SUBJECT: Banking

Class 2nd Year

Chapter # 1 Definition and Origin of Banking

Q1. How was the word bank drive?
Answer: Different banking experts have different view about derivation of the word
“Bank”.
I. Italian experts said: it has been derived from Italian words “Bancus” or
“Banco”.
II. French experts said: It has been derived from French word “Banque”.
III. German experts said: It has been derived from Italian word “Back”.
Q2. The role of which people is important in the evolution of banking?
Answer: The role of following three is considered important in evolution of banking:
● Merchants
● Money lender
● Gold Smith
Q3. Define Bank.
Answer: “Bank is an institution which deals in money, it accepts deposits from its
clients and makes loans and advances to them in need.”
Q4. Write the name of methods of formation of bank?
Answer: Following are the methods of formation of bank
● By Royal order
● By Special ordinance
● By Companies ordinance
Q5. What is meant by Statement of LEIU Prospectus?
Answer: If bank cannot submit prospectus of the time of registration then another
statement with all necessary information is sent to registrar office. This statement is
called “Statement of LEIU Prospectus”
Q6. What is meant by Memorandum of bank? Also write name of
Clauses?
Answer: “This document is a sort of contract between bank and its share holders. No
change can be made in it without permission of court.
Clauses:
● Name of Clause ● Association Clause
● Object Clause ● Liability Clause
● Head Office Clause ● Capital Clause
Q.7. Define Articles of Bank.
Answer: “It is second imported document of the bank, which includes rules and
regulation necessary to run the bank”.
Contents:
● Different types of shares
● Value of shares
● Name and number of directors
● Directors Meeting
● Powers and Duties of directors
Q8. Define Prospectus?
Answer: “This document is advised for raising the capital. In this general public is
invited to purchase the shares”.
Contents:
● Name and addresses of directors
● Name and addresses of auditors
● Name and addresses of bank
● Balance sheet of bank
● Business contracts
Q9. What are different kinds of bank?
Answer: Following are the kinds of bank
● Central Bank
● Saving Bank
● Mortgage Bank
● Development Bank
● Investment Bank
● Consortium Bank
 Chapter# 2 Central Bank
Q1. Define Central Bank.
Answer: “The guiding principle of central bank is that should act only in the public
interest for the welfare of the country s a whole and without regards to profit as a
primary objective.”
Q2. Why central bank given the authority of note issue?
Answer: The authority has been given to central bank for:
● Uniformity in the notes
● To Check expansion of notes
● To Regulate Currency
Q3. Write down the methods of note issue.
Answer:
● Fixed fiduciary system
● Proportional Reserve system
● Minimum Reserve system
Q4. Define monetary policy?
Answer: “All the measure which central bank of country takes to control supply of
money in an economy is called “Monetary Policy”
OR
“Monetary policy is considered as the regulation of cost and availability of money and
credit in the country.”
Q5. What are objectives of monetary policy?
Answer: Objectives:
● Price Stability
● Foreign exchange Stability
● Favorable Balance of Payment (BOP)
● Standard Living
● Economic development
Q6. What are quantitative and qualitative methods of monetary policy?
Answer: Monetary Policy
Quantitative Control Qualitative Control

● Bank Rate policy ● Direct Action

● Open Market Operation ● Publicity
● Change in Reserve Ratio ● Moral
punctuation
● Credit Rationing ● Change in
Margin
● Discount Rate Policy ● Restriction on
Advancing
Q7. Define Clearing House?
Answer: “Clearing house is that department of central bank where the representatives
of member banks and financial institutions gather to clear their accounts”.
OR
“Clearing house is a platform provided by central bank to scheduled banks for the
settlement of their dues of debiting and crediting the accounts.”
Q8. Describe advantages of clearing house?
Answer: Advantages:
● Saves times and labor
● No need to keep large money
● Better services to customers
● Check on Activities
● Large Credit
● Getting Information
● Encourage use of cheques
Q9. What is fixed fiduciary system and Proportional Reserve system?
Answer: Fixed Fiduciary System:
“Central bank can issue against the government securities up to certain limited fixed by
government, notes issued excess of limit must be backed by 100% gold or silver.
Proportional Reserve System:
Under this system notes are issued against proportional reserve in the form of gold,
silver or foreign currencies. In Pakistan this method system is adopted.
Q10. What is bank rate policy? Give its effects.
Answer: Bank Rate Policy:
Bank rate or discount rate is the rate at which the central banks rediscount the bills
presented by commercial banks or loans to them.
OR
It is the rate of interest at which central bank advances loans to the commercial banks.
If the commercial bank makes some changes in the bank rate, the charged by
commercial banks also alters that in turns affects the volume of loans.
 Effects:
 Effects on Deposits
 Effects on Credit
 Effect on Investment
 Effects on Import and Exports
Q11. What is Market Operation?
Answer: The sale and purchase of government securities in open market (stock
exchange) by the central bank is called open market operation.
 Chapter# 3 Commercial Bank
Q1. What is meant by cash reserve of a bank?

Answer: “This part of total capital of any bank which is essential to deposit with central
bank or to keep with itself in cash form is called reserve.
 Factors:
● Nature of Accounts
● Size of Deposits
● Legal Requirement
● Availability of capital
● Nature of Deposits
Q2. What is meant by balance sheet of bank?
Answer: “Balance sheet is the comparison of asset and liabilities is made to check,
the progress of a bank during the year”
OR
“Balance sheet is a statement of asset and liabilities of business of a particular time”
Q3. If the reserve ratio is 2% then how much can a commercial bank
create credit with Rs.2000?
Answer: Credit creation = New profit x 1/Reserve Ratio
2000x1/2= 10,000
Q3. What are the limitations / obstacle of credit creation for a bank?
Answer: Limitation of Credit creation
 Cash Reserve Ratio
 Central Bank Policy
 Habit of customers
 Primary Deposits
 Types of Deposits
Q4. What are types of loans according to terms?
Answer: Types of loans according to term:
 Call or Demand loans
 Short-term loans
 Medium loans
 Long-term loans
 Project loans
Q5. Describe the kinds of loans according to issue?
Answer: Kinds of loans according to issue:
 By Overdraft
 Cash Credit
 By Discounting Bill of Exchange
 By Mortgage
 By opening Loan account
Q6. Define Scheduled Banks.
Answer: “The banks which are registered in the list of central bank under its charter
are called scheduled banks.
In Pakistan Scheduled banks are registered under State bank of Pakistan Act 1956, Sec
37(1).
 Habib Bank (HBL)
 Allied Bank
Q7. Define Non-Scheduled Banks?
Answer: “The banks which are not registered in the list of Central bank under its
charter are called non-scheduled banks”
 Bank of Punjab is a Non-Scheduled bank.
Q8. Define Overdraft.
Answer: An overdraft is an extension of credit from a lending institution when an
account reaches zero.
And overdraft allows the individual to continue withdrawing money even if the account
has no funds in it or not enough to cover the withdrawal.
Q9. Which documents have to submit in central bank to become a
scheduled bank?
Answer: Documents to be submitted:
 Memorandum of Bank
 Articles Of Bank
 Audited Annual Report of bank
Q10. What percentage of its assets a scheduled bank has to keep
within country?
Answer: Under section 33, every scheduled bank is restricted to keep 80% of its total
deposits within country.
Q11. What are the Merits / Advantages Scheduled Banks have over
Non-Scheduled Banks?
Answer: Advantages / Merits:
 Last Resort
 Rediscount of Bills ( Discount of bill)
 Transfer of Money
 Foreign Exchange
 Chances of Failure

Q12. What is the importance of Banking in the development of

Commerce and Industry?
Answer: Importance of banking:
 Providing loans
 Transfer of Money
 Financial Advisor
 Direct Investment

Chapter# 4 Bank Accounts

Q1. Define Bank Account.
Answer: The amount of money standing to the credit of a customer of a bank. Bank
accounts are assets of its customers and liabilities of the bank
Q2. Define different types of Bank account.
Answer: Current Account:
“In this account, money can be deposited and withdraw from bank at any time.
Generally, interest is not paid on this account and bank deduct service charges”
Saving Account:
Saving accounts is an important source of funds for the commercial banks. It is
encourage thrift among the person of small means.
Fixed, Time OR Term Deposit Account:
Fixed deposits are a major source of funds of commercial bank. These deposits, as
their name implies are the deposits kept with a bank for certain period of time. They are
not payable on demand. Customer only withdraws his money after specific time period
given by the bank.
Profit and loss sharing Account (PLS):
In Pakistan, the Islamic Banking System has been introduced in January 01, 1981. The
money received by the banks under these accounts was invested in those sectors
where the chances of loss were very low. If Bank received Profit from investment then
this profit is shared between customer and the bank. There are two kinds of PLS.
 PLS-Saving Accounts
 PLS-Term Accounts
Q3. What is meant by foreign currency account?
Answer: “This account is opened in foreign currency instead of local currency. This
account can be opened in saving fixed and current account”

Q4. What is Introductory Reference while opening a bank account

Answer: When a bank opens a new account of a person it demands a reference.
Another person, who must be an account-holder of the same bank, makes this
reference.
Q5. What are the documents by the bank to depositors of PLS-Saving
and Current Accounts?
Answer: A person opening a current account, or saving account or PLS-Saving
account, receives the following three books from the banker:
 Pay-in-Slip Book: This book is given to the depositor for the purpose of
depositing cash, cheques or bank drafts in the account. This book contains at
least 10 slips. This book contains the following particulars:
 Name of the bank
 Name of the depositor
 Account Number
 Current date
 Amount to be deposited
 Signature of the depositors
 Passbook: Bank makes all the (debit and credit) entries made by the
depositors in the passbook. Passbooks rendered by various banks are somehow
different from one another. For present days the computerized statement has
removed passbook.
 Cheque-book: Cheque-book is issued by the bank to its depositors. Every
cheque form has two parts; one the larger part is called “Main-folio” generally
called a cheque, while the other is counter-folio. When a person wants to
withdraw amount, he fills the cheque, and on the counter-folio he makes some
general entries of the same cheque. The larger part is given to the bank and the
counter-folio is retained with the depositor for this own record.
Q6. When did bank can terminate the account?
Answer: Following are the circumstances for the termination of
account:
 Minimum Limit
 Non-profitable
 Lack of Confidence
 Fraudulent
 Death of the Deposit

Q7. When did the Depositor can terminate the account?

Answer: A depositor can terminate his account at any time. For this purpose he
informs the bank, and withdraws his account or makes the payment of overdraft.
Following are the Circumstances by which depositor terminate his account:
  Deficiency in services
 Deficiency in facilities
 Low Profit
 Appropriate Conditions
 Lack of confidence
 Distance
 Migration
 Maturity of Deposit
Q8. What are the Merits of opening Account to the Customer?
Answer: Merits Of Opening Account:
 Security of Money
 Reasonable Income
 To Avoid Extravagancy
 Safety in Payments
 Overdraft Facility
 Advisory Facility
 Transfer of Money
 Agency Services
Q9. What are the Merits of opening Account to the Banker?
Answer: Merits of Opening Account:
 Increase in Resources
 Sources of Income
 Increase in Investment
Q10. What are the Merits of Opening Account to the Government?
Answer: Merits of Opening Account:
 Increase in Economic Development
 Use of Idle Money
 Savings
 Chapter # 5 BANK AND BANKS’S CUSTOMER

Q1. Define Bank and Bank’s Customer as a relation?

Answer: “A banker is a dealer in capital, or more properly, a dealer in money. He is
an intermediate part between the borrower and the lender. He borrows from one party
and lends to another”.
Q2. Give the Name of Different kinds of Bank’s Customer.
Answer: Kinds of Bank’s Customer:
 Individual Customer
 Joint Customer
 Married Women
 PARDAH-NASHEEN WOMAN
 Minor OR Infant Customer
 Lunatic OR Mental Patient
 Partnership Firm
 Joint-Stock Company
 Non-Trading Concern
 Trustee
 Government Institutions
Q3. What is difference between Mortgager and Mortgagee?
Answer: When a banker accepts real estate as security by way of mortgage, the
relationship becomes that of mortgager and mortgagee. In this case bank is a
mortgager and the customer is a mortgagee.
Q4. Give the difference between Bailer and Bailee.
Answer: When a bank takes charges of its customer’ valuable goods it becomes a
bailee or trustee, and the customer who deposits the property in this way is called a
bailer.

Q5. How the relationship between bank and customer can is

terminated.
Answer: Termination By The Customer:
 No Confidence
 Low Profit Rate
 Lack of Facilities
 Termination By The Bank:
 Short Balance
 Non-Profitable
 Fraud
 Transfer of Money
 Bankruptcy of Customer
Q6. What is the difference between Agent and principal?
Answer: When a banker buys or sells security on behalf of its customer, when a
banker give the duties of his customer like collecting cheques, drafts, bill or other
instruments and pays fee and rent on behalf of its customer, it act as a agent to the
customer and the customer becomes the principal.

Chapter # 6 Negotiable Credit Instruments

Q1. What are the Negotiable Credit Instruments?
Answer: “A document possessing certain transferable qualities entitling the holder to
a specified sum of money”.
OR
“Negotiable Instruments are Cheques, Bill of Exchange, Promissory notes etc”.
Q2. Define Cheque.
Answer: “A Cheque is an order, written by the drawer, to banker to pay on demand a
specified sum of money to the person named on it”.
Q3. Cheque according to the Negotiable Instrument Act 1881
Answer: “A cheque is a bill of exchange drawn on a specified banker and not
expressed to be payable otherwise than on demand”

Q4. Write in brief about the parties involved in a cheque.

Answer: Important Parties:
 Drawer: A drawer is that person who draws the cheque on the bank. He is the
depositor of the bank.
  Drawee: A drawee is the bank to which the cheque is issued. The cheque can
only be issued to the branch of bank where the customer has deposited his
money.
 Payee: A payee is that person who receives the amount of a cheque from the
bank whether Depositor himself receive the amount or his relatives.
Collateral Parties:
 Holder: A person having a cheque is May bearer or any other particular person
who can withdraw the cheque. He is not a Holder because may be cheque was
stolen or lost. The Holder is only that person who has a legal right or Status to
have a cheque and to cash the cheque.
 Endorser: An Endorser is that person who transfers the right of a cheque to
another person. To transfer the right of a cheque means an endorsement. For
this purpose just signature of the depositor are required.
 Endorsee: An Endorsee is that to whom the right of a cheque is transferred.
Q5. What are the difference kinds / Types of Cheques?
Answer: Kinds of Cheques:
 Bearer Cheque: A cheque that can be cashed by any person, who possesses
it, is called a bearer cheque. The bank pays its amount without any identification.
 Order Cheque: Order cheque is a cheque, which can be cashed by the
nominee of the cheque. Or the money can be obtained by the order of the
depositor. The bank makes no payments till the identification of the person
whose name is mentioned on the cheque.
 Crossed Cheque: When two transverse parallel lines are drawn on the upper
left of a cheque, the cheque becomes a crossed cheque. The amount written on
a crossed cheque cannot be obtained directly from the counter of the bank.
Q.6.What is meant by Bill of Exchange.?
Answer: An unconditional order in writing by one person to another person. In other
words we can defined bill of exchange is a document, which contains an order of
creditor ( seller ) to a debtor ( buyer ) to pay a certain amount of money to him at some
future time.
Q.7. what is difference between inland and foreign bill of exchange?
Answer: Inland Bill: A bill of exchange, which is drawn, accepted and payable in the
same country or whose drawer and drawee belong to one country, is called an inland
bill of exchange.
Foreign Bill: A bill of exchange, which is written in one country and accepted in another
or whose drawer and drawee belong to two different countries, is called a foreign bill.
Q.8. what are the terms used in a bill of exchange?
Answer: Following are the terms used in bill of exchange:
 Discounting of Bill
 Retirement of Bill
 Endorsement of Bill
 Renewal of Bill
 Acceptance for Honour
 Payment for Honour
Q.9. what are the merits of Bill of Exchange.?
Answer: Advantages of using bill of Exchange:
 Economic Development
 Investment
 Transfer of Money
 Rediscounting
 Expansion of Banking
 Source of Income for Banks
 Income for Government
 Endorsement of Bill
Q.10. what is different between Cheque and Bill of Exchange.?
Answer: Cheque: It is an order, written by the drawer, to a banker to pay on demand a
specified sum of money to the person name on it.
Bill of Exchange: It is an order, written by the drawer to pay to the drawee a specified
sum of money at a certain date.
Q.11. what is different between Cheque and Promissory Note.?
Answer: Cheque: It is an order, written by the drawer, to a banker to pay on demand a
specified sum of money to the person name on it.
Promissory Note: It is a promise, written by the drawer to pay to another a specified
sum of money at a certain date.

Chapter # 7 Non-Negotiable Credit Instruments

Q.1. write some lines on I owe you (IOU)

Answer: A documents which is given to lender by borrower, this document need
signature, stamp. Usually only the date and addressed of the lender is mention. This
document is a memorandum of debts by the borrower to lender.
Q.2. what is meant by postal order?
Answer: An order of a sum of money, specified on the face of the instrument, issued
to a customer at one post office for payment at another.
Q.3. what are crossed postal orders?
Answer: The amount of this postal order cannot be received directly from the post
office, rather the payee has to deposit it in his account at his bank, and the bank
receives its amount from the post office. After the clearance of the postal order the bank
credits its amount to the payee’s account.

Q.4. what are the Merits of postal order?

Answer: Followings are Merits of Postal order
 It is helpful to transfer small amounts of money from one place to another.
 It is low cost way of transfer of money.
 It is easily available at every place because post office work in almost all the
cities, towns and prominent villages
 It is not a transferable document; therefore, its money can be received by that
person only to whom the sender wants to send.
Q.5. Define Money order
Answer: A money order is a mean of payments provided by the post offices to enable
people to transmit sums of money from one place to another.
Q.6. what are the merits of Money order?
Answer: Following are the Merits of Money Order:
 It provides an easiest way to send money from one place to another.
 It is a low cost source of transferring money from one place to another.
 The amount of money sent through money order can only be received by the
person, whose name is mentioned in it as a payee. No other person can get this
money.
 Money order is an instrument which cannot be transferred to any other person.
Its money can be received by the person only, to whom it is drawn.
Q.7. Why it is necessary for share holder to get Stock Certificate?
Answer: A stock certificate is the document issued by a company to a share or stock
holder specifying the number of shares or the amount stock held by him.
OR
Stock Certificate is a document which is held by the share holder as a proof, these
certificates are a proof that the holder has a share in the business on term of profit and
loss. These certificates are sold and bought in stock exchange.
Q.8. How many parties are involved in Stock Certificate?
Answer: Following are the parties to a stock certificate:
 Purchaser Or Shareholder:
Purchaser of the stock certificate is that person who purchases the shares of the
registered limited company, and becomes a shareholder to the profit and loss
according to the value of his share purchased.
 Seller:
Seller of the stock certificate is that registered limited company, which sells its
shares through the brokers in stock market and invests collected money.
 Broker:
Broker is that person, who sells and buys the shares of different registered
companies in stock market from or to the people, and receives his commission for
this service.
Q.9. what is letter of Certificate?
Answer: A letter of credit is a letter addressed by one bank to another requesting the
bank to whom it is addressed to hold at the disposal of a named third party, a specified
amount of money, and to change the issuing bank with the total amount of all cheques
honoured or payments of all cheques honoured or payments made on the authority of
the letter.
Q.10. what is difference between Commercial and Non-Commercial
Letter of Credit?
Answer: Difference between commercial and Non-Commercial letter of Credit:
 Commercial Letter of Credit:
A letter of credit is commitment on the part of the buyer’s bank to pay or accept
drafts drawn upon it provided such drafts do not exceed a specified amount.
 Non-Commercial of Credit:
Generally a bank issues this type of letter to travelers.
An arrangement made by a bank for a customer proposing to stay abroad for a
period who wishes always to be sure of being able to obtain money wherever he
may be

Chapter # 8 Bank Advances

Q.1.What is the terms used in advancing?

Answer: Following are the common terms used in loaning by the banks:
 Mortgage:
It is deed between a bank and customer showing that the money has been borrowed
with land or immovable property as collateral security. Mortgage bank assists
customer by lending a sum of money, the property being mortgaged to him until the
loan with interest has been repaid.
 Hypothecation:
It is a type of security where neither ownership nor possession passes to the bank.
Thus it is an agreement to give a charge over goods, or over the documents of title
to goods, in circumstances that make it impossible to give any possession to the
bank.
 Lien:
It is a right to bank to retain possession of the property of the customer until certain
legitimate demands, such as payments of debts, are satisfied. Thus, bank has a lien
on collateral securities until the loan is repaid.
 Pledge:
It is a delivery of goods or the documents of title to good, by the customer to the
bank as a security for debt. The subject of pledge is returned to the (pledger)
customer when the pledge (bank) has been paid.
Q.2. what is meant by Credit Creation by Commercial Banks?
Answer: The creation of credit is one of the most important functions of a
commercial bank. The bank does not keep 100 percent reserve against depositors
because the depositors do not come to withdraw money simultaneously (same).
Therefore, bank advances loans and charges interest, which is known as certain of
credit.
Following are the ways from which bank create credit:
 By providing Loans or Overdraft
 By discounting the bill of exchange
 By marketing investments
Q.3. Define Foreign Exchange and foreign Exchange Rate
Answer: Foreign Exchange:
Foreign exchange is defined as the exchange in which the exchange of one
country’s Currency is Exchange with another Country’s Currency. In other words we
can say that the exchange of Currency Note between two different Countries is
called foreign exchange.
Foreign Exchange Rate:
Foreign Exchange rate is the ratio between the values of two currencies. It is a price
of foreign unit of currency in terms of a country’s domestic unit of Currency.
 Fixed External Value
  Fixed Internal Value
Q.4. Define the “mint price” of gold.
Answer: The rate at which the standard money of the country was convertible into
gold was called mint price.
Q.5. Define the purchasing power theory
Answer: Gustav Cassel presented this theory in 1920. According to this theory the
equilibrium between two inconvertible paper currencies is determined by the equality of
their purchasing power. It is a moving par and not a fixed par as in gold standard.
Q.6. Define the Equilibrium Exchange Rate.
Answer: The exchange rate is determined by the equilibrium of demand for and
supply of foreign exchange as represented by the debit and credit side of balance of
payments. When the exchange rate falls below the equilibrium exchange rate in a
situation of adverse balance of payments, exports increase, unfavourable balance of
payments disappears and the equilibrium exchange rate is reestablished.
Q.7. How can you define Exchange Control?
Answer: Exchange control system involves complete government control over the
foreign exchange market in the same that all foreign currencies are required to be
surrendered to the central bank, which in turn, sanctions and allocates all foreign
payments.
Q.8.What is the methods of Foreign Exchange Control?
Answer: Following are the methods of foreign exchange control:
 Direct Methods
 Exchange Restrictions
 Exchange Rationing
 Government Intervention
 Clearing Agreement
 Blocked Account
 Indirect Methods
 Import Licenses
 Interest Rate Alteration
 Import Duties
 Export Promotion
 Export Bonus Scheme

Q.9. what is the Objectives of Foreign Exchange Control?

Answer: Following are the objectives of foreign exchange control:
 To provide a sufficient supply of foreign exchange
 To stop the export of flight of capital
 To stabilize exchange rates
 To appreciate and promote home industry
 To provide favourable balance of payments
 To increase Government Revenue

THE END

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