Embading of RAS Model

Course: Banking
Class: MS Accounting and Finance

By
Dr. Farrukh Naveed
Course outline of Banking integrated with RAS Model
 Different Economic systems
•Capitalism
• Private ownership, Free Market economy, Capital used to earn
personal profit, Laissez faire, Interest in allowed on capital,
Maximization of profit,
•Socialism
• Government ownership, Central economic planning, No
private ownership, Government control on production
and distribution, Maximization of social benefits,
Minimum competition.
 Characteristics of Islamic Economic System
• The central features of an Islamic economy are often summarized as:
(1) the "behavioral norms and moral foundations" derived from the
Quran and Sunnah;
• (2) collection of zakat and other Islamic taxes,
• (3) prohibition of interest (riba) charged on loans, which is not
allowed in Islam.
• (4) Recognition of private ownership even the ownership of factors of
productions.
• (5) prohibition of all types of contracts and transactions which are not
recognized by Shariah like Gharar (Uncertainty), Gambling, Ihtikkar,
• (6) Private ownership is allowed
Introduction to Banking
• Different types of Banks
• Commercial, central, investment, Agricultural, industrial etc.
• Different Types of Bank accounts.
• Current account, Fixed account, PLS account, Saving account.

Shariah View point regarding different types of Bank accounts.

Credit creation By banks
• Credit creation by banks
Functions performed by commercial
Banks
• Providing loans
• Accepting deposits
• Financing for different projects
• Helps in Import and export (LC)
• Hajj applications
• Utility bills services
• Fee collection.
• ATM services.
• Providing locker Facilities
• Dealing in Foreign Exchange
• Agency Functions
 Shariah View point regarding different types of
bank’s functions performed by commercial banks
Functions of Central Bank
• Note Issue (Some detail of note issue)
• Government Bank (It keeps the accounts of the government. Bank pay interest on
national debt. Bank manages Public debt by sale of T bill and other documents)

• Government Adviser (Advise the government about loan program, interest

rate, terms and conditions of new loans etc).

• Government Agent (This bank acts as a agent of the government. It can buy and
sell gold, silver and foreign exchange as government agent).

• Banker’s Bank (it keeps the reserves of other banks for regulating and
improving banking system. The week banks can borrow from these reserves)

• Lender of last resort (It provides help to member banks in times of need.
When commercial banks feel pressure on cash position they can get necessary funds from
central bank)
 Continue….
• Foreign Exchange (Central Bank keeps the foreign exchange reserve on behalf of government. It is done for
keeping the exchange rate stable).

• Credit Control
• Remittance Facility (It provides remittance facility to banks and government institutions. It can transfer the funds
form one place to another by means of mail transfer and bank demand draft).

• Clearing House (The member banks keep the cash reserve with central bank. The settlement of
claims among banks can be made in books of central bank).

• Custodian of Metallic Reserve

• Development of Banking sector
• Supervision (It monitors the activities of commercial banks)
 Monetary Policy
• Credit control or monitory policy refers to the regulation of the quantity
(amount or supply) and direction (distribution) of money and credit in a
country.
OR
The regulation of the availability, cost and allocation of money and
credit in the economy.
Tools / Methods of monetary Policy
• Quantitative or general methods (measures)
These methods are those that are used increase or decrease or to keep with in desirable limit the
total quantity or amount of credit.
The basic assumption here is that the expansion of credit causes a rise in price, investment, output
and employment and the contraction of credit causes to fall in price, investment, output and
employment.

 Bank rate Policy ( It is called discount or repo rate. It is the key interest rate charged by
central bank on money lent to commercial banks.

Raising of bank rate (when central bank want to decrease the amount of credit, it increases the bank
rate, which causes rise in the commercial bank landing rate. This discourages the borrowing from
commercial banks.

Lowering he bank rate (Opposite to previous)

• OMO (Open market operations)
It refers to buying or selling of the government securities in the money market by
the central bank with a view to affect the amount of credit in the country.

Selling of securities (If the central bank decide to decrease the amount of credit, it
sells securities in the market. The buyers (banks or private buyers) pay the value of
the securities to the central banks. This reduces the cash reserves of the bank, their
lending and credit creation power. Thus the amount of credit decreases.

Buying securities (As oppose to the selling securities)

• Changing statutory reserve ratio
(It is the ratio of cash to total deposit, which the commercial banks are required by law to keep as reserve with the central
bank. The changing in this ratio directly affect the lending ability of banks) Rising the statutory ratio reducing the lending
power of banks and vise versa.

• Changing Liquidity Ratio

It is the ratio of liquid assets to total deposit, which the commercial banks are required by law to maintain with in them.
Rising of this ratio decreasing the ability of commercial banks to grant credit to private sector and vise versa. It affect the
flow of credit to private sectors.

• Credit Ceilings
In this case an upper limit is set on the total amount of credit that can be provided by each bank during a given period. The

banks are not allowed to give credit beyond the fixed ceilings.
 Qualitative or selective control (measures)
• These are used to increase or decrease the amount of credit for different purposes or to different sectors. The main
aim is to expand or control selected types of credit and not total credit.

• Fixing maximum credit limit (to be provided to particular sector only, not the whole economy
sectors)

• Fixing minimum credit limit (to be provided to particular sector only, not the whole economy
sectors)

• Changing margin requirements (The minimum margin requirements on securities for loan may be lowered by the
central bank to encourage the flow of credit to specific sectors or vice versa.
• Charging different rates of interests
The central bank fixes different rate of interest to be charged by commercial banks
on loan generated for different purposes or to different sectors.

• Totoal Ban on loans ( for particular sector as SBP banned loans for
construction sectors in 1981).
• Shariah View point on Monitory Policy