MONEY AND BANKING

Money also sometimes called Currency, can be defined as anything that people use to buy
goods and services. 

Narrow Money is money in forms that can be used as a medium of exchange, generally notes, coins,
and certain balances held by banks.
Broad Money Broad money includes notes and coins but also saving accounts and deposits in a savings
account, treasury bill etc.

Functions of Money
1. Money is a medium of exchange
Because money is a good that is generally acceptable in exchange for all other goods, t rade is
brought about by two transactions with money being used in each.

2. Money is a unit of account

Just as a thermometer measures temperature and a ruler measures length, so money provides a
measure of value. Using money helps those producers and consumers engaged in trade to avoid the
problems of fixing prices of goods and services.

3. Money is a store of value

Money is usually a good store of value. Unless prices are rising rapidly, money tends to hold its value
over time. In other words, it allows people to save in order to make purchases at a later date.

4. Money is a means of deferred payment

When a person buys goods on credit the consumer has the use of the goods but does not have to pay
for them immediately. The consumer can pay some time after he or she receives the goods. In the case
of hire purchase, payment is made by instalments spread over a number of months or years.

Characteristics of money
1. Divisibility

It must be possible to divide money of a large value into smaller

values to make small purchases or to give change, without it losing value.

2. Acceptability

Anything can be used as money as long as it is generally acceptable. This is

why a worthless piece of paper can be used as money, for example, a 10 dollar
or a 50 euro note.

3. Durability

Any good used as money must be hard-wearing. Money would be useless if it

just melted away in your pocket. Coins and notes must be strong and durable
so that they may act as a store of value.

4. Portability

Money should be easy to carry around. A house would clearly be far too heavy to move.
Paper notes are lightweight and can be folded into a wallet or purse.

5. Scarcity

A good money must be limited in supply or scarce if people and firms are to value it. For
example, small stones or pebbles would not be a good money because people could simply
pick up as many as they liked from the ground whenever they wanted to.

Banking
A bank is a financial intermediary because it brings together customers who want to save
money and customers who want to borrow it.

Types of Banks

1. Commercial Banks
2. Central Banks

1. Commercial Banks

Commercial banks are often called ‘high-street banks’ because they have retail branches
located in most cities and town. They perform many functions

 accepting deposits of money and savings

 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 Accounts

1. A deposit account is a current account, allows money to be deposited and withdrawn

by the account holder at any time.

2. A savings account is a safe place to store your savings. Interest will usually be added
to your savings by a bank depending on how much you have saved and how often
you can make withdrawals.

3. A fixed deposit account is a financial instrument provided by banks which provides

investors a higher rate of interest than a regular savings account, until the given
maturity date.

2. Central Bank

Central bank is owned by the government and run by a public corporation.

A central bank usually performs the following functions:

i. It issues notes and coins for the nation’s currency

ii. It manages payments to and from the government
iii. It manages the national debt
iv. It supervises the banking system, regulating the conduct of banks, holding their
deposits and transferring funds between them
v. It is the ‘lender of the last resort’ to the banking system
vi. It manages the nation’s gold and foreign currency reserves
vii. It operates the government’s monetary policy