Money and Banking

Contents

 Need for Money and Problems of Barter

 Forms, functions and characteristics of MONEY
 Role and importance of Central Bank
 Role and importance of Commercial banks
 What is Bartering?
Bartering is an act of swapping items in exchange for other items through a
process of bargaining and negotiation, due to the absence of money in the
economy.

Double Coincidence of wants

Challenges

Divisibility

Portability
What is Money?

Money is any commodity that can be used as a medium of exchange and is widely
accepted for the purchase of goods and services e.g. banknotes, coins, gold etc.

Forms of Money

Cash Bank Deposits Central Bank Reserves

• Physical form of money • Electronic form of money • Money help by Central

• e.g. Banknotes and coins
• Convenient to use
• Risky for large
transactions
• Money reserves placed in
commercial bank accounts
• Transactions using debit
and credit cards
Bank
• Used by Commercial
banks to make payments
between themselves
• Electronic form of money
Functions of Money

Medium of Measure
Exchange of Value

Standard
Store of
of deferred
Value
payment
 Characteristics of Money
Durability Acceptability

Divisibility Uniformity

Scarcity Portability

Q. Why do you think the following products would not make “good” money?
1. Milk 3. Fish
2. Cloth 4. Cigarettes
Central Bank
The Central Bank of a country is the monetary authority that overseas and manages the
economy’s money supply and banking system.
Functions of Central Bank
Sole issuer of bank notes and coins
• Sole rights to print bank notes and mint coins
• Essential for uniformity and public confidence
• Hong Kong is an exception with 3 commercial banks having note issuing rights

Government’s Bank
• Maintains bank account of central government, accepts deposits, makes payments, extends loans etc.
• Management of public sector debt
• Represents the government in international financial markets (foreign exchange). Holds and manages
foreign exchange reserves.
The Bankers Bank
• Supervises commercial banks, Overseeing cash reserves of commercial banks
• Manages the clearing system making banking transactions more efficient
• Oversees liquidity position of the commercial banks

Lender of last resort

• Financial assistance to commercial banks – it will lend to banks that are temporarily out of cash
• Safe guards the nations banking systems and economic welfare

Implements the Governments Monetary policy

• Control of money supply
• Influence interest rates
Commercial Bank
A Commercial Bank is a retail bank that provides financial services to its customers e.g.
savings, bank loans and mortgages.
 Functions of a Commercial Bank
Accept Deposits
• Accept deposits from individuals, firms and government
• Sight deposits and time deposits
• Enable transactions, provide money transmission services
Extend loans
• Overdrafts
• Mortgages or home loans
• Secured and unsecured loans
Credit creation
• Increase money supply in economy by making money available to borrowers
• Enables commercial banks to generate additional purchasing power
Additional functions
• Collecting and clearing cheques
• Offer financial services like tax advice, foreign exchange dealings, purchase and sale of
stocks
• Safety deposit boxes
• Payment of utility bills
• Credit card facilities
• Internet banking facilities
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