Unit 3.

1 Money and banking

Presented by: Mega Prisay Sidabutar, M.Ed
Section 1: The need for specialization and exchange

🠶 Why do we need money?

🠶 Today, no one is self-sufficient – self-sufficiency is producing everything you needed or
wanted for yourself.
🠶 Specialization – production involving employees or organizations each concentrating their
productive efforts on limited range of tasks or products.
🠶 Division of labour – the separation of a production process into a series of tasks, with each
one completed by a different worker or group of employees.
Overcoming the problems of barter

🠶 Barter – exchanging one good or service for another.

🠶 Three main problems arise:
🠶 Fixing a rate of exchange
🠶 Finding someone to swap with
🠶 Trying to save
Functions of money

🠶 Money is a medium of exchange

🠶 Generally acceptable in exchange
🠶 Money is a measure of value
🠶 Money is unit of account used to measure and compare the value of different goods and services,
and used to express their prices.

🠶 Money is a store of value

🠶 Money tends to hold its value over time. It allows people to save.
🠶 But inflation reduces the value of money.
🠶 Money is a means of deferred payment
🠶 Money can be used to pay credit or loan
What makes a good money?
Characteristics of a good money

🠶 Acceptability
🠶 Generally accepted
🠶 Token-money – piece of paper or metal coin it is worth much less than the face value printed
upon it.

🠶 Durability
🠶 Coins and notes must be strong and durable so that they may act as a store of value.
🠶 Portability
🠶 Money should be easy to carry around
🠶 Paper notes are lightweight and can be folded into a wallet or purse, while a handful of metal
coins can be carried easily in your pockets.
Characteristics of a good money

🠶 Divisibility
🠶 It must be possible to divided money of a large value into smaller values to make small purchases
or to give change, without it losing value.
🠶 Notes and coins have different face values (denominations) to buy goods and services with
different prices and to give change.

🠶 Scarcity
🠶 A good money must be limited in supply or scarce if people and firms are to value it.
🠶 Only if money is scarce will people value it as a good that can be used in exchange.
Why money is so important?
History of money

🠶 Stage 1
History of money

🠶 Stage 2
History of money

🠶 Stage 3
History of money

🠶 Stage 4
History of money

🠶 Stage 5
What is money?

🠶 Money is generally acceptable medium of exchange

🠶 Money supply – notes and coins circulating in an economy and deposits with banks and
other financial institutions.
🠶 Cash or notes and coins with different face values are generally accepted and recognized
as money in all economies.
🠶 Financial assets are good store of value.
🠶 Liquid assets or near money as they can be converted back to cash easily.
🠶 Examples: personal savings, savings tied up in bonds, time deposits
🠶 Physical assets or real assets – may also provide a good store of value but are not
generally acceptable in exchange for goods and may be difficult to sell quickly to raise
cash.
🠶 Bank deposits – held at banks and other financial institutions
Velocity of money

🠶 The number of times notes and coins are exchanged, or circulate in an economy over a
given period of time
The money market

🠶 Financial institutions – business organizations that specialize in providing financial

services like accept deposits, loaning/lending money to other businesses or individuals,
exchange money, etc.
🠶 Money market is made up of all people who demand and supply money.
🠶 Individuals or businesses demand for money for spending or investment
🠶 Banking system creates deposit money and central banks issues notes and coins.
 What is a bank?
🠶 Banks are financial
intermediaries
between customers
who want to deposit
money and
customers who want
to borrow money.
How do banks earn revenues?

🠶 Charging interest on loans

🠶 Loans – are borrowed money from the bank for investment or personal spending
🠶 Interest rate – the percentage of interest charged on loan.
🠶 For example, a customer who is loaned $1,000 repayable over one year in 12 monthly instalments and is
charged interest at 5% of the loan value. How much to be repaid to the bank?

🠶 Charging fees for the provision of other financial services

🠶 Withdrawals from automated cash machines
🠶 Exchanging and transferring foreign currencies
🠶 Buying and selling shares in public limited companies
🠶 Providing life, property and travel insurance
🠶 Issuing debit and credit cards
🠶 Storing valuables
🠶 Organizing customer payments in the form of cheques or electronic transfers
🠶 Telephone and internet banking
How do banks earn revenues?

🠶 Making investments
🠶 Banks can use the depositors’ money to invest in the shares of other public limited companies.
🠶 How do bank earn from shares?
🠶 Capital gains and dividends
 Types of bank
🠶 Commercial banks
🠶 are often called “high-street banks” because they have retail branches located in most cities and towns.
🠶 Provide telephone and online banking facilities
🠶 Provide financial services for everyone from private individuals to both large and small businesses.
🠶 Services:
🠶 Accepting deposits of money and savings
🠶 Helping customers make and receive payments
🠶 Making personal and commercial loans
🠶 Buying and selling shares for customers
🠶 Providing insurance
🠶 Operating pension funds
🠶 Providing financial and tax planning advice
🠶 Exchanging foreign currencies
 Types of bank
🠶 Credit unions
🠶 A credit union is a cooperative, not-for-profit organization, owned by its members.
🠶 Provide low-cost loans to members who were in low incomes and unable to borrow money from other
banks.

🠶 Mutual societies
🠶 Also known as savings and loans associations or building societies in some countries.
🠶 Investment banks
🠶 Specialize in helping large business orgnanisations raise finance to fund their operations and expansion
🠶 Merchant banks are a type of investment bank.
🠶 Islamic banks – banking is based on principles of Islamic Sharia Law, which forbids interest
charges and payments.
🠶 Earns profit through fees of banking services including making loans, depositors will earn a share from
the bank’s profits.
Types of account

🠶 Deposit account – keep money and make payments + transfer

wages
🠶 Current account or checking account – deposit account + cheques
+ debit + overdraft facility
🠶 Savings account – store savings + earns interest
Types of loan

🠶 Overdraft – allows bank customers to overdraw their account by an agreed

amount. Interest is charged.
🠶 Personal loan – repaid with interest over a fixed period, usually for more than 6
months and up to 10 years.
🠶 Commercial loan – loan to a business to pay for operating costs and the purchase
of materials and machinery.
🠶 Mortgage – long-term loan, often up to 25 years, used by people or firms to buy
property.
Methods of payment

🠶 Cash – notes and coins

🠶 Direct debit – regular payments are made through the banks
🠶 Cheque – it is a written promise to pay cash to or transfer money into the
account of , another person or organization.
🠶 Debit cards – electronic method of payment to another business organization.
🠶 Credit card – electronic payment but gives the cardholder a month long to pay. It
provides short-term loan with interest.
The role of a central bank

🠶 Central bank performs the following functions:

🠶 It issues notes and coins for the nation’s currency – has the exclusive right to print and
issue new notes and coins and to replace old worn out ones in the country
🠶 It manages payments to and from the government – tax and revenues, government
payments
🠶 It manages the national debt
🠶 It supervises the banking system, regulating the conduct of the banks, holding their
deposits and transferring funds between them
🠶 It is the ‘lender of the last resort’ to the banking system
🠶 It manages the nation’s gold and foreign currency reserves
🠶 It operates the government’s monetary policy.
The stock market

🠶 Stock – is the name used to describe money raised by a joint stock company or
corporation, or a government.
🠶 Shareholder – is any person or organization that buys and holds shares in a joint stock
company.
🠶 Market capitalization – the market value of all shares or equity issued by a company
🠶 Dividend – share of any profits made by the company for each share held
Types of stock

🠶 Preferred stock (preference shares)

🠶 holders of preferred stocks are given preference in the payment of dividends
from profits.
🠶 The dividend paid is usually a fixed percentages of the face value printed on
the share.
🠶 Dividend rights are cumulative – if a dividend is not paid in one year it
accumulates to be paid in future years
🠶 Preference shareholders, however, are not usually allowed to vote on
company policy or in the election of directors to run their company at annual
general meetings (AGMs)
Type of stock

🠶 Common stock (ordinary shares)

🠶 Ordinary shareholders receive a dividend from any profits remaining after preference
shareholders have been paid.
🠶 If no profits remain, ordinary shareholders will not receive a dividend.
🠶 Ordinary shares carry one vote per share at AGMs.
🠶 So if a person or organization owns 10,000 ordinary shares in a company, how many
votes?
🠶 The person or organization with the most ordinary shares in a company is the majority
shareholder and can determine the company policy and who sits on the board of
directors.
Type of stock

🠶 Government stock or securities (government bonds)

🠶 These are loan stocks by a government to borrow money over a fixed period of time.
🠶 This means they are repaid with a fixed rate of interest at the end of their term, or on
‘maturity’.
🠶 Some mature after 20 or 25 years.
🠶 Within this time they can be bought and sold many times over by different investors.
🠶 The final holder of the stock at maturity gets repaid its face value plus interest, but
investors who buy and sell the stocks before they mature can make a profit from
changes in their market price over time.
Functions of a stock exchange

🠶 Stock exchange – is a business organization that enables individuals, companies

and governments to buy and sell shares on the global stock market.
🠶 Functions:
🠶 It brings together buyers and sellers of new and second-hand stocks
🠶 It provides up to the minute information on the market prices of different stocks and
quantities traded
🠶 It supervises the conduct of firms of brokers that buy and sell shares on behalf of
investors.
🠶 Stock market – is the global market for the buying and selling of new and
second-hand government stocks and company shares.
How a stock exchange works
How a stock exchange works

🠶 Broker – a share dealing firm that is a member of s stock exchange.

🠶 Have large sum of money in order to buy and sell shares on the stock market.
🠶 Professional share dealers work for major banks and other large financial institutions
🠶 Online brokers and banks
🠶 Brokers will buy and sell shares for a fee known as commission.
Speculating on changes in share prices

🠶 Speculation – attempting to make money from buying and selling shares in the hope their
prices will change
🠶 Bulls – people and firms who buy shares in the hope their price will rise so that they can
sell them at a profit
🠶 Bullish – if share prices are rising in general
🠶 Bears – people and firms who sell shares in the hope that their price will fall so that they
can buy them back later at much lower prices
🠶 Bear market – when share prices are falling
🠶 Stags – people and firms who apply to buy up newly issued shares in the hope their price
will rise quickly after dealing begins