Money & Banking

Scope of Banking

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The word "Scope " mean the extent of Knowledge. The scope of banking refers to the extent to which it deals with the receipts of deposits and advancing loans. The scope of banking covers all the forms of business coming within the legitimate of a banker. The scope of banking is normally determined by the legislation regulations and business requirements. Development in the last few decades has extended the scope of banking. The scope of banking can be described by the help of following points:

Accepting Deposits: Banks accept deposits from its customers. The customers are allowed to draw their money by cheques. Deposits are the basis of Bank's activities. The deposits are of four kinds like Saving Deposits, Current or Demand deposits, Fixed Deposits and Foreign Currency Deposits.
Advancing Loans: The deposits received from customers are not kept idle by the banks. The banks advance loans to their customers maintaining safety and profitability. Banks allows the loans in form of Cash, Credit, Call loans, Over draft and Discounting Bills of Exchange.
Financing Foreign Trade: A bank finances foreign trade by accepting foreign bills of exchange from foreign banks. Banks also issue letter of credits to the businessmen to facilitate international trade.
Acts Upon Standing Instructions: Sometimes the customer may issue instructions in writing to his bank to do something on his behalf regarding the conduct of his account. These written instructions are called standing instructions. These instructions are usually given in respect of payment of insurance premium, subscriptions and similar payments.The bank acts upon these instructions.
Collects Dividend or Interest: The customer may ask the bank to collect dividend on shares or interest on investment. The bank acts upon the instructions of his customers and collects dividend and interest on investment made by customer. Banks also collect pension and other sums.
Investment: Banks made investment by purchasing shares, bonds and securities. The purchase of securities and shares f reputed companies is considered safe investment, because shares and securities can be pledged by the bank for securing loans in times of need.
Purchase and sale of securities: Sometimes bank purchases and sells securities on behalf of its customers. The securities may include shares, bonds and government securities. Banks can do it well because they are aware of market conditions.
Foreign Exchange: Commercial banks deal in foreign exchange. This enables the individuals and businessmen to obtain foreign currency in exchange of their home currency. For dealing in foreign exchange, commercial banks have to obtain permission from central bank of the country to act as a dealer in foreign exchange.
Acts as a Referee: To act as a referee is very valuable service to businessmen. It enables them to receive reliable information about the general standing of the people with whom they have business transactions. This information should be collected by a banker with great care and utmost secrecy.
Hajj Services: The commercial banks provide free Hajj services to the intending pilgrims. Bank receives Hajj applications. Banks also facilitates to form Hajj groups. Training of intending pilgrims is also arranged by the commercial banks.
Remittance of Funds: Modern commercial banks facilitate transfer of money from place to place and country to country by drawing bank drafts on their branches.
Safe Custody of Valuables: Banks provide facility of safe custody of valuables, important documents, ornaments etc. of their customers.
Acts as a Trustee & Attorney: On behalf of customer banks act as a trustee & attorney.
Issue of Traveler's Cheque: Bank issues traveler's cheque to the customers for traveling in and outside the country.
Accepts Utility Bills: Bank receives utility bills from customers on behalf of government bodies.
Trade Information: Bank provides trade information and tender advice to its customers about financial matters.
Issue Credit Cards: Banks issue credit cards to their trustworthy and valued customers. This facilitates the customers to pay for their necessities of life.
Modaraba Company: The commercial banks acts as Modaraba and leasing companies under the provision of Modaraba Companies Ordinance 1980.
Purchase PTCs: Commercial banks underwrite or purchase Participation Term Certificate (PTCs), Term Finance Certificate (TFCs), and Modaraba Certificates.
Electronic Banking: Electronic banking has enlarged the scope of banking. At present banks are offering improved services to the customers as follows:

ATM Cards
Credit Cards
Electronic Transfer of Money

Kinds of Banks

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A) Kinds According to Function:

Central Bank: A bank that supervises and regulates the whole banking system is called central bank. The state bank of Pakistan is the central bank of Pakistan. It is the head of all other banks. Every country has its own central bank. It works without profit motives. It regulates the monetary system of the country. It has right of note issue. It serve as an adviser to the government.
Commercial Bank: A bank that is established primarily to earn profit is called commercial bank. The banks accepts deposits from general public and advance loans to the borrowers. The banks provide agency services like collection of dividend, collection of cheques, bills of exchange, payment of regular charges,purchase and sale of securities, transfer of money etc.
Exchange Bank: A bank which deals in foreign currencies is called exchange bank. These banks provide foreign exchange to the importers and exporters of the country.Exchange banks purchase, sell and collect foreign bills, issue letter of credit, facilitate foreign remittance through bank draft, telegraphic transfer etc.Some examples of such banks are Bank of America, Bank of Oman, Bank of Tokyo Ltd., Grindlays Bank, American express Bank Ltd., etc.
Saving Bank: A bank which collects the savings of people by providing them incentives of interest is called a saving bank.People can withdraw their savings when they require. Government sponsors these banks to develop and promote saving habits among people.
Co-operative Bank: Co-operative banks are basically opened to help the small farmers and producers. They are not profit making institutions. Their working is based on service motives. They are registered under the co-operative societies act.
Agricultural Bank: Agricultural bank, as its name indicates, is established to provide short and long term loans to the farmers. These loans are provided for the purchase of seeds, fertilizers, agricultural machinery and for any type of permanent improvement in land.
Industrial Bank: Industrial banks are established purely to finance the industrial sector. These banks provide normally long term loans to the industrialists. Industrial bank of Pakistan was established in1961 for this purpose.
Investment Bank: Investment banks buy and sell shares, bonds other securities. They also provide loans for the purchase of shares and debentures etc. They help the new companies by providing under writing services. They finance different projects which are vital for economic prosperity. Investment Corporation of Pakistan, National Investment Trust Limited (NIT), Bankers Equity Ltd., are serving as Investment banks in Pakistan.
Micro Finance Bank: Micro finance banking (MFB) is a newly introduced concept in banking system. Dr.Yunas of Bangladesh is considered pioneer of micro finance banking. He is also awarded "Noble Prize" for his valuable services in the development of micro finance banking. MFB has been more appreciated in developing countries like Pakistan because of its key function of encouraging small business community like shopkeepers, small traders and farmers etc.

B) Kinds According to Ownership:

Government Banks: These are the banks that are owned and managed by the government. They are also called state-owned and public sector banks.
Private Banks: Private banks are the banks that are owned and managed by the general public i.e., private shareholders. They are under the ownership of private sector. Bank Al-flah is the example of private bank.
Semi-Government Banks: These are the banks that are jointly owned by the government and private individual or group of person. Government and private representatives jointly make the policies to control and manage these types of banks.

C) Kinds According to Domicile:

Domestic Banks: These are the banks which are incorporated (registered) in Pakistan.They are called Pakistani banks. National bank and Habib banks Ltd. are the examples of Pakistani / Domestic banks.
Foreign Banks: The banks which are incorporated (registered) outside Pakistan are called foreign banks. These banks have the head office outside the Pakistan. City bank is the example of Foreign Bank.

D) Kinds According to Status:

Scheduled Banks: Scheduled banks are those which are declared by the State Bank of Pakistan (SBP) as scheduled banks. They are included in the list of the banks maintained by the SBP under section 37(2) of its Act, 1956. They must have paid-up capital and reserves of at least Rs. 6 billion and must function to the satisfaction of the SBP.
Non-Scheduled Banks: Non-scheduled banks are those which are not declared by the State Bank of Pakistan (SBP) as scheduled banks and are not included in the list of banks maintained by the SBP under section 37(2) of its Act, 1956, are called non scheduled banks.

E) Development Banks:

International Development Banks: These are the banks, which provide assistance for the progress and economic development of all the countries. They work for the development of industry, agriculture and social welfare of all countries e.g. International Bank of Reconsideration and Development (IBRD).
Regional Development Banks: These banks are established to develop to particular region of the world. They help to improve the living conditions and to obtain modern technology for the development e.g., Asian Development Bank (ADB).
Agricultural Development Banks: These banks are formed to develop the the agriculture sector of the country. They provide loans to purchase modern machinery, fertilizers and seeds etc. For example Zarai Taraqiati Bank of Pakistan (ZTBL).
Industrial Development Banks: These banks are established to promote the industrial sector of the country. They provide loans to set up new industries and rehabilitation of sick units e.g., Industrial Development bank of Pakistan (IDBP).

F) Other Banks:

Consortium Banks: These are the banks established and run by other banks from their own sources provide the funds to consortium banks. These banks provide finance to big business houses and industries to meet their long-term requirements.e.g., Orion Bank and British Middle East Bank etc.
School Banks: School Banks are established to develop the habit of saving among school children. In this system of banking, the bank officials provide banking facilities to students at their schools. This system is not prevailing in Pakistan. The first school bank was Beloit saving bank, which was established in USA in 1882.
Labour Banks: The first labour bank was established in America. A labour union can establish this bank for the welfare of workers. The employees contribute in different funds e.g.,pension fund, group insurance, union fund and social security fund during their employment which can be kept these banks on the behalf of employees. Moreover, the employees also deposit their savings in these banks. For example Saving bank of Chicago etc.
Islamic Banks: Islamic bank are those banks which are working under the golden principals of Islam. It is interest free banking system and Islamic banks are working under profit and loss sharing principals. Islamic banks offer the sharia complaint products and services only."Sharia complaint products and services" means banking products and services offered by banks to their clients duly approved by their Sharia Advisers/Sharia Supervisory Committee. In Pakistan, Mezan Bank is an example of such bank.

Introduction to Banking

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Introduction:

A bank is a company which deals in money for the purpose of earning profit.It collects money from those who have it spare and lends to those who need it. The bank pays interest on deposits and receives interest on loans and advances. Bank not only provides funds to the businessmen but also gives valuable business information to them. Bank also provides safe custody services to its customers against rent. The bank deals in foreign exchange. It shifts money from one place to another place for customers. Banks also promote international trade with the help of letter of credit. A legal framework has been designed for regulation and supervision of banking business. This regulatory process is basically maintained by the state bank.

Definitions:

Crowther says:

"A bank is a firm which collects money from those who have it spare. It lends money to those who require it."

J.M.Gilbert says:

"A banker is a dealer in capital or more properly a dealer in money. He is an intermediate party between borrower and the lender. He borrows from one party and lends to another."

Mr.Kinly says:

"A bank is an institution which receives deposits and advances loans."

Professor Kent says:

"An organization whose principal operation are concerned with the accumulation of the temporarily idle money of the general public for the purpose of advancing to others for expenditures."

Mr.Parking Says:

"A bank is a firm that takes deposits from households and firms and make loans to other households and firms."

Banking Companies Ordinance 1962 Pakistan states:

"Banking means the accepting, for the purpose of lending or investment, of deposit of money from the public, repayable on demand or otherwise,and withdraw able by cheque, draft and order to otherwise"and Banking company means any company which transacts the business of banking in Pakistan."

Qualities / Characteristics of Good Money

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Following are the qualities or characteristics which good money should possess:

General Acceptability: Good money is accepted by all because it serves as a medium of exchange. Metallic money is acceptable due to its utility and value. Gold and silver coins had general acceptability. The holder can use it as money or as metal. He does not lose value in both cases.
Malleable: A good money material must be malleable. A metal is melted and then coins are minted. The proper designs are made on it. The money material, which can be melted, is fit for making coins. The malleable materials have impression on its face and back for recognition.
Elastic: The good material has the quality of elasticity. The business needs from season to season. Paper money possess the quality of expansion and contraction of money supply.
Recognizable: Good money is recognized either by sight or touch. The printing of notes is secret. The imitation is not possible, because the process of coloring and the quality of paper are always in the hands of central bank. The general public is familiar with the various kinds of notes.
Durable: Money should be durable. The money must not lose its value with the passage of time. Metals are most durable as compared to other forms of money. The gold and silver do not wear out quickly but it can be treated as durable due to replacement by the bank.
Portable: Good money must be portable easily. It should have more value in small quantity. The passenger must feel easy while taking money with them.
Storable: A good money material is storable for for meeting the future demand. The minimum space and lowest storing expenses are necessary for keeping the money material. The rupee notes and coins have this quality. .
Standardized: The good money material is of standardized nature and quality of its material does not undergo great change.
Stable: Money must have stable value because it serve as a standard for measuring the value of other things. A change in its value brings change in the prices of goods and services. The public confidence is developed if value of money is stable. The money having ever-changing value is not liked by the people.
Divisible: The money is always divisible without losing its value. The small units of money are needed for making the smallest payments. The metallic money is to make nominal payments in paisa. Public confidence develops due to this quality of money.
Difficult to duplicate: Good money is one which is difficult to duplicate. There should be no danger of fake issuance of money.
Scarce: The scarcity is the quality of good money material. Good money is always scarce. Money must be limited in supply as compare to demand for it. This quality induces the people to have more and more money for meeting their basic necessities of life.
Homogenous: Good money must be of the same quality and quantity. The unit of money must be of the respects otherwise there will be confusion in buying and selling of goods and services. The color and size of money material help the people to deal in the market.
Economical: The good money material has economical quality. The cost of printing currency notes and minting coins must be lower. The money system cannot last for a longer period if it is too much costly.
High Value: The money material should possess high value in small bulk, so that it can be conveniently carried and handled.
Effective Supervision: The good money is one that can be effectively supervised by a central monetary authority. It is of such a nature that central authority is able to keep records of the amount of money in circulation and the pattern of its distribution.
Government Support: The good money material must be supported by the government. The people accept even fiat money (money issued without keeping any metallic reserves) due to the government support. The government's backing to money creates a sense of confidence.

Conclusion:-After discussing the essential qualities of a good money material, we find that so far not a single commodity has been discovered which possess all the attributes given above in their entirety. Gold and silver do satisfy of the conditions of standard coinage. These have been discarded in the past in favor of paper currency and bank money. Some material is yet to be found which can serve as ideal money.

Functions of Money

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The functions of money can be divided into three main categories:

Primary Functions
Secondary Functions
Contingent Functions

Primary Functions: 1.1 Medium of Exchange: Money serve as a medium of exchange. It is used to make payments for goods and services. Different goods can be sold in terms of money and this money can be used to purchase other goods. So it acts as a medium of exchange between the buyer and the seller.
1.2 Measure of Value: Money is used to measure the value of everything (Except love, life, care, respect etc.) in the same way as we can measure the weight in Kilograms and distance in Kilometers. It acts as a standard of Value. Goods and services are priced and valued in terms of money.
Secondary Functions:                                      2.1      Monetary Management: Money is very important factor of monetary and fiscal policies. Collection of taxes and public finance management is only possible in terms of money. Under barter system, it is impossible to collect taxes in the form of goods and then to use the amount of tax for the development projects.
2.2      Future Payments: The money has removed the inconvenience of future payments. Now the loans can be taken from banks and financial institutions. The future payments can be stated in terms of money.
2.3      Income and Consumption: Income and consumption of different factors of production is determined in terms of money. Money helps in determination, valuation and budgeting of expenses and revenues.
2.4      Specialization: In barter system specialization is not possible because everyone tries for self sufficiency. Work specialization has been made possible because of use money. Specialization has played vital role to up lift the economy.
2.5      Economic Activities: All kinds of economic activities such as investment, savings, credit, advances etc. are made in terms of money. The use of money has facilitated the expansion of trade.
2.6      Market Mechanism: The use of money provides basis of market mechanism. The demand and supply are two major forces of market which work only because of money. Money is a factor which leads to the determination of prices, demands and supply.
2.7      Promote Foreign Trade: Money has made possible the huge foreign investment in today's world. Under barter system the foreign investment was not possible but the use of money made it possible because in money economy wealth can easily be transferred from one place to another.
2.8      Transfer of Wealth: Money also serve as a means of transferring value from one place to another place. A person may sell his movable and immovable property for money at one place and can use that money to purchase property at some other place.
Contingent Functions: Besides the primary and secondary functions, Professor Kinley has also given following four contingent functions: 3.1 Distribution of National Income: With the help of money, it is possible to determine and distribute national income among various classes of society. 3.2 Basis of Credit System: Money also provide the basis of bank credit. Bank creates credit only when they possess cash. Also the money value of securities is considered by banks while granting loans.Different negotiable instruments also work on the basis of money. 3.3 Maximum Satisfaction: Money enables consumers to get maximum satisfaction through the law of Equi-marginal utilities. Similarly the producer can get maximum profit by equalizing the marginal productivity of different factors of production. 3.4 Liquidity of Wealth: Money gives a liquid form to wealth. A property can be converted into liquid form with the use of money.

Evolution of Money

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Stages of Evolution of money:
The following are the stages of evolution:

Commodity money Stage: It is the earliest form of money. Initially, a large number of commodities such as skis, arrows, cattle, wheat, rice etc. have served as money.
Metallic Money Stage: Commodity money was replaced by metallic money, particularly gold and silver.
Coins Stage: Coins was the first great invention in in the evolution of money. It is believed that first coins were stuck in the 11th Century BC in China. For a long period of time full bodied coins, particularly of gold and silver, served as money. Now all coins of different metals are only token coins.
Paper Money Stage: With the increase in population and expansion of trade and commerce next development in the history of money is paper money.
Credit Money Stage: The fifth stage in the evolution of money is the credit money. Credit money includes bank draft, bills of exchange, cheques, promissory notes,. These instruments are being used as money. Credit money has made the developed countries of the world to adopt credit money system instead of other forms of money.
Plastic Money Stage: The last and final stage in the evolution of money is the plastic money. Plastic money is the most modern form of money.Plastic money consist of credit cards and debit cards issued by commercial banks. Now-a-days credit cards are being used widely for the purchase of necessities of life.

Introduction to Money

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Introduction:-
                                      Money comes from the Latin word "Moneta" which denotes Goddess Juno in whose temple money was minted in Rome. Money has been defined in different ways by different writers. Some have defined it in a very narrow sense and others in a very wide sense.
                                      In the narrowest sense the term money includes only the commodity that may serve the purpose of money, that is, metallic coins only.
                                      In the widest sense, money signifies each and every form of medium of exchange gold, silver, copper and other metallic coins, paper note, cheques, bills of exchange etc.
                                      Modern economists have, however, adopted the golden means and have defined money as anything that is generally acceptable in a community in exchange for all other commodities and services.
Definitions:-
Ely says:
             "Anything that passes freely from hand to hand as a medium of exchange and it is generally, received in final discharge of debts."

Robertson says:

"Anything which is widely accepted in payment for goods or in discharge of other kinds of business obligations."
G.D.H.Coley says:
   "Purchasing power, something which buy things."
J.M.Keynes says:
                          "Money is that by the delivery of which debt contracts and price contracts are discharged and in the shape of which generally purchasing power is held."
Geoffrey says:
   "Anything that is generally acceptable as a means of exchange (i.e. as a means of settling debts) and at the same time act as a measure and as a store of value."

R.P.Kent says:

"Money is anything which is commonly used and generally accepted as a medium of exchange and as a standard of value."
G.N.Haim says:
"The word money has been used to designate the medium of exchange as well as the standard of value."

Barter System

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Introduction:-
A system of direct exchange of one commodity or service for another without the use of money is called barter. This system was popular in economy before the invention of money. Under this system there was no money so there was no medium of exchange. One had to exchange the product which he had in excess with those who had surplus product with themselves. Barter system was common at an early stag of man's economic life when the wants were limited. Man could easily satisfy all his wants which he produce himself. But as time passed, his needs began to increase. He lost his self sufficiency. He began to produce some goods in greater quantity then he could consume himself. The purpose was to exchange some of his products which he had in excess. In old ages and still in backward areas the blacksmith, carpenter, cold merchant etc. generally receive wheat in exchange for their goods and services.

Definitions:-
R.H.Parker says:

"Barter is the direct exchange of goods and services without the use of money as either means of payment or a unit of account."

G.Thomas says:

"Barter is a form of trading n which goods are exchanged directly for other goods without the use of money as an intermediary."

H.S.Sloan says:"

Barter is the direct exchange of one commodity or services for another without the use of money."

In Simple words:

"The direct exchange of surplus commodity for commodity with another person without the use of money is termed as barter in economics."

Features of Barter System:-
The main features of barter system are as under:

Barter system is direct exchange of goods and services.
It requires the double coincidence of wants.
Barter system eliminates the use of money.
It generally flourishes among uncivilized and backward communities.
It is possible only if the wants of members of a community are very limited.
Barter system is possible where the area of exchange is limited.
It is possible where the ratio of exchange between two commodities are determined.
It is now used in the modern foreign trade because of having good impact on balance of payment of trading countries.