 By employing full time security guards.
 By using automated teller machines and assigning personal identification

numbers.
 By banning the use of mobile phones in the bank.
 By having strong buildings.
THE CENTRAL BANK:
A central bank is a financial institution at the apex of banking institutions in a country.
It is established and managed by the government and it acts as the controller and guide
of commercial banks’ and other financial institutions in the country.
It is a non-profit making institution which does not deal directly with the general public.
It provides the general channel through which the government executes its monetary
policy.
OBJECTIVES OF A CENTRAL BANK:
 To issue domestic currency and maintain the supply at a desirable level. It is also
responsible for safeguarding the external value of the country’s currency.
 To ensure stable prices in the economy by designing and implementing

monetary policies that minimize incidences of inflation and deflation in the
economy.
 To achieve full employment through adopting policies that promote creation of

more employment opportunities.
 To ensure stable balance of payment position by controlling the exchange rates.

 To promote monetization of the economy by encouraging commercial activities

that involve the use of money.
FUNCTIONS OF THE CENTRAL BANK: (2010-p.1)
Functions of the central bank:
1. It issues the country’s currency i.e. printing currency notes and minting coins. It
is also responsible for withdrawing bank notes and coins from circulation.
2. It is a banker to the government by operating accounts for it. It offers

government all services that commercial banks offer to the general public.
3. It acts as a fiscal agent and advisor to government inform of formulating

budgets, taxation, devaluation/economic policy.
4. It is a banker to commercial banks and other financial institutions. It accepts

deposits from commercial banks and makes payments on their behalf.
5. It controls and regulates the operations of commercial banks. It permits the

operation of commercial banks in the country and setting guidelines for their
activities.
6. It is a lender of last resort to commercial banks, where the commercial banks’ fail
to raise the necessary cash to settle customers demand, the central bank is in
position to lend them money.
7. It is a banker to international institutions operating in the country by providing

banking facilities to them e.g. International monetary fund, Red Cross, Food
Agricultural Organization etc.
8. It is a clearing house for all commercial banks, by transferring funds in their

different accounts. They use the central bank to debit and credit their accounts
money amounting to what each owes the other.
9. It manages the country’s debt (public debt). It keeps an up-to-date profile of the
country’s total indebtedness; therefore the central bank handles all the public
and private loans.
It also advises the government on the safe limits of borrowing and to ensure
prompt payment of loans.

10. It manages the country’s monetary policy by controlling the volume of money in
circulation in order to achieve development objectives.
11. It controls/regulates foreign exchange rates. It conducts daily sales and

purchases of foreign exchange through the money market and it also controls
the unnecessary outflow of foreign exchange.
THE MONETARY POLICY (2010-p.2:)
Monetary policy refers to the deliberate attempt by the government through the
central bank to regulate the amount of money in circulation so as to attain objectives
of development; such as attaining price stability, stable economic growth rates, full
employment and, balance of payment stability/equilibrium.
Monetary policy is divided into two:
 Restrictive monetary policy- it is a deliberate government attempt to control the

level of economic activities by reducing amount of money in circulation in order
to attain objectives of development.
 Expansionary monetary policy- it is a deliberate government attempt to control

the level of economic activities by increasing the amount of money in circulation
in order to attain objectives of development.
OBJECTIVES OF MONETARY POLICY (2013-p.2,2009-p.2)
1. To ensure price stability in the economy by regulating money supply so as to

control the adverse effects of inflation.
2. To influence the level of employment. As money supply increases, economic

activities also increase thus creating more employment opportunities in the
economy. Reducing the amount of money supply reduces output and this forces
producers to reduce the number of people they employ.
3. To influence/improve balance of payment position by adopting a restrictive

monetary policy to reduce demand for imported goods and services.
4. To ensure stability of exchange rates by intervening in the currency market.

Where it wants to control the depreciation of the local currency, it sells foreign
currency so as to increase the supply of the foreign currency and reduce that of
the local currency in the currency market. To control the appreciation of the
local currency, it buys out the foreign currency thus reducing the supply of the
foreign currency while increasing the supply of the local currency.

5. To influence levels and nature of investment, as a way of encouraging

investment in the economy the central bank encourages lending to investors and
if it wants to reduce the level of investment, it discourages lending.
6. To encourage the growth of the financial sector by putting in place measures

that aim at protecting depositors so that they have trust in the sector.
7. To influence the rate of economic growth. Where government wants to

stimulate economic growth, it may adopt an expansionary monetary policy
which increases aggregate demand in the economy thereby raising national
output levels, but where the economy is experiencing unsustainable growth, it
then adopts a restrictive monetary policy so as to keep growth rates in
manageable limits.
8. To influence interest rates, by manipulating the bank rate. Raising the bank rate
is a signal to commercial banks to also raise their lending rates while lowering it
compels commercial banks to lend at lower rates.
TOOLS OF MONETARY POLICY (2019-P.1 2010-P.2)
These are weapons/ instruments/ guidelines employed by the government through the
central bank to increase or decrease the amount of money in circulation so as to achieve
development objectives such as price stability, influencing balance of payment position
etc.
These tools are basically methods of credit control and they include:
1. Open market operation (OMO), this refers to the buying and selling of
government securities through the central bank to the public. Selling treasury
bills to the public reduces money available in the hands of the public and buying
treasury bills from the public increases money in the hands of the public.
2. Bank rate, this is the cost of borrowing by commercial banks from the central
bank. Increasing the bank rate compels commercial banks’ to increase the
interest charged on loans, reducing the demand for loans hence reducing money
supply. On the other hand, reducing the bank rate encourages commercial banks
to borrow money from the central bank and then charge low interest on loans
hence attracting more borrowers which increases the money supply.
3. (Minimum) legal reserve requirement, this refers to the minimum balance

commercial banks are required by law to keep with the central bank. Increasing
the legal reserve requirement reduces commercial banks’ capacity to create

credit hence reducing money supply and decreasing the minimum balance
increases commercial banks’ capacity to create credit thus increasing money
supply.
4. Special deposits/supplementary legal reserve requirement, this is the amount

of money which the central bank requires commercial banks to deposit with it
over and above the legal reserve requirement. During a deflation, the special
deposit is reduced and this increases liquidity of commercial banks hence
increasing money supply and during inflation the special deposit is increased
thus reducing money supply.
5. Margin reserve requirement, this refers to the difference between the value of
the collateral security and the loan advanced against it. Arise in the margin
reserve reduces borrowing and money in the hands of the public and a fall in the
margin reserve requirement increases borrowing and money in the hands of the
public.
6. Selective credit control, this is where the central bank gives directives to the
commercial banks concerning lending where loans are given to priority sectors of
the economy. During inflation, the central bank gives more strict conditions
where by credit is only given to priority sectors of the economy with an aim of
reducing money supply and in periods of a deflation, the central bank directs
commercial banks to extend credit to all sectors of the economy hence
increasing money supply.
7. Variable reserve requirement (cash ratio, liquidity ratio), this refers to the
proportion of commercial bank deposits that is kept in cash or near cash form.
An increase in the liquidity ratio reduces commercial banks capacity to create
credit hence reducing money supply while a decrease in the liquidity ratio
increases commercial banks capacity to create credit hence increasing money
supply.
Cash ratio, it is the proportion of commercial bank deposits that is kept in cash
form to meet the daily withdraw requirements of customers. A high cash ratio
reduces the amount of money commercial banks have for lending thus reducing
money supply and a low cash ratio increases amount of money commercial banks
have for lending hence increasing money supply.
8. Moral suasion, this involves the central bank persuading commercial banks to
follow policies spelt out by government in order to achieve stable economic
growth for example to give more loans during a deflation and less during inflation.

9. Rationing of credit, it refers to the restriction or refusal of availability of credit

even when the applicant is willing to pay more than existing comparable
borrowers. A high degree of credit rationing reduces money supply and a low
degree of credit rationing increases money supply.
10. Currency reform, this is the act of the government to withdraw currency that is
currently in circulation and replacing it with new currency that is of higher value.
This is done especially after a war and the government is not sure of how much
money is in circulation, it is also done after the failure of all other monetary tools.
LIMITATIONS OF THE MONETARY POLICY IN UGANDA:
1. High liquidity preference among the population, most people in Uganda do
not keep their money with commercial banks, this makes it difficult on the part
of the central bank to control money which is outside the banking system.
2. Dominance of foreign owned commercial banks which are not under the direct
control of the central bank. Many of these banks have cash at their disposal
from their foreign headquarters and can easily avoid some monetary tools
used to reduce their business activities for example bank rate.
3. Excessive liquidity of commercial banks, this makes it rare for them to borrow
money from the central bank, eventually, the use of bank rate as a monetary
policy becomes ineffective.
4. Ignorance of the public on facilities offered by commercial banks for example
open market operation, once these securities are offered for sale to the public,
few buyers are attracted and therefore some securities are not bought and
this renders open market operation ineffective.
5. Existence of a large subsistence sector. This implies that few people deposit
and borrow which makes it difficult to implement the monetary policy.
6. High levels of corruption especially in the use of selective credit control. Credit
at times is not channeled to priority sectors of the economy and besides, most
banks aim at profit maximization and therefore do not follow the central bank
directives.
7. Poor distribution of commercial banks, most of them are concentrated in
urban areas and this implies that money in rural areas is not under the control
of the central bank.
8. Under developed capital and money markets where few securities are floated.
This hinders the selling and buying of securities thus making open market
operation ineffective.
9. Limited effective use of commercial banks due to limitedcollateralsecurity.
This makes borrowing difficult and leaves commercial banks with excessive
liquidity making it difficult to implement the monetary policy.
10. Conflicting objectives of government, government may be adopting a
restrictive monetary policy and yet increasing salaries of civil servants or
financing a war which increases money supply hence making it difficult to
achieve workable policies.

11. Political interference in the operation of the central bank, this implies
increased borrowing from the central bank which then limits the operation of
the monetary policy.
Explain the factors that influence the success of the monetary policy in an economy.
(2019-P.1) Leave one page please.
Other terms used under money and banking.

 Reserve ratio (2010-p.1) is the percentage/fraction of commercial bank’s total
deposits which by law must either be kept with the commercial bank or central
bank.
REASONS WHY RESERVE RATIO MAY BE INCREASED (2010-p.1)
 To control inflation/to reduce amount of money in circulation.
 To restrict credit creation by commercial banks.
 To protect the interest of depositors in times of crisis and financial instability.
 To reduce the liquidity level of the commercial banks.
 To safe guard commercial banks against uncertainties during periods of recession.
 Currency depreciation (2019-P.2) - it is the fall in the value of the local currency
against foreign currencies as a result of inter-play of forces of demand and supply.
EFFECTS OF CURRENCY DEPRECIATION: (2019-P.2)
- It leads to the rise in prices locally.
- It encourages foreign investment.
- It discourages local investment
- It encourages speculation.
- It makes projected planning difficult.
- It makes exporters receive higher local currency value.
 Currency appreciation- it is the rise in the value of the local currency against
foreign currencies as result of inter-play of forces of demand and supply.
 Currency devaluation- is the legal/official lowering of the exchange value of a
country’s currency in terms of foreign currencies.
 Currency revaluation (2008 p.2) - is the deliberate government act of raising the
value of its country’s currency in terms of foreign currencies.
 Currency under valuation (2008 p.2) it is the fixing of the value of a country’s
currency by a monetary authority below the equilibrium exchange rate.
EFFECTS OF CURRENCY UNDER VALUATION: (2008-p.2)
- It reduces imports.
- It reduces imported inflation.
- It increases foreign capital inflows.
- It worsens external debt burden.
- It increases exportation of goods.
- It increases production/output.
Questions:
1. What are the objectives of monetary policy in your country? (2009-p.2)

2. Explain the functions of the central bank (2010-p.1)

3. How does the central bank control credit creation? (2010-p.1) (Neutral)
4. Explain the various tools of monetary policy used in your country. (Neutral)
5. Explain how the tools of monetary policy are used to increase credit. (+vely biased)
6. Explain how the tools of monetary policy can be used to control inflation.
(Negatively biased)
7. Explain the factors which limit the effective operation of the monetary policy in
your country. (2009-p.2)
8. Explain the factors that limit the success of the monetary policy in your country.
(2013-p.2)

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MOUNT OF OLIVES COLLEGE KAKIRI

SENIOR FIVE ECONOMICS

Types and evolution of money

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X-tics of good money

Functions of money (2016-P.1)

1. It is a medium of exchange. Money makes it possible for people to specialize

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Value of money: (2009-p.1)

Factors that determine money value:

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Assumptions of the Quantity theory of money.

Limitations of the Quantity theory of money.

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Supply of money: (2005-p.1)

Determinants of money supply.

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 Level of liquidity preference, a high liquidity preference leads to high money

THE DEMAND FOR MONEY:

- The transaction motive, it is where money is demanded to finance the day

Determinants of Liquidity Preference:

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 Economic situation- deflation/Inflation/boom/recession/general price

Non-banking financial institutions, (2012-p.2) these are financial institutions that

DIFFERENCES BETWEEN BANKING AND NON BANKING FINANCIAL

Similarities between BFI and NBFI

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FUNCTIONS OF COMMERCIAL BANKS: (2012-p.2)

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Role of commercial banks in economic development.

2. They facilitate the process of capital formation, by promoting savings and

3. They facilitate the implementation of government programs such as currency

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FOREIGN COMMERCIAL BANKS:

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Liquidity ratio (2014-p.2) is the proportion/ percentage of commercial bank total

 Process continues till amount to be lent is negligible…………………

 Total amount created= Initial deposit x bank multiplier…………….

 Computed figure given/final answer……………………

 Receiving of deposits by a commercial bank, for example bank A receives shs

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 At the end of the process, final deposit is equal to

Initial deposit x 1/cr or credit multiplier…………

Customer/Bank Initial deposit (shs) Cash ratio/Reserve New loan

Total credit created = Initial deposit x 1/cr

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FACTORS THAT INFLUENCE THE PROCESS OF CREDIT CREATION IN UGANDA

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1. Absence of collateral security. This limits credit creation because commercial

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ASSETS AND LIABILITIES OF COMMERCIAL BANKS:

- Deposits in the central bank and other financial institutions.

- Loans and advances inform of overdrafts to customers.

- Fixed assets such as buildings, machinery owned by the bank.

- Retained profits of commercial banks after taxation.

- Interests received on loans.

- Investment in other business ventures such as rental houses etc.

- Reserves payable to the central bank.

- Customers’ deposits in the bank, customers may be individuals, government or

- Interest payable to deposits.