BANKING AND

FINANCIAL
INSTITUTIONS
C H A P T E R V. B A N K C R E D I T I N S T R U M E N T S
CHAPTER OBJECTIVES:
•Bank Credit Instruments
•Negotiability of Credit Instruments
•Division of Credit Instruments
•Money Market Instruments
•Significance of Bank Credit Instruments
•The Banks, being dealers in credit, must
handle some credit instruments to
facilitate and enhance their functions.
•It is always best that there is a written
evidence of the existence of credit. As
much as possible, it must be signed by the
both the debtor and the creditor.
NEGOTIABILITY OF CREDIT
INSTRUMENTS
•Credit takes place when there is the
creditor’s belief or faith in the
borrower’s willingness and ability to
pay.
•The object of credit transactions is
mostly money.
•Banks use negotiable documents in
plying their trade. The most common
of these are the bills of exchange,
promissory notes, and checks.
ESSENTIALS OF
NEGOTIABILITY
•Must be in writing and signed by the
drawer or maker.
•Must be made payable to order or to
bearer.
•Must be payable on demand or at a
future determinable time.
•Must be an unconditional order or
promise to pay.

Note: Lacking any of these would render

the instrument non – negotiable.
DIVISION OF CREDIT
INSTRUMENTS
•Promises to pay – unconditional promise of
the maker to pay a certain sum of money
to the payee.
•Orders to pay – is a command by the
drawer to the drawee to pay a certain sum
of money to the payee.
PROMISES TO PAY
•Promissory Note – this is an unconditional
promise of the maker to pay a sum certain
in money to order or to bearer on
demand or at a future determinable time.
•Bank Notes – is an unconditional promise
of a bank to pay a sum certain in money
on demand. Such note is used as a
substitute for money.
– Bank Notes are practically like money.
The only divergence of the note from the
real money is the fact that the note
represents private credit rather than the
state’s credit.
•Banker’s Acceptance – it contains the
bank’s promise to pay a draft that is
presented to it for acceptance. To
constitute the bank’s intention of honoring
the instrument, the word “ACCEPTED” is
stamped on the face of the draft and it is
duly signed by the bank’s representative.
•Letter of Credit – a promise of a bank to
honor drafts drawn against it or for its
account. By virtue of the letter of credit, a
bank substitutes its credit for that of the
accredited buyer and promises to pay the
beneficiary or his representative upon
presentation of a draft, subject to the
conditions in the letter of credit.
ORDERS TO PAY
•Bills of Exchange – is an order of one
person/bank (drawer) to another
person/bank (drawee) to pay a third
person (payee) a sum certain in money or
demand or at some specified future time. A
bill of exchange is also in the form of a
check of draft.
•Check – a check is the order of a
depositor to his bank to pay a third person
or himself a sum certain in money on
demand. Such is commonly known as a
personal check. When a bank’s cashier is
the drawer of the check, it is known as a
cashier’s check. When the manager of a
business concern is the drawer, it is
termed as a manager’s check.
PERSONAL CHECK
CASHIER’S CHECK
MANAGER’S CHECK
•Draft – a draft is also an order to pay and
is a bill of exchange. These are classified as
sight or demand, time, commercial or bank
drafts. Such instruments which are paid at
sight upon presentation are known as
demand drafts. Those payable at a future
time are time drafts. When the draft is
drawn by a bank against another bank, it is
a bank draft.
SIGHT OR DEMAND DRAFT
MONEY MARKET INSTRUMENTS
1. Treasury Bills – These are short – term
securities issued by the country’s
Treasury.
– This is the safest form of investment since
it is backed up by government.
– This consists of an obligation to pay the
bearer the face value of the bill upon a
given date.
2. Commercial Papers – These are short –
term debt instrument commonly used
by corporations to fund a temporary
capital requirement.
– It is guaranteed by the company that
incurs the obligation.
3. Negotiable Certificates of Deposit –
These are like fixed deposits except that
they are bearer documents. Most NCD’s
have a term of less than one year. They
usually offer a rate of return slightly
higher than banker’s acceptances.
4. Bank Guarantees – This is a written
undertaking wherein the bank agrees to
make stipulated payments on your behalf
should you fail to fulfill or carry out
specified terms of a contract.
SIGNIFICANCE OF CREDIT
INSTRUMENTS
•Facilitating great extent in the dealings in
credit satisfies the demands of countless
depositors and customers. Using these
credit instruments, the public confidence in
the soundness of banks and their
patronage of the banking system as a
END…