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Prepared By
ARFAN SHAHZAD KHAN M.COM, M PHIL MUHAMMAD NADEEM RAZA MBA, M.PHIL
ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
MONEY
removes these defects. Q2: Define money. D Q3: Discuss the econo money.-----------------Q4:. Define money di
Q1: WHAT IS BARTER SYSTEM. DISCUSS THE PROBLEMS OF BARTER ECONOMY. ALSO POINT OUT HOW INTRODUCTION OF MONEY REMOVES THESE DEFECTS
OR BARTER SYSTEM DOES NOT FULFILL TODAYS REQUIREMENT DISCUSS? (1999, 2000, 2003)
DEFINITION:
ACCORDING TO R.H. PARKER:
Barter is the direct exchange of goods and services with out the use of money as either a means of payment or a unit of account.
ACCORDING TO SLOAN:
Direct exchange of commodity or services for another with out the use of money.
ACCORDING TO G. THOMAS:
Barter is a form of trading in which goods are exchange directly for other goods with out the use of money as an intermediary. Barter, however, is possible only under extremely simple condition of exchange. A pure barter do not exist today:
INCONVENIENCES OF BARTER
1. LACK OF DOUBLE COINCIDENCE OF WANTS:
The basic problem of barter economy was the double coincidence of wants. It means there must be double satisfaction of bother parties in bargain. For Example: In this situation, the exchange can be effective only if a person in able to spare what the other person wants and at the same time needs what the other can spare. Suppose a person needs cloth and has the surplus of wheat, he will have to find a person who needs wheat and want to sell the cloth. Person (A) surplus of wheat (wants cloth) Person (B) surplus of cloth (Wants wheat)
5. LACK OF SPECIALIZATION:
ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
Specialization is essential for gaining competitive advantage over others. Under barter system each person is jack of all trades, so a high degree of specialization is difficult to achieve. Specialization and inter. Dependence in production is possible in an expanded market system based on market economy. 6. DIFFICULTY IN FUTURE PAYMENT) deferred: In barter economy it is difficult to make payments in future. Because there was no mechanism to state debt and repayment in future with reasonable certainty and security. It is very difficult to land goods to other people as the value of commodities will fall with the passage of time. 7. DIFFICULTIES IN TAX COLLECTION:
Under this system, Tax collected by revenue department in the form of commodities. The goods collected form Tax payer will not be stored for a longer period. They will lose their value with the passage of time.
9. NO CAPITAL FORMATION:
The creation of capital goods is necessary for further production of goods and services. The basis of Barter is formation is saving. In the absence of capital formation the economic progress become zero.
12. NO BUDGETING:
Under barter, it was not possible to budget expenses and incomes. People were unable to for-caste the worth of their mechanism and merchandise. They, there fore cannot make any estimate of their future incomes and revenues.
5 Money is used as a common measure of value by which was can measure and compare the values of different goods and services.
6. LIQUIDITY TO WEALTH:
Money imparts liquidity to various forms of wealth such as land, machinery, stocks and stores etc. These forms of wealth can easily be converted into money.
CONCLUSION:
Because Barter System has many difficulties and problems so at is better for everyone to use money. In this time many developing countries are using to the barter system. Even Pakistan was doing trade with Communist Countries like china and Russia.
DEFINE MONEY. DISCUSS VARIOUS FORMS OF MONEY. 2000, 2002, 2004, 2004(S), 2006 Answer:
INTRODUCTION
Money is the greatest discovery of modern age. The word MONEY is derived from the LATIN word MONETA. It occupied a unique and important position in all the fields of life. Generally speaking anything that people will accept in exchange of their goods and services and at the same time by which they will purchase goods and formed the modern form.
DEFINITION
(I). WALKER Says: Money Is What, Money Does.
PAPER MONEY
Paper money consists of notes made of paper, issued by the central bank of the country. Paper currency are of fixed denomination (I.e. Rs 5,10,100,500,1000) in Pakistan. Paper money is widely used now days on the following reasons. i. It is easy to count. ii. Easy to print. iii. Easy to handle. iv. Easy to transfer from place to place. v. Large value in small bulk.
BANK MONEY.
Bank money or credit money are the instruments (documents) issued by the banks. This is accepted as a medium of exchange, due to confidence on the bank. It consists of Cheque, draft, bill of exchange.
a. CHEQUE:
A cheque is issued by the account holder to the bank to pay a sum of money to himself or to the third party mentioned in the cheque. Three kinds of cheques: -------Bearer Cheque -------order Cheque -------Crossed Cheque.
8 A bill of exchange is an order from a creditor (seller) to a debtor (buyer) to pay a certain sum of money mentioned in the bill to him or to the bearer at a fixed future date. --------Sight bill of exchange. --------Time bill of exchange.
c. DRAFT:
A draft is a cheque drawn by a bank on its own breach or on the branch of the other bank, requesting it to pay on demand a specific amount to the person named on it.
(ii) NEAR MONEY: Number of Asses which are liquid and can be converted into money easily. For example govt bonds, shares, time deposits etc.
SUMMING UP:
Consequently the money at present age is the out come of evolution of money. After passing through above discussed stages, now it is the medium of exchange all over the world.
Q3: DISCUSS THE ECONOMIC IMPORTANCE (SIGNIFICANCE, ROLE) OF MONEY. ALSO EXPLAIN THE CHARACTERISTICS (ATTRIBUTE QUALITIES) OF MONEY.
ANSWAR: INTEROUCTIO
Money plays very important role in the economic development. Three is no doubt. That money helps and motivates all economic activity relating to consumption, production, ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
9 exchange and distribution. It has become a vital necessity of people. They use it in daily transaction. The important points are as under:
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CHARACTERISTICS OF MONEY:
Following are the characteristic (qualities) of money: 1. GENERAL ACCEPTABILITY:
The good money is one which is generally acceptable by all with out hesitation. It means that any one will be willing to accept it in settlement of debt or in discharge of any obligation. The people trust because this is issued by Govt. & Central bank.
2. STABILITY:
The value of money should stay stall otherwise people will Loose confidence over it. It means that the commodity Chosen as money not depreciate due to usage or wear and tear.
3. STANDARDIZED:
The good money is of standardized nature and quality of its material does not undergo any great change. It must not be weak of such nature that may loose its original form and shape due to mishandling or temperature.
4. ECONOMICAL:
The issuance of good money should always be economical. This means that cost incurred on it issuance must be very low as compared to its value.
5. STORABILITY:
Good money is one in the shape of which purchasing power can be stored for a longer period. This means the people must be able to save the money with surety that it will not lose it value.
6. DIVISIBILITY:
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11 Good money is capable of being divided into smaller denominations. Hence both the costly and cheap things can be purchased from such money.
7. TRANSPORTABILITY:
Good money is that which can easily be transferred from one place to other for payments e.g. currency notes, cheque, bank draft. Etc.
8. RECOGNIZABLE:
Good money is one that can be easily recognized by seeing or touching. It should be of such nature that can be easily identified by any one.
9. DIFFICULT TO COPY:
A good money is one which is very difficult to be copied. In other words there should be no danger of fake issuance.
10. MALLEABILITY:
A good money can be conveniently kept and stamped. It is the quality of metal coins. The coins can be melted and reproduce with new govt seal. More issue PxI B.op (-)
7. LESS STABILITY:
There is less stability in the value of the pap money as compared to metallic money. Some time it over-issued and people lose confidence in the value of money and they prefer to keep their savings in term of gold and silver.
8. UNCERTAINTY:
Paper currency has no value of its own. All the value it commands is because of its status as legal tender. If this status is lost the currency becomes worthless.
CRUX
Form above discussion we concluded that paper money has also some defects. It is better that metals and it is also helpful for removing the economic problems. It is a source of blessing for mankind. However, when it is properly manage it becomes source of peril and confusion.
ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
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Q4:. DEFINE MONEY DISCUSS THE FUNCTIONS OF MONEY? (2001, 2002, 2003 (S)).
ANSWER: DEFINITIONS OF MONEY:
According to its scope: WALKER:
Money is what money does.
PROFESSOR ROBERTSON:
Anything which is widely accepted in payment for goods or in discharge of other kinds of obligations
ELY:
Money is any thing that passes freely from hand to hand as a medium of exchange and is generally received in final discharge of debts.
KENT:
Money is anything which is commonly used and generally accepted as a medium as a medium of exchange or as a standard of value.
2. DESCRIPTIVE DEFINITION:
CROWTHER: Money may be defined as anything that is generally acceptable as a mean of exchange and that at the same time acts as a measure and as a store of value.
G.D.COLE:
Purchasing power, something which buys things. COULBORN: Money may be defined as means of valuation and of payment.
FUNCTIONS OF MONEY:
Money performs a number of primary, secondary and contingent functions which not only remove the difficulty of barter but also oils the wheels of trade & industry in present day world:
A: PRIMARY FUNCTIONS:
Money performed the following primary functions:
13 their needs with money. It serves as link between the buyer and the seller to complete their transactions.
2. STANDARD OF VALUE:
Money serves as a standard of value. The goods and services of modern world are priced and valued in terms of money. This has greatly helped in reducing the time and effort to make the transaction. Money is used to measure the economic values of goods and services. Money measures the values of every thing in the same way as kg is used to measure weight, km is used to measure distance.
3. STORE OF VALUE:
Money serves as a store of value for future purpose the people keep money for construction of houses, marriage of their children and other expenses. This function of money is useful because most of us do not want to spend our income immediately upon receiving it. They prefer to wait until they have the time or desire to spend it. Money deposited in the bank is a store of value for the account holder. Money is safe and earns interest when it is kept in banks.
B. SECONDARY FUNCTIONS:
Following are 2ndry functions of money,
14 Money has provided the liquidity to international trade. The wealth can be transferred from one country to another. Payment can be made and receive on the other end of the world in no time.
C. CONTINGENT FUNCTIONS:
Contingent functions are derived from the primary and secondary functions. According to KINLEY the contingent functions of money are as under:
15 With the help of money, it is possible to determine the solvency of a person, whether the person is able to repay his present debt or not.
CRUX:
Simply, we may say that, money is a matter o-= four functions, a medium, a measure, a standard a store, but it must serve as medium of exchange and it must be accepted by all. Money has converted moneyless economy of primitive states of society into monetary social solving major problems of primitive society.
ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
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Q5: WHAT IS PAPER MONEY? DESCRIBE ITS DIFFERENT FORMS? ALSO DISCUSS THE ADVANTAGE AND DISADVANTAGES OF PAPER MONEY? (1998, 2004)
ANSWER: PAPER MONEY INTERDICTION:
Paper money means the Currency notes issued by central bank of country. In the present age paper money has got a significant place in place of metallic money. Paper money is convenient to carry and easy to handle and store. It is the most advance form of money. It fulfills nearly all the characteristics of ideal money. It is believed that different attempts are made to introduce paper money i.e. in china during 9th century, Iran 13th century and finally paper money was originated by gold smith of England in early 17th century. Now in all developed and underdeveloped countries of world, inconvertible paper money is used as medium of exchange and standard of value.
DEFINITION:
PROF. HANSON: Paper money means the paper instrument such as bank notes, cheque bills and other forms which act as a currency.
According to F ,Perry:
Paper money is documents representing money such as bank notes, promissory notes, bills of exchange etc.
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3. LIGHT WEIGHT:
The paper money has less weight than metallic money. It is easy to handle than metallic money.
4. EASY COUNTING:
Paper money due to its elasticity is very useful for the government. It can be increased or decreased according to business requirements.
5. EASY COUNTING:
Paper money is much easier to count and piled up in bundles. It can be counted either manually or by specialized currency counting machine
6. CONVENIENCE:
The paper money is convenient to carry and transfer. It can be easily kept in pocket or wallets.
7. DIFFICULT TO COPY:
The design of paper currency is very intricate and special type of ink and paper is used hence it is difficult to copy it.
8. RECORD:
Paper currency is always numbered. Each one has a distinct number. So in case of robbery, bank fraud, the involved person can be traced out when they use the embezzled money.
9. EASILY RECOGNIZABLE:
The paper money is easily recognizable. There is no botheration of testing the genuineness of the money material.
10. CONVERTIBILITY:
Paper currency is easily convertible into other credit instruments such as draft, promissory note and bills etc.
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14. UNIFORMITY:
The paper money stays uniform. The apparent loss of colour or tearing of paper does not affect the value. It is uniform in colour, size, design, weight etc.
2. DANGER OF INFLATION:
The biggest demerit is that paper money is over issued then it brings inflation in the country which is harmful for purchasing power.
3. DEMONETIZATION:
The other demerit is that paper money is just a piece of paper. It has value only because of the back of government and if some time the govt. replaces old money with new one the old money has not value after certain period.
4. LACK OF DURABILITY:
Normally paper money has a short life than metallic money. There are chances of damages to paper. Fire may burn it. Paper money loses its good appearance and shape.
5. SMALL DENOMINATIONS:
Paper money is not suitable for small monetary denominations such as 1,2,5,10,25 and 50 paisa in this case metallic money gets preference over paper money.
6. BALANCE OF PAYMENTS:
More and more currency issue decreases its value. This cause inflation. Due to which prices of imports increases because they are to be paid out by in exchange of devalued local currency.
CONCLUSION
Q6: DESCRIBE THE PRINCIPLES OF NOTE-ISSUE? ALSO EXPLAIN THE METHOD OF NOTE ISSUE WITH THEIR ADVANTAGES AND DISADVANTAGES: Answer: 2001, 2005 ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
19 INTRODUCTION In all over the world, all most all the countries have fiat standard and fiat paper money. The management regulations and control of paper money is normally assigned to central bank of the country. The main advantage of this single authority control and management is that is that there is uniformity in quality, size and design of all paper currency notes.
MERITS:
I. STABLE VALUE:
The value of money will be kept stable because over issue is not possible due to security of gold. Because value of gold is almost stable, so the value of paper money issued against gold also stable.
DEMERITS:
I. INELASTIC: The currency principle is inelastic. The expansion and contraction of note issue is based upon the inflow and outflow of gold. Not fit for business need. II. EXPENSIVE: The currency principle demands that every note issued must be covered by value of gold. It is the game of richer countries and not for poor countries. III. IDLE GOLD RESERVES: The gold kept by the note issuing authority remains useless. The principle is not acceptable in real world.
2. BANKING PRINCIPLE
J.W. Gilbert was a leading banker in England. He says that only a percentage of notes in circulation should be covered by gold. It means there is no need to keep 100% gold or silver against note issued. The total money supply can expand or contract according to the needs of trade and industry. The notes over the needs will be returned to bank for encashment.
ADVANTAGES:
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I. Elastic supply:
The principle gives an elastic supply of currency. As there is no restriction of 100% backing of gold so central bunk can issue currency in response to changes in economic and monetary situation.
V. HELPFUL IN EMERGENCY:
The principle is helpful in emergency. It means in time of need such as war, flood, famine, govt. can print notes with out keeping 100% reserves.
DISADVANTAGES:
I. DANGER OF OVER ISSUE:
This system is unsafe because there is always a danger of over issue of currency notes.
ADVANTAGES:
(I) SAFETY:
This method ensures the safety of note issued. It acts as brake on the undue expansion of money supply.
DISADVANTAGES:
(I) INELASTIC:
This system is relatively inelastic. As when there is need of more notes beyond the fiduciary limit every note should be fully backed by gold reserves.
21 This system is suitable to those economies where money needs do not change very much and frequently as was the case before world war I.
ADVANTAGES:
(I) ELASTIC:
This system is more elastic than fixed fiduciary system because under it the central bank can issue a larger amount of notes.
DISADVANTAGES:
(I) UNABLE TO CONTROL PRICE:
This system does not help in controlling sharp fluctuations in prices which brings inflation in the economy.
ADVANTAGES:
(I) ELASTIC:
The money supply in this system is very elastic.
(II) ECONOMICAL:
It is very economical because only a fixed amount of gold, silver, and foreign exchange has to be kept under this system.
DISADVANTAGE:
(I) DISADVANTAGE ISSUE OF CURRENCY:
There is always a danger of over issue of currency in this system.
ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
22
METHOD IN PAKISTAN:
Till 1965, the note issue in Pakistan was base on proportional reserve system. In 1965, the SBP (Stat bank of Pakistan) adopted fixed minimum reserve system. The amount was fixed out 1.2 billion rupees. It can be changed by the government in consultation with the state bank. This method was the safety as well as the elasticity.
CONCLUSION
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ANSWER:
Inflation means a situation where the general price level increases over a period of time. Inflation is term which is known to most of us. It is criticized by many of us. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
DEFINITIONS:
ACCORDING TO R.P. KENT:
Inflation is nothing more than a sharp upward movement in the price level.
ACCORDING TO CROWTHER:
In the state of inflation the prices are rising c.e. the value of money is falling.
ACCORDING TO ACKLEY:
A persistent and appreciable rise in general price level.
ACCORDING TO COULBORN:
Too much money chasing too few goods.
TYPE OF INFLATION:
A. ON THE BASIS OF RATE OF INFLATION:
(I) CREEPING INFLATION:
It is a situation where the increase. In the price level is very slow. i.e. 2% P.a. (Japan, USA, Singapore)
(II) WALKING INFLATION: In this situation increase in price level is more than
creeping inflation i.e. 5% P.a.
(III) TROTTING INFLATION: In this situation prices rise more than they are in
creeping inflation i.e. 5-20% (Pakistan, Greece, and Italy).
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CAUSES OF INFLATION.
I. INCREASE IN SUPPLY OF MONEY:
The rapid increase in money supply is the major cause of inflation. It increases the demand for gods and services. And due to more demand, the price level starts rising. He who not economizes will have been struggle.
2. DEFICIT FINANCING:
When the govt. expenditures exceed then revenue in a budget it is called budget deficit. In order to fill up this gap the government prints more notes. This process again increases the supply of money in the country and price level. 1952-1.2 billion but in 1998- 447 billion.
4. FOREIGN REMITTANCE:
The people who work abroad they send money to their relatives and families. Due to increase in the income of the people, they increase their demand and hence the price level goes up. 195248.7 million 19981500 million. Income demand for goods P
5. POPULATION EXPLOSION:
The increase in population, increases the demand for goods and services. Due to this reason the price level shows up ward trend.
6. BLACK MONEY:
The black money earned through smuggling, tax evasion etc. increase the demand for Luxurious goods. So this in factor of inflation. Black money is estimated about 25% of GNP.
7. IMPORTED INFLATION:
As we import a lot of goods from the other countries. If the price of the imported goods is high, it further increases the price level in the country.
8. DEVALUATION OF RUPEE:
Pakistan has devalued its currency in order to correct the BOP deficit. Yet at has not achieved its goods. Due to devaluation, the import become expensive which increases the price level in the country.
25
3. CONCESSION IN TAXES:
The government has lowered the tax rates of income tax excise duty, custom tariffs. The tax reform introduce will control inflationary pressure in the economy.
4. COMPULSORY SAVING:
The government may start Schemes of compulsory savings to take from each person some portion of his earnings. The purpose is to decreasing purchasing power
5. CREDIT CONTROL:
The central bank can control credit in order to control inflation. Money is needed to do business. The limit of credit is fixed by govt. from time to time. Monetary authority should act according to the credit ceiling approved by the state.
6. CONTROL ON IMPORTS:
The govt. must reduce its imports of luxury goods. The govt. must adopt the policy of import substitution and save its foreign exchange.
7. PRICE STABILITY:
Price committee must be formulated to control the price level. The weekend markets must be introduced in order to stabilize the price level. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
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8. OVER VALUATION:
The govt. can overvalue its money in terms of currencies of other countries. The holder of overvalued money can buy more goods and services than before. V.m p
9. INCREASE IN PRODUCTION:
The increase in production of goods is helpful to increase the supply in the market. The increased production can regulate the price level.
CONCLUSION:
The causes of inflation may operate singly or combination of one another. Inflation is bad for economy and measure should be taken to stop it. No country can be on the way to progress unless inflation is under control.
Q 8: WHAT IS DEFLATION? WHAT ARE ITS CAUSES AND REMEDIES? 2005-2006 ANSWER:
DEFINITIONS: ACCORDING TO G. THOMAS:
Deflation is a reduction in the general price level due to a decrease in the economic activity of a nation.
27 Deflation refers to a sustained decrease in the general price level. it is clear that deflation reduces the general price level that is due to decrease in output and employment. It is a set back to the rate of economic growth in the country.
CAUSES OF DEFLATION:
1. EXCESS PRODUCTION:
The production of goods and services in excess of its demand is a cause of deflation. The price level comes down. The producers may not be able to continue their output at present level.
2. HIGH TAXES:
A high rate of income taxes means the low purchasing power of general public. The decrease in income due to taxes forces the people to buy less than before. High tax forces the people to lower their demand rate.
3. LESS DEMAND:
The decrease in demand is cause of deflation. The demand may decrease due to decrease in income, wages and population. The excess supply and less demand brings deflation in the economy.
5. SURPLUS BUDGET:
The surplus budget is a cause of Deflation. The govt. revenue is excess as compare to expenditure. The supply of money reduced in the market. The income of peoples comes down; demand for goods is lowered leads deflation.
6. EXCESS SAVING:
Excess saving is a cause of deflation. The banks can start saving scheme to collect deposits from general public. When saving exceeds the desirable limit there is deflation.
7. LOWER PROFIT:
The low rate of profit is a cause of deflation. The businesspersons cut their profits to retain the market. The lower profits induce the people to cut the activates so there is deflation.
28 The decrease in population can lower the demand for goods and services. All marketing activities are useless when there is no demand. The population is a source of demand for purchase of goods.
CONTROL OF DEFLATION:
1. CURRENCY EXPANSION:
The central bank can issue new notes to increase the supply of currency in the country. The demand increases which raises the level of production. In this way deflation is driven out of the economy.
2. CREDIT EXPANSION:
The central bank can ask commercial banks to expand the volume of credit in the country. The rate of interest is lowered. The business activities goes up and deflation comes to an end.
4. CONSUMER CREDIT:
The loans are provided to consumers for the purchase of household assets. The number of installments can be increased to provide relief to the borrowers. In this way more money remains in the business.
5. TAX DECREASE:
Deflation can be controlled through tax decrease. The rate of tax may be seduced so that income of people may increase. The amount saved can be used for purchase of goods and services. The demand for goods goes up.
7. PUBLIC WORKS:
The govt. can start public works programmer to eliminate deflation the amount is transferred from govt to general public. The demand for goods increases and there is increase in production.
8. NEW INVESTMENT:
The investment can be made to set up new factories and mills. The production and employment increases due to new investment.
9. PRODUCTION CONTROL:
The control over production can help to control deflation. The producers can fix production quota for each producer. The control over supply is necessary to maintain price level.
29 The exporters can play their part for selling extra out put in the overseas market. The businessmen can reduce the worries of deflation.
CONCLUSION
Q9: DIFFERENCE BETWEEN INFLATION AND DEFLATION? ANSWER: DEFINATION OF INFALATION AND DEFALATION
INFLATION DEFLATION
1. PRICES: 2. output:
The general price level goes up due to inflation in The general price level comes down due to deflation in the economy. the economy. The out put of goods and services increases The out put of goods services decrease due to due to inflation in a free market economic system deflation. In a free market economic system.
3. EMPLOYMENT:
The rate of employment increases due to ever The rate of employment decreases due to decreasing activities in the country. increasing a activities in the country. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
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4. BUSINESS:
The business earns higher profits due to rising The business earning is disturbed due to prices. The production factors are paid at old deflation. The prices come down. the unsold rates but goods are sold at current market prices. stock become a problem for the business person during deflation.
5. IN VESTMENT:
The shareholders feel comfort due to The shareholders feel sorry due to deflation. The inflation. The share prices and dividend increases investment is unable to generate reasonable income for them due to low activities. due to expanding business activities
6. INCOME:
Inflation does not reduce the national income Deflation reduces national income of the country. of the country. The business work do not shrink The low business activities shrink the size of income. the size of income.
7. AGRICULTURE:
Inflation is a friend of agriculture. The prices Deflation is an enemy of agriculture. The prices of goods and services go up. The farmers are of goods and services comes down. the farmers feel burden due to it. happy due to it.
8. SAVING:
The saving is looted by inflation due to The savers are encouraged due to deflation. They decreasing value of money. The savers are can buy more goods with their saving due to decreasing prices. discouraged due to increasing prices.
The boarding of goods is profitable during The hoarding of goods becomes unprofitable due to decreasing prices. inflation. The Quality of output is adversely affected The quality of output is maintained during by inflation. The producers pay attention to deflation. The producers can attract customers due to better quality of goods. quantity rather then quality.
11. EXPORTS:
The demand for goods in overseas markets The exports become necessary during deflation. come down due to rising prices. The foreign The goods are cheaper for overseas customers the demand for exports increases due to decreasing customers can buy goods form elsewhere. prices.
The balance of payments position become The balance of payments position can be improved by exporting goods abroad. unfavorable due to inflation. It is easy to control inflation the governments It is difficult to control deflation. The government can fix the prices of goods and services for some has to do a lot of work through fiscal and monetary measures. time.
14. TIME:
The time of deflation is longer. It takes a long The time period of inflation is short. It is easy to fall. The government can take measure to time to go up. The government can regulate the activities through various measure. regulate the activities.
15. speculation:
Inflation helps the speculation activities. The Deflation can not help speculators to earn profits. businessmen put their energies to make quick Artificial demand can not attract investor to profits. They do not take care of genuine indulge in non-productive activities. productive work.
16. GOVERNMENT:
The government is in trouble due to The govt. revenue can be used to complete the inflation. The revenue raised loses its value. The projects. But deflation is also a burcine on the on going projects remain incomplete due to high economy in the years to come. prices.
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17. estate:
The real estate owner lose their purchasing The real estate owners feel happy as they receive power due to high prices. They collect rent at old rent at old rates but now prices are low so they can buy more goods with the same income. rates according to the agreements already made.
Father of Nation
Q10: CRITICALLY EXPLAIN QUANTITY THEORY OF MONEY? OR Q: HOW TO VALUE OF MONEY IS DETERMINED?
ANSWER: CLASSICAL, APPROACH. INTRODUCTION:
The quantity theory of money was presented by jean Bodin in 1568 for the first time. Afterward John Law, David Hume and J.S. Mill have also worked on this theory. But it was popularized by professor irving fisher with the help of an equation in his book purchasing power of money in 1911. By value of money is meant the purchasing power of money over goods and services with in a country. What a monetary unit (e.g. Rupee) can buy represents the value of money of the rupee. The relation between value of money and price level is an ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
FISHER,
TRANSACTION
BALANCE
32 inverse one, and relation between quantity of money and price level is direct one. When price (P) rises, the value of money decreases .and vice versa. The quantity theory of money states that the quantity of money is the main determinant of the price level or value of money.
DEFINITION:
ACCORDING TO IRVING FISHER:
Other things remaining unchanged, as the quantity of money in circulation increases, the price level also increases in direct proportion and value of money decreases and vice versa
ASSUMPTIONS OF THEORY:
The quantity is based on some assumptions:
EQUATION OF EXCHANGE:
Prof Irving fishers expressed the relationship between the quantity of money and its value of money in the form of equation. PT= MV+M1V 1 PT= total demand for money. From the equation: P= General price level. M= Quantity of legal tender money. M1= quantity of bank/ credit money. V= velocity of circulation of legal tender money. V1= velocity of circulation of bank money. T= total transaction. The above equation shows that a proportional change in quantity of money brings of money brings proportional change in prices.
NUMERICAL EXAMPLE:
Let M=100, M1=200, V=3, V1=3 T=90. Putting the values in the equation of exchange. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
33 P= (100x3) + (200x3) P = 300+600 =10 In order to prove that variation in money supply produces proportional change in price, we now double the supply of money by keeping other variables Constant: P= (200x3) + (400x3) = 600+1200 = 1800 =20 90 90 90 The general price level has doubled by doubling the supply of money. Now we half the supply of money and keeping V, V1 and T constant. P2= (50x3) + (100x3) = 150+300 = 450 =5 90 90 90 The price is now one half what it was before and value of money is double now.
ms2
mso A
ms1
B
C 50 100 200
Fig (a) shows, the direct relationship between the supply of money and general price level. When total money supply MSo and price is Po. When we increase the supply of money from Mco to MS1 price also increases from Po to P1 and in the same way when we decrease the supply of money from MSo to MS2, the price also comes down from Po to P2. Fig (b) shows the inverse relationship between the supply of money and price level. As the supply of money is MSo the value of money is VMo. By increasing the supply of money Ms. From MSo to MS1, value of money decrease from VMo to VMI and vice versa.
Quantity of money.
CRITICISM:
Quantity theory has been criticized on the following grounds:
34
CONCLUSION:
Although the quantity theory in its original and crude form has been rejected. Yet all modern theories accept that change in the quantity of money is one of the factors affecting price level. -----------------------------------------------------------------------------------------------------------Come forward as servants of ISLAM, organize the people economically, socially, educationally and politically and I am sure that you will be a power that will be accepted by everybody.
By Father of Nation
ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
35
Q11: DEFINE THE TERM TRADE CYCLE. EXPLAIN ITS CHARACTERISTICS DESCRIBE THE DIFFERENT PHASES OF THE TRADE CYCLE: (2002), 2003(S).
ANSWER:
MEANING:
The fluctuations (ups & down) in business activities which originates different phases of trade (business) cycle. So the periodic fluctuations in economic activities of a country is called trade cycle.
DEFINITION:
According to Hanson, business cycle is the fluctuations in the following variables: (1) Employment (2) Output (3) Prices.
EXPLANATION:
The fluctuations in the economy may be positive or negative. If the change in fluctuations is called period of Good Trade of BOOM. On the other hand if the changes in characterized by low price and high unemployment is called period of bad trade or depression. If we see the history of the world, we see that sometimes there is a period of goods trade and some times a period of bad trade.
2. RECURRING CHANGE:
There is a recurring change in the phases.
3. RHYTHMIC CHANGE:
The business activities are rhythmic and balanced.
4. SHOW RECOVERY:
The movement of business activity is slow from depression to boom.
5. RAPID DECLINE:
There is rapid decline of business activity from boom to depression.
6. EMPLOYMENT LEVEL:
The employment level falls with the contraction of business activity and rises with its expansion.
7. TIME PERIOD:
The time period between the two successive booms is one to two years but it may increase from 8-10 years or even up to 50 years.
8. WORLD WIDE:
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36 A trade cycle is not the problem of one country. It is world wide in nature.
9. PRICE MOVEMENT:
The prices move downward with the reduction of activity and upward with the expansion of activity.
IMPORTANT:
According to Hanson, trade cycle may be a period of over 80 years. Trade cycle thus in short run fluctuation in economic activity. PHASES OF TRADE (BUSINESS) CYCLE: There are four phases of trade cycle written below:
TRADE CYCLE
Depression
Recovery
Boom
Recession
ECONOMIC ACTIVITY
RECOVERY OR REVIVAL:
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37 After the depression has lasted for some time a ray of hoe appears in the business horizon. Businessmen start thinking about their businesses. They decide to repair their industrial units. And alert the factors of production. This phase is characterized by: 1. 2. 3. 4. 5. 6. 7. 8. 9. Optimistic approach of businessmen. Investment in consumer and produce goods starts. Profit margin increases. Per capital income is increasing. An upward trend in national income. Prices show upward trend. Bank starts advancing loans. Employment rate is increasing. Propensity to consume is increasing.
RECESSION:
In this period economy moves from boom to depression. The periods of boom does not last forever. In order to increase production in boom, less efficient factors of production are employed at high cost. Due to increased demand, the production falls short which result in increase in prices. The main characteristics of recession are as under: 1. Pessimistic approach of businessmen. 2. Aggregate demand starts decreasing. 3. Per capital income is falling. 4. National income also starts falling. 5. Over-production tasks place. 6. Investment starts decreasing. 7. Prices also come down. 8. The profit margin decreases. 9. Unemployment creates in the economy. 10. Banks feels hesitation in advancing loans.
CONCLUSION:
In a nutshell, trade cycle means the whole course of business activities which passes through all phases of prosperity and adversity. Business cycle generally refers to those fluctuations which take place in the business enterprise and occurs with a fair degree of regularity. ------------------------------------------------------------------------------------------------------------
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38
1. WARS:
During war, the resources are used for the production of armaments. As such the output of capital and consumer goods greatly falls. The fall in output, income, profit etc, causes contraction in economic activity.
3. REVOLUTIONS:
The revolutions disturb the economic development. The economy leads towards depression any disturbance slows down the rate of new investment. The foreign investors hesitate to bring their capital into the country. If there is boom it works for depression.
4. POPULATION:
The population increases aggregate demand. The investment, employment and income go up. There is tendency towards boom. High rate of inflation will make the bankers nervous. They will take back loan due to which investment level will shrink.
5. SCIENTIFIC BREAKTHROUGH:
The discovery of new material, machines, and methods helps to produce more at low cost. The invention leads to high level of competition in the economy. There is big investment in the economy. There is tendency towards boom.
6. INNOVATIONS:
Innovation includes improvement in existing ideas and process. Many new business houses are established and boom takes place. When the products of the innovation reach the market the old products lose the market.
7. GOVERNMENT POLICES:
Govt. policies at home and abroad bring changes in total spending and hence in the level of economic activity.
9. WEATHER:
The good and bad weather affect the production in agriculture sector. When weather conditions are bad there is low production in agriculture. The result is that there is low production in industrial sector. The demand Is the same but output is low so price level goes up.
ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
39
B. INTERNAL FACTORS:
1. UNDER CONSUMPTION:
There is too much saving during boom which reduces the level of consumption. The prices goes on increasing but wages lag behind. The profit of rich increase at higher rates but income of the poor does not increase as compared to price level. The result is that demand for consumption goods decrease.
2. INVENTORIES:
Trade cycle occurs due to unsold stock. There is excess supply of goods and services but people are unable to buy goods of their own choice. The unsold stock results in depression.
3. IMPORTS:
The imports increases the supply of goods in the economy. If the total stock of goods in more than its demand there is depression.
4. MONEY SUPPLY:
The changes in money and credit supply have a major effect upon the level of economic activity . an expansion in money and credit supply stimulates economy activity and its contraction brings down economic variables over period of time.
5. OVER INVESTMENT:
Excessive investment in capital goods industries brings upswing and a fall in investment brings downswing in economic activity.
7. AGGREGATE MARKET::
The business cycle can also be caused by changes in aggregate demand and change in aggregate supply. The contraction phase of the business cycle is caused by decline in aggregate demand and expansion phase by increase in aggregate demand.
2. MARKET OPERATION:
The central bank can buy and sell bills and government securities. When money supply is less as compared to its demand the central bank buy the securities and vice versa. The purpose is the regulate supply.
3. RESERVE RATIO:
The central bank can increase or decrease the reserve ratio. The rate of reserve is decreased during depression, and increase in expansion.
4. SELECTIVE CONTROL:
The central bank can provide credit to one sector at low rates and at high rate for another sector. The central bank can check the loans granted by commercial banks, to control trade cycle.
B. FISCAL POLICY:
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40
(2) TAXES:
The state can increase or decrease rates of taxes. The government can raise more taxes for contraction of money supply. The tax rates may be lowered to provide excess money supply.
(3) BUDGET:
The government can prepare surplus budget during boom period. There is need of deficit budget during deflation. The government can use budge teary measure alone with other methods to control trade cycle.
4. PUBLIC DEBT:
The government must take loans during depression to meet various needs. In case of boom the debt should be repaid. The government can overcome the difficulties of low business activity through public debt.
5. IMPORTS:
The government can allow import of goods, which are needed by public. during depression there is no need to import the items, but when there is boom period the supply of goods can be maintained through imports.
INTERNATIONAL MEASURES:
1. PRODUCTION CONTROL:
The production control measures can be made at international level. The goods produced in excess of demand create problems. The producers can fix quota for production at world level. In this way trade cycle can be controlled.
2. BUFFER STOCK:
Buffer stock can be kept in warehouses. When production is low the suppliers can meet the demand from such stock. In case of excess production they hold surplus stock. Control over supply means control over trade cycle.
3. INVESTMENT CONTROL;
The government may allow investment in an area where there is low investment. Excess investment in any sector may lead towards depression. There is need for balanced investment in all economic sectors.
CONCLUSION
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By Father of Nation QUIED E AZAM MUHAMMAD ALI JINNAH RA With faith, discipline and selfless devotion to duty, there is nothing worthwhile that you cannot achieve.
ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
41
Q13: WHAT IS AN INDEX NUMBER? DISCUSS ITS CONSTRUCTION, ADVANTAGES, LIMITATION AS WELL. ALSO EXPLAIN AND CONSTRUCT THE SIMPLE INDEX NUMBER AND WEIGHTED INDEX NUMBER? 2003
ANSWER:
A large number of commodities are offered for sale in every country of the world. The prices of commodities sometimes fall or rise. So in order to find the relative changes in prices level we use index number.
DEFINITION:
D. GREENWALD: index number is a measure of relative changes occurring in a series
of values compared with base year.
ACCORDING TO A. HABER:
an index number is a ratio, usually expressed as a percentage of prices, quantities, or values that relates a given period with a comparison period
(IV) WEIGHTING:
Each commodity is a weight. The weight shows the impotence, people give to different commodities.
APPROPRIATE FORMULA:
CONSTRUCTION OF SIMPLE AND WEIGHTED INDEX NO:
According to simple index number all items are equally important for the people. But in practical life it is not so. The commodities should be given due importance according to their consumption.
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42 Price in base period x 100 or Po 1. 25 x 100= 125 20 2. 10 x 100 = 200 5 3. 30 x 100 = 200 15 4. 50 x 100 = 125 40 5. 450 x 100 = 2250 200 price index in 200 = R = 875 = 175 N 5 As the index is 175 which means that the price level rose 75% in 2000 over 1990.
A B C D E
5 4 2 3 10 w=24
20 5 15 40 200
25 10 30 50 450
The weighted index in 200 = WR = 4450 = 181.2 W 24 The weighted price index number is more accurate than the simple index number. the index 181.2 shows that there is 81.2% rise in prices in 2000 as compared to 1990.
2. FORECASTING:
Index numbers are very helpful for forecasting economic and business conditions.
3. POLICY MAKING:
Many economic policies are formulated with the help of index number.
6. PRODUCTION:
Index numbers are useful for measuring the change in production level. The goods and services produced during one year are compared with the goods and services output level. The government can decide to import or export goods for welfare of people.
7. INVESTMENT:
ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
43 Index number is helpful to note the changes in investment. The stock exchange prepares index numbers to show the investment made by people from period the period.
8. SALES:
Index of sales is prepared to find out the quantities and value of total sale between times.
2. SELECTION OF COMMODITY:
The pattern of consumption of all categories of people is not the same. So selection of commodities is a difficult job.
3. PRICE QUOTATIONS:
An index number may be for wholesale or retail prices. Whole sale prices are easy to obtain, but they do not show the real cost of living.
4. WEIGHTING:
The weight (preference, importance) people give to different commodities in base year may be changed, in current period due to change in taste and income etc.
5. AVERAGE:
An index number is an average. An average can not give a complete picture of the situation.
CONCLUSION
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44
Q14: DEFINE FOREIGN EXCHANGE. DISCUSS MAIN OBJECTIVES OF FOREIGN EXCHANGE CONTROL. ALSO POINT OUT THE METHODS EMPLOYED FOR EXCHANGE CONTROL? (2000, 2001, 2002, 2002(S). ANSWER: INTRODUCTION:
The term foreign exchange denotes either a converted into another or means and methods by which one currency is exchanged for another. It is related to the exchange methods and with international trade are made.
ACCORDING TO HARTLEY:
Foreign exchange is a mechanism by which international indebtedness is settled between two countries.
EXCHANGE CONTROL:
Exchange control refers to restrictions put by the government on the private foreign exchange dealings. In Pakistan foreign exchange regulation act 1947 is used to control and regulate foreign payments, import and export of currency, bullion and foreign exchange.
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45
11. UNDER-VALUATION:
It means to fix a rate, lower than it would be in a free floating exchange system. The basic aim of this to protect local industry and favour of local exporters.
3. BLOCKED ACCOUNTS:
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46 If a country prohibits the transfer of funds of foreigners held in its banks, the accounts are said to be locked and funds to be frozen. The account holders can not draw cheques with out the permission of the central bank of the blocking country.
4. CLEARING AGREEMENTS:
Under this system, the governments of two countries agree to clear the accounts in home currency through their central banks.
7. COMPENSATION AGREEMENTS:
According to this agreement the two countries import and export the commodities of equally valued. Since no payment is made to foreign exchange. Problem of foreign exchange doesnt arise.
8. PAYMENT AGREEMENT:
The payment agreements are made between a debtor and creditor country. This method is used in such a way that debtor country make more & more exports to creditor country and import less and less quantity form it. In this way the transactions are sttled and cleared.
CONCLUSION
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47
Q15: DEFINE MONEY MARKET? ALSO DISCUSS ITS FUNCTIONS, INSTRUMENTS AND MAJOR PARTICIPANTS? ANSWER?
Money market is a financial market for short term loans. It is a market for short term borrowing and lending of funds.
2. SUPPLY OF FUNDS:
Money market is responsible for supply of funds. The money supply is a source of earning income for members of money market. The interest rate its follows the bank rate fixed by the central bank. The borrowers can approach the members of money market. The lenders must be satisfied with the securities offered for loan. The loan is provided on short term basic for meeting the working capital needs. Recovery may be made in installment or as a whole.
4. FINANCIAL STABILITY:
It promotes financial stability. A money MKT promotes financial stability. By enabling the transfer of funds from one sector to the other. Such flow of funds is regarded as essential for growth of trade and commerce in an economy.
48 The better use of funds is possible through money market. The idle funds in one sector are transferable through money market to more productive sector. If one sector is not earning reasonable profit the money market rate attracts the investor to shift their funds. The funds so collected are given to those people who are able to generate more money.
1. TREASURY BILLS:
The treasury bills are the short term debt instruments issued by the central bank of a country they are always issued on discount basis and the period of maturity ranges from 3 to 12 months. The governments of a country pays a set amount at the maturity of the bill and have no interest payments treasury bills are the most liquid of all instruments.
2. BILLS OF EXCHANGE:
Bill of exchange is another important short term debt instrument. The commercial banks advance loans by discounting bills of exchange of exchange of their clients. These loans are granted to meet the working capital requirements of the firms.
3. CALL LOANS:
Call loans are the loans which are granted for a very short period not exceeding seven days in any case. Bill brokers and dealers in the stock exchange generally borrow money at call from the commercial banks. The borrowers have to repay the money immediately whenever the bank call these loans back. No securities are needed against these loans.
5. BANKERS ACCEPTANCE:
A bankers acceptance is a draft issued by a firm upon a bank and accepted by it. The bank, here, is required to pay to the order of a specific party or bearer a specific party or bearer a specific sum of money at some future date. These are mostly used in financing the commercial transaction both with in and outside country. The accepted draft can be sold or discounted in the money market.
2. CENTRAL BANK:
Central bank is the top institution of the money market. Its role is not confined to just participation. In the market but also extends to the regulation of the market. In this capacity its role is crucial and delicate. On one hand it has to make sure that market is functioning alright and on other hand it has to make sure that unhealthy practices do not take place in the market.
3. COMMERCIAL BANKS:
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49 Commercial banks are active participants. On one hand, they act as suppliers of funds in the market by providing short term loans to their customers under scheme of temporary running finance and by discounting their bills of exchange and, on the other hand, they also act positively on the demand side. The major buyers of PAKISTANS GOVERNMENTS treasury bills are commercial banks.
6. ACCEPTANCE HOUSES:
These institutions facilitate the business by making bills of exchange tradable on the market. They do so by accepting the bills of exchange.
7. OTHER PARTICIPANTS:
Every institution or individuals who buys or sells a short-term commercial paper becomes a participant of the money market. I.e. co-operative banks, IDBP, PICIC, HBFC. What is capital market?
3. CAPITAL MARKET:
Financial market whether it is a money market or capital market performs an essential economic function. It mobilizes surplus funds and provides these to those to those who have a shortage of funds. Money market is a financial market which deals in short term securities and loans. Whereas capital market is a market in which long term debt having maturity of one year or greater is traded.
I. NON-SECURITIES MARKET.
In Pakistan, the non-securities market consists of (a) commercial banks (b) development finance institutions such as PICIC, NDFC, etc, and (c) specialized banks for providing loans to agriculture and industry such as ADBP, IDBP etc. Pakistan etc. Pakistan non-securities market is now well developed. It has helped in raising a large portion of its investment funds form national savings these national saving are mainly routed through commercial banks and national saving schemes. The national saving Organizations, modarabas and leasing companies are providing long term loans to industry for the purchase of fixed assets such as machinery, tools, construction of buildings etc. a portion of the total national investment is being funded from ordinary and concessional loans from bilateral and multilateral financial institutions.
2. SECURITIES MARKET:
Securities market deals with equity shares. It has two main components (a) the new securities market and (b) secondary market.
50 The secondary market also called stock exchange specializes in buying and selling of old shares. The shares are purchased and sold by investment banks, firms and individual investors through the members. At present there are three stock exchanges working in Pakistan. The largest and also the oldest one is Karachi stock exchange it has 761 companies listed on it. The third is the Islamabad stock exchange which has 224 registered companies. The securities and exchange commission of Pakistan (SECP) through various measuries is increasing the efficiency of the stock exchanges and is also ensuring the protection of the interest of investor.
1. SHARES:
Finance is essential to any business. The larger the business grows, the wider the sources of finance should be available to it. A public company raises capital through the sale of shares called equity financing and by borrowing named as debt refinancing. Shares are the equity claims on the net income and assets of a company. The holders of ordinary shares or equity shares are the real owners of the company. In case of bankruptcy, claims of share holders are paid only after the other claims have been paid.
2. DEBENTURES:
Debenture is a long term loan to the company with very strong credit rating. Each year debenture holders receive a fixed rate of interest whether a company is making profit or not. If the company goes bankrupt, the debenture holders must be paid before any other claim is met.
3. MORTGAGES:
Mortgages are long term loans provided to individuals, firms against tangible security. When the loan is not paid in accordance with the terms of the loan, the little of the property is transferred to the creditor. The commercial banks and specialized financial institutions are actively engaged in providing long term finance to business in Pakistan.
1.
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51 The securities market both primary and secondary help the companies to raise long term capital. If there were no such organized markets, it would then be very difficult to exchange their shares for cash. The stock exchanges provide this facility. The sale and purchase of shares of the company does not affect the capital raised by it. The life of the company remains unaffected. 2.
3.
SAVING INCENTIVES.
If in a county, the capital market is organized, it encourages people to save money. If there has been no banking and non-banking financial institutions to collect savings of the people, it would have been diverted to unproductive channels such as purchase of Jewelers, land, gold etc.
4.
5.
6.
5. The demand for short term loans comes from 5. The demand for long term loans comes from government industrial and commercial concerns, private sector manufacturing industries, merchants, stock exchange. companies and government. 6. The money market revolves mostly around 6. Commercial banks play a par but they are not the commercial banks. the centre of activation in the capital market. ------------------------------------------------------------------------------------------------------------
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52
Q 16. CRITICALLY EXPLAINS MODERN THEORY OF MONEY? (2005 (A) 2003 (A).
ANSWER: INTRODUCTION:
Milton Friedman of Chicago school developed modern quantity theory of money in 1956. According to Friedman people hold money not for specific purpose such as transaction speculative and precautionary motives. The demand for money in fact is a wealth theory of demand. In his view money is durable consumer goods. It held for the services it renders. It yields a (give) flow of services proportional to the stock. Thus the money is demanded as an asset or capital. The theory of demand for money is the theory of assets demand for money.
4. DEGREE OF RISK:
The degree of risk also affects the demand for an asset. Holding other things constant, if an asset risk raises relatively to that of an alternative asset, its quantity of demand for money will fall.
5. LIQUIDITY:
Another factor which affects the demand for an asset is how quickly it can be converted into cash with out incurring large costs. If an asset is highly liquid relatively to an alternative asset, other thing remaining unchanged, the greater will be its quantity demanded and vice versa. Liquidity D.M
STATEMENT OF THEORY:
The theory of assest demand indicates that the demand for money is a function of resources available to individuals and the expected return on other assets relative to the expected return on money. Friedman developed simplified version of the demand for money. His money demand equation is expressed as: MD=F(YP) In Friedmans view, the demand for money is a function of permanent income (YP). The permanent income is affected by the yield on securities and human and non human wealth holdings. According to Milton Friedman, demand for money is insensitive to the changes in the rate of interest.
53 The Milton Friedmans quantity theory of money is criticized on the following grounds:
3. PROPORTIONAL RELATIONSHIP:
Friedman tested the proposition that demand for money varies directly and proportionately to changes in the price level. The fact is it is more than proportionately changes in the level of income.
CONCLUSION
Q:1 WHAT IS BANK? EXPLAIN DIFFERENT KINDS OF BANK? (2003, 1999) ANSWER: INTRODUCTION:
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54 The word bank is derives from Italian word BANCO and French word BANQUE which means a bench. It is also derive from German word bank which means a heap and stock of money. Generally, it is said that A financial institution which deals in money and credit. It borrows and lends money and credit. It borrows money and lends money and in this way acts as financial intermediary between the lender and borrower We can say that: The banker is a man who lends you an Umbrella when it rains, and takes it away when the weather is fair.
DEFINITIONS:
ACCORDING TO PROF-KINLEY:
A bank is an institution which receives deposits and advances loans
ACCORDING TO H.L.HART:
A banker is one who, in, the ordinary course of his business, honors cheques drawn upon him by persons from or for whom he receives money or current account
ACCORDING TO PROF-CROWTHER:
A bank collects money from those who have it spare or who are saving it out of their incomes. It lends money to those ho require it
KINDS OF BANKS:
Banks can be classified on the basic of: A) FUNCTIONS: B) OWNERSHIP C) REGISTRATION
FUNCTIONAL CLASSIFICATION:
(I) COMMERCIAL BANK:
The most popular kind of bank is the commercial bank. The commercial bank receives surplus money from the public and lends to others who needs funds. The bank collects cheques, bill of exchange etc for customers. It transfers money from one place to another. The purpose of a commercial bank is to earn profit. The main commercial banks of Pakistan are national bank, Habib Bank, Allid Bank, United Bank; MCB etc. these banks play a vital role in economic development.
55
56
CONCLUSION
Q2: DEFINE COMMERCIAL BANK. DISCUSS ITS FUNCTIONS IN DETAIL? 1999, 2001, 2002, (S) 2003(S) 2006) ANSWER:
A commercial bank is a public limited company. It is set up under companys ordinance 1984. The operations of commercial banks are controlled under banking companys ordinance 1962, foreign exchange act 1947 and stat bank of Pakistan act 1956. The bank receives deposits from general public. Different accounts are opened to collect ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
57 money. The bank keeps some money to honor cheques of customers. A large part of such money is provided to people as loans. The bank is important for government, businessmen and general public. A commercial bank is something with which every one of us is familiar. Commercial bank plays very important role in economic development of the country. It is often called the HEART of financial system of an economy.
DEFINITIONS:
ACCORDING TO CAIRN CROSS:
Bank is a financial intermediary, a dealer in loans and debts.
ACCORDING TO SAYERS:
Banks is an institution whose debts are widely accepted in settlement of other peoples debts to each other.
ACCORDING TO CROWTHER:
Bank is a dealer in debt of its own and other people.
BASIC FUNCTIONS:
1. ACCEPTING DEPOSITS:
Bank accept deposits from those who have surplus money in their in their hands but they cant use it in a profitable way. So banks give them opportunity to deposit their money and enjoy profit.
a. CURRENT ACCOUNT:
In this account the depositor can deposit and with draw money at any time. Normally traders, businessmen, are interested to open this account - bank pays no interest on this A/Cs. A cheque book is given to the account holder to with draw his money.
b. SAVING ACCOUNT:
This account is suitable for those people who have small level of savings. In this account, a nominal interest is paid to customer. Cheque book is given to account holder.
2: ADVANCING LOANS:
The bank gives loans in order to earn profit. In this way it accepts deposits at low rate of interest and advances loans at high rate of interest. The difference becomes profit of the bank. Advances are given in the following forms.
a. OVER-DRAFT:
This is a short period financing facility. In this facility, the bank sanctions that the customer can with draw his money over and above the balance lying in the bank. This facility is provided to current a/c holders. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
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c. CASH CREDIT:
In this loan facility the bank sanctions a particular amount. The facility is provided against security.
SECONDARY FUNCTIONS:
1. TRANSFER OF MONEY:
The banks transfer money from place to place by means of banks draft, collection of cheques, telegraphic transfer and direct debt. The banks purchase bills of exchange to help their customer for collection of money.
3.
INVESTMENT
OF
FUNDS:
the banks can invest funds in stocks shares and bonds. As per law commercial banks invest at least 25% of their deposits in securities.
6. STATUS REPORT:
The commercial bank act as referee for supply of information about its customer, relating to financial position of party concerned.
AGENCY FUNCTIONS:
1. COLLECTION OF CHEQUES:
A commercial bank acts as agent to the customer to collect and make payment on the cheques. The cheques may be local or out station.
2. COLLECTION OF INCOME:
Banks collect pension, dividend, rent and interest of their customers. A credit voucher is sent to customer for information.
3. PAYMENT OF EXPENSES:
The bank makes payment of insurance premium, trade subscription, school fee and similar other expense.
59
5. TAX RETURN:
The banks act as agents of customers who are bound to pay tax to government.
6. HAJJ APPLICATION:
The bank collects hajj applications from general public on behalf of government.
7. SAFE CUSTODY.
The bank accepts valuables and other papers for safe keeping. A nominal fee is charged from customer. .
8. ZAKAT DEDUCTION:
Deduct Zakat on first Ramzan every year.
UTILITY FUNCTIONS:
1. LETTER OF CREDIT:
Commercial banks issue letter of credit in order to provide financial assistance to the customers dealing in foreign trade.
2. INFORMATION:
The banks collect and supply trade information to businessmen. The issue bulletins that provide update information about companies working abroad.
3. GOVT. LOANS.
The banks participate in debt management for government. The bank can by bonds, and other securities offered by central bank.
4. LOCKERS FACILITY:
Banks provide lockers facility to general public. Gold ornaments, documents, and their valuables can be placed in lockers.
5. TELEVISION LICENCE:
Bankers issue television licenses on behalf of Pakistan Television Corporation.
6. SHARE APPLICATION:
Bank accepts applications for subscription of shares on behalf of company. The price of shares is collected with application money.
7. FOREIGN EXCHANGE:
Banks deal in foreign exchange and facilitate both foreign and foreign travel.
8. UNDERWRITING:
Banks underwrite shares, bonds etc, issued by government, public bodies or trading corporations in order to raise capital or fund.
9. ACCEPTANCE OF B/E
Banks accept bills of exchange on behalf of customers to meet their financial needs.
CONCLUSION:
ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
60 Banks play a dominant and useful role in promoting economic development by mobilizing the financial resources of the country. In past activities of commercial bank were very limited but now commercial banks are Multi Services Organization ----------------------------------------------------------------------------------------------------------
ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
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Q3: WHAT ARE THE DIFFERENT TYPES OF DEPOSITS THAT COMMERCIAL BANKS ACCEPT? (2002)(S). OR Explain The Salient Features Of Different Types Of Accounts? What Are Different Types Of Accounts Maintained By Bank?
ANSWER:
There are many types of accounts which are kept with a bank by customers. They are named as: (i) Current account, (ii) Saving account (iii) Fixed account. The classification of bank deposits into current, saving, and fixed account is normally based on the duration (period) and purpose (aim) for which the account is maintained at a bank. The salient features of these accounts are as under?
SALIENT FEATURES:
The current account has the following features:
(9) PAY-IN-SLIP:
ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
62 The customer can use pay in slip to deposit money and cheques into bank accounts.
(10) INTRODUCTION:
Bank can open current account after proper introduction the old customers are allowed to introduce new one.
SALIENT FEATURES:
(1) WITH DRAWL OF AMOUNT:
In this account the account holder is allowed to withdraw an amount twice with in a week or month with the help of cheque. But if he wants to withdraw a big amount then he would have to give a prior notice of 7-=15 days.
(2) INTEREST:
The bank pays interest on saving account according to the prescribed rates by the central bank of the country.
(3) CHEQUE:
The customer can withdraw money through cheques.
(4) INTRODUCTION:
THE saving account is opened with proper introductions. By an old customer or an employee of bank.
FEATURES:
(1) INITIAL AMOUNT:
Profit & loss sharing (PLS) saving account can b opened with a minimum of Rs.500 or 100.
(3) INTRODUCTION:
There is requirement of introduction for opening account. The customer has to find out old customer of bank for introduction.
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63
SALIENT FEATURES:
(1) WITHDRAWL AFTER A SPECIFIC PERIOD:
This deposit can be withdrawn after a specified period of time. The time for which the money is deposited varies from 03 months to 05 years or more.
64 Joint account as the name suggest are jointly owned and operated by more than one person. It is opened in the name of two or more person. In order to draw cheque, all the person will have to sign it otherwise the bank will not honor it. However parties may give rights to anyone to draw cheques with signatures of other person.
CONCLUSION
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ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
65
Q4 BANKING, Discuss
THE PROCEDURE FOR OPENING CURRENT, SAVING AND FIXED DEPOSIT ACCOUNT WITH A BANK?
ANSWER: FORMALITIES FOR OPENING CURRENT & SAVING ACCOUNT WITH A BANK:
There are certain formalities which to be observed for opening a current and saving account with a bank. These formalities are as under:
1. FORMAL APPLICATION:
The customer is required to fill in account opening form. It is a formal request to the bank to allow him to operate the account. This form is then signed and name of introducer is also mentioned.
2. INTRODUCTION:
Introduction is very much important in order to open an account with the bank. The introducer may be old account holder or responsible person etc. a current account opener must be introduced by the person who has current account with the bank.
3. SPECIMEN SIGNATURE:
When the banker is satisfied about the customer, he agrees to open the account. The banker of the branch takers specimen signatures on the specimen signature card
4. DECLARATION:
The signature of account opener is obtained on a declaration by which he binds himself to follow the rules and regulation of the bank which are read by him or read to him.
6. ACCOUNT IS OPENED:
After the deposit of initial money, the account is opened by the banker in his books.
PAY-IN-SLIP:
Pay-in-slip is given to the customer in order to deposit the cash or cheque in the bank.
CHEQUE BOOK:
When the account is opened, the banker give cheque book which contains cheques for with drawing money from the bank.
PASS-BOOK
A pass-book is issued to the account holder. This is a copy of entries of amount deposited and withdrawn and then the net-balance.
1. SUBMISSION OF APPLICATION:
ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
66 The person will submit the form available from the concerned bank. In this from the person will write his name, period and amount of deposit. He will put his signatures and provide a copy of identity card also.
3. PAYMENT OF INTEREST:
The bank normally pays the interest after the expiry of the period. However if the customer desires the interest can be paid quarterly, half yearly, and on yearly basis.
5. TIME OF DEPOSIT:
The customer can decide time of deposit. It may be very form 03 months to 05 years
6. NO NEED OF INTRODUCTION:
The bank accepts fixed deposits account without introduction. A copy of identity card is sufficient to open such account. The banker is free from risk of loss.
CONCLUSION
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ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
67
5: WHAT IS CENTRAL BANK? EXPLAIN ITS FUNCTIONS IN DETAIL? OR DISCUSS IN DETAIL THE FUNCTIONS OF STATE BANK OF PAKISTAN? (2000, 2001, 2002, 2004)
ANSWER:
Central bank is the most important bank of a country. Its importance has increased manifold during past 50 years. It is the symbol of financial sovereignty and stability of the country. It is the head of banking and monetary system. The principles on which a central bank operates are different from those of the commercial banks. It does not work form profit motive. It acts in the public interest and earning of profit is only a secondary consideration. Before the world war first (WWI), there were a few countries which had their own central banks. After the war, the number of central banks has increased and now there is not a single country which does not have its own central bank. Central bank has different name in different countries. e.g. in USA federal reserve system, in India it is reserve bank of India, in U.K. Bank of England Pakistan, state bank of Pakistan which was established in July 1948. (The first central bank in the world is Risk bank of Sweden. Declared by central bank of country in 1668.
DEFINITION:
ACCORDING TO DR. DE. KOCK:
The guiding principles of central bank are that it acts only in the public interest and for the welfare of the community as a whole and without regard to profits as a primary consideration.
IN WORDS OF KENT:
An institution which is charged with the responsibility of managing the expansion and contraction of volume of money in the interest of general public welfare
68 The object of central bank it the direct finances towards important sectors of the economy and ensure that credit requirements of such sectors are fulfilled.
3. BANKERS BANKER:
The central bank acts as banker to commercial bank as: It holds cash reserves and deposits of commercial banks. Discounting of bill of exchange of commercial bank. Enabling the commercial banks to create credit. Clearing house facility (i.e. the settlements of mutual claims of commercial banks) Lender of last resort (granting of loans to commercial banks in the days of financial crises) Establishment of new banks (prior permission necessary). The advance policy (keeping in mind the influence of rate of interest). Every commercial bank sends a monthly statement of its assets and liabilities to central bank.
5. CLEARING HOUSE:
Central bank also performs the functions of a clearing house. Since central bank holds the cash reserves of other bank, it easily helps to settle their mutual obligations. Payments by one bank to another are settled through central bank daily, n every bank, people deposit cheques which are to be drawn from other banks. In this way every bank has to receive amounts on behalf of its customers and has to make payments on behalf of them. But the banks do not get cash from each other. They settle their accounts with the help of central bank. Every bank has account at central bank. So funds can be transferred from the account of one bank to other bank.
6. CONTROLLER OF CREDIT:
ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
69 The central bank also regulates and controls the supply of money in the country. In order to mange the supply of money it implements monetary policy. The important tools of monetary policy are bank rate, open market operation and varying reserve requirement. So by controlling the supply of money & credit achieves the following target. --- Internal price stability --- Exchange rate stability --- Stability in money market.
12. SUPERVISION:
The central bank can supervise actives of bank management. The bank has powers to look after working of commercial banks fine is imposed on banks that violate the rules framed by central bank for smooth working. In developed countries there is no need to supervise the working of commercial banks. But in developing countries the management may not be professional so there is need to guide the management for successful working.
OTHER FUNCTIONS:
i. establishment of training institutes (for staff training) ii. Representation in international financial institutions (IMF, world bank) iii. Publication of annual report. iv. Industrial and agricultural development.
CONCLUSION:
ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
70 Central bank performs variety of important functions. All these functions in turn play important role in economic development of the country. Central bank can be deemed of as a castle that takes care of the whole banking system of the economy. =============================================================== HISTORY OF PAKISTAN BANKS UNITED BANK LIMITED PAKISTAN Description: With over 1400 domestic branches all over Pakistan and 19 overseas branches UBL is one of the largest banks in Pakistan. MCB BANK Description: MCB is one of the leading banks of Pakistan with a deposit base of about Rs. 280 billion and total assets of around Rs.300 billion. The Bank has a customer base of approximately 4 million, a nationwide distribution network of over 1,000 branches and over 450 ATMs in the market. ALLIED BANK LIMITED Description: Established in Lahore in 1942 before independence, Allied Bank Limited is one of the largest bank in Pakistan with more than 700 Branches connected to an online network. In August 2004 the Bank was restructured and the ownership was transferred to Ibrahim Group. HBL Description: HBL has the largest domestic branch network with over 1,400 branches and is present in 25 countries. THE BANK OF PUNJAB Description: Established in 1989, in pursuance of The Bank of Punjab Act 1989 and was given the status of scheduled bank in 1994.The Bank of Punjab is working as a scheduled commercial bank with its network of 272 branches at all major business centers in the country. The Bank provides all types of banking services.
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Q6: Give A Comparison Between Central Bank And Commercial Bank? ANSWER:
DEFINITIONS OF CENTERAL BANK AND COMMERCIAL BANK
Central Bank Commercial Bank The central bank is formed under an act of The commercial bank is formed under the companys law. parliament or ordinance. The share capital of the central bank is owned by The share capital of the commercial bank is owned by the people the government or people The management and the employees are appointed The management and other employees are appointed the board of directors. by the government.
1. FORMATION: 2. OWNERSHIP
3. MANAGEMENT:
4. NUMBER OF BANK:
There is only one central bank for every country.
The central bank has only in land branches. It has The commercial banks have both inland and foreign branches no foreign branch. The aim of central bank is to maintain monetary The sole aim of commercial bank it to earn profit. and economic stability therefore profit is not the sole aim of the bank. The central bank can issue currency money like The commercial banks can issue plastic money, cheque, credit and visa card. Rs. 2, 5, 10, 50,100,500. The government and commercial banks are the The individual, partnership, limited companies are the account holders. account holders. The central bank advises the government on The commercial banks advise their customers for investment & business consultancy. financial matters. The central bank opens the government accounts The commercial banks open current, saving, PLS, fixed deposits accounts under various head of accounts.
5. BRANCHES: 6. AIM
7. ISSUE OF MONEY:
The bank controls the volume of credit through The commercial bank creates credit according to money available. various methods.
It is the authorized dealer in foreign exchange under the supervision of central bank.
The central bank can not be closed up even if The commercial bank can be closed up if the management so decides due to unsuccessful working at loss. business.
14. WIND UP
It makes the foreign payment on behalf of the It makes the foreign payment for customers due to import of goods and services. government.
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It transfers money from one place to an other for It transfer the money from place to place for the people. the government and banks.
16. TRANSFER:
It arranges loans for the government and provides It provides loans, cash credit and overdraft to the loans to commercial banks as lender of last resort. customers.
17. LOANS
The central bank does not provide evening The commercial banks provide evening banking services for the customers. banking services.
It is responsible for the monetary stability of a They assist the central bank for achieving monetary stability. country.
It is not the custodian of ornaments or important It provides the facility of lockers to their customers. documents of people.
22. CUSTODIAN:
CONCLUSION
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WHAT IS THE RELATIONSHIP BETWEEN THE TWO? DISCUSS THE RIGHTS AND DUTIES OF BANKER AND CUSTOMER. ALSO POINT OUT THE REASONS FOR TERMINATION OF RELATIONSHIP? (2003, 2002,2006) ANSWER:
Banker or bank means any company which transacts the business of banking. A customer is a person who maintains an account with the banker. The relationship is created due to contract between the banker and customer. A banker is debtor for deposits and creditor for loans and advances.
BANKER:
G. CROWTHER SAYS:
A banker is a dealer in debt of his own and other peoples.
J.W.GILBERT:
A banker is a dealer in capital or more properly a dealer in money. He is an intermediate party between the borrower and the lender. He borrows from one party and lends to another.
CUSTOMER:
ACCORDING TO JUSTICE LINDLEY:
Customer is a person who has some sort of account either deposit or current account or some similar relation with a banker.
2. SPECIAL RELATIONSHIP:
(A) PRINCIPAL AND AGENT:
The customer is the principal when deposits cheque, drafts, dividends for collection with bank. The bank is an agent when he sells or purchase securities and installments of loans etc.
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(F) CONSULTANT:
Bank usually undertake financial consultancy for their client. In such a situation the bank becomes a consultant. When a bank advises his client on any important financial matter, bank becomes advisor and client becomes advisee.
4. SECRECY:
It is the right of customer that bank can be kept his account secret and not disclosed to any one.
5. RIGHT TO INTEREST:
It is the right of customer to receive the interest and bank is bound to pay, depends upon the nature of account.
DUTIES OF CUSTOMER:
1. OBEY BANKING HOURS:
ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
75 A customer must present his cheques for encashment (payment) and collection with in banking hours and days.
5. SAFE DEPOSITS:
The bank should act as trustee and keep the deposits in safe custody.
7. COURT ORDER:
It is the duty of the banker to stop the operation on a specified account as per the order of the court.
TERMINATION BY CUSTOMER:
1. 2. 3. 4. 5. 6. 1. 2. 3. 4. 5. 6. The customer will terminate the relationship on the following: The rate of interest/ profit is not acceptable to him. Bank does not give him the facility as offered by other. Not satisfied with the services. His confidence in the bank is not. He changes his place of residence. Due to the death of the customer. If the customer does not obey the banking hour. intimation of death of customer: Due to insanity of customer. Due to insolvency of the customers. Due to court order. Character is not satisfactory.
TERMINATION BY BANKER:
2. RIGHT OF LIEN:
The bank has a lien on the goods and securities of the customer until he repays his dues. The bank can sell such items after giving proper notice.
76
4. ADJUSTMENT OF BALANCES:
The banker has right to adjust debit balance against credit balances.
CONCLUSION
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ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
77
Q8: WHAT DO YOU MEAN BY MONETARY POLICY? DISCUSS ITS OBJECTIVE AND METHODS OF MONETARY POLICY? EXPLAIN THE LIMITATIONS OF MONETARY POLICY? OR
DISCUSS ROLE OF CENTRAL BANK AS CONTROLLER OF CREDIT? OR EXPLAIN THE DIFFERENT METHODS OF CREDIT CONTROL?
ANSWER:
Monetary policy is formulated and implemented by the central bank of the country. The central bank is responsible of monetary system. The central bank gives primary importance to public interest and profit seeking is only a secondary motive. Monetary policy refers to the measures which the central bank of a country takes in controlling the money and credit supply in a country, with a view to achieving certain specific economic objectives. The commercial banks increase total money supply in the country by creating credit. The ups and downs in the volume of credit affect the purchasing power of money. The central bank as Leader of money market controls the volume of credit for many purposes. The rules & regulations which make by central bank for controlling credit called monetary policy
ACCORDING TO H.W.ARUDT:
Monetary policy is that branch of economic policy, which is concerned, with regulation of the supply, the cost and the direction of credit.
ACCORDING TO H.G.JHONSON:
It is a policy of central bank in control the supply of money with the aim of achieving macro economic stability.
4. PROMOTE EMPLOYMENT:
The main objective of monetary policy is not only to maintain the conditions of employment in country but also create more opportunities of new employments.
6. INCREASE IN PRODUCTION:
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78 With the help of monetary policy, various productive sectors are encouraged to get loans, due to which a comprehensive increase in production can be expected.
7. INCREASE IN INVESTMENT:
With the help of monetary policy, central ban plays vital role in the enhancement of investment with results in economic stability.
8. MORE EXPORTS:
The central bank helps in increasing the exports of a country, sanctioning credit to the selected industries. The commercial banks are directed to advance loans to the exporters.
9. STABLE PRICES:
The credit is controlled to keep price stable. The economic development depends on stable prices. Monetary authority determines the credit limits. The central bank can control money supply according to business needs for stable price level.
(1)QUANTITATIVE CONTROL
(a) (b) (c) (d) (e) Bank Rate Policy: Credit Rationing Discount Rate Policy. Open Market Operation. Varying Reserve Ratio.
(2)QUALITATIVE CONTORL
(A) Consumer Credit Control (B) Direct Action. (C) Marginal Requirement. (D) Moral Persuasion. (E) Publicity.
1. QUANTITATIVE CONTROL:
(A) BANK RATE POLICY:
Bank rate is the rate at which central bank advances loans to commercial banks or discounts or rediscounts their bills.
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(e) PUBLICITY:
The central bank can inform other banks about credit and business conditions. The annual reports are published on trade, industry public finance and money market. The central bank keeps the nation well informed about the economic condition through publicity.
1. CO-OPERATION OF BANKS:
It is very difficult for central bank to control credit, if commercial banks do not extend their full co-operation.
2. CONFLICTING OBJECTIVES:
The greatest difficulty in controlling credit is the simultaneous achievement of conflicting objectives of price stability, economic stability etc.
3. CONVENTIONAL TECHNIQUES:
In under developed countries like Pakistan, the conventional techniques of credit control namely, bank rate policy, open market and reserve ratio are not all powerful. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
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5. DEFICIT FINANCING:
A large sale of deficit financing by govt. many makes the central bank powerless in controlling the credit which causes inflationary pressure in the country.
CONCLUSION
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ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
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Q9: HOW DO THE COMMERCIAL BANK CREAT CREDIT? INDICATE THE LIMITATIONS ON THE POWER OF A BANK TO CREAT CREDIT?
OR
LOANS ARE CHILDREN TO DEPOSITS AND DEPOSITS ARE CHILDREN OF LOANS EXPLAIN:
ANSWER: INTRODUCTION:
CREDIT:
The term credit is an evolution of a Latin word Credo which means I entrust and I put my faith in. the word credit has been described by Gide in the following ways. An exchange which is completed after the expiry of certain period of time after payment. In simple words credit means a loan.
CREDIT CREATION:
The creation of credit or deposits is one of the most important functions of commercial banks. Like other corporations banks aim earning profits. Credit creation is the multiple expansions of banks demand deposits. When a bank advances a loan, it does not pay the amount in cash, but it opens a current account in his name and allows him to withdraw the sum by cheque. In this way the banks create deposits or credit. It is an open secret that banks advance a major portion of their deposits to the borrowers and keep smaller part of them for payment to the customers on demand.
By over drafting bank creates credit. Secondly, bank purchases the securities and paid them with its own cheque. The holder of theses cheque deposits them in the bank. They create deposits which is nothing other than creation of credit. It is recognized that the process of credit creation cant proceed without involvement of the whole banking system According to Samuelson. ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
82 The banking system as whole can do what each small bank can not do. It can extend its loans and investment many times. The new reserves of cash created for its even though small bank is lending out only a fraction of its deposits
EXPLANATION:
The credit creation process can be explained follow. The bank receives Rs.5000 as fresh deposits form a customer. The bank keeps some cash to honor cheque of customers. The amount so kept is known as cash reserves. Suppose cash reserve ration is 20% the bank can lend 80% of deposits to the needy people. The position of first category bank after credit creation is as follow:
5000
The loan of Rs. 4000 may be deposited by the customer with this or other bank. The receiving bank can lend 80% of it by keeping 20% as cash reserve. It can be stated in the balance sheet of second bank
4000 The deposits creation position of the third bank is stated below:
3200
The process is not yet complete. It will continue further. The whole process can be settled in a summary form as follows:
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83 The fresh deposit of Rs. 5,000 is used to create credit of Rs. 25,000. If the reserve ratio is 10% then created credit will be Rs. 50000. The amount can be calculated by following formula. Deposits x ____100______ Cash reserves% We have discussed the credit creation process through loans. Deposits can also be created by overdraft, discounting of bills & purchase of assets.
1. AMOUNT OF CASH:
The credit creation power of bank depends upon the primary deposits, with the bank the larger the cash. The larger the amount of credit that can be created by bank.
2. PROPER SECURITY:
An important factor that limits the power of bank to create credit is the availability of securities because the bank advances loans to its customers on the basis of securities or a share, or a bank, or a building or some other types of assets.
5. SHORTAGE OF BORROWERS:
If there is shortage of borrowers due to business slump or due to any reason, the ability of banks to create credit will also be decreased.
6. CLEARANCE FACILITY:
If banks enjoy clearing house facility by the central bank then they can create more credit and vice versa.
9. CASH IN CIRCULATIONS:
If the loan issued by the bank may not be deposited in to the bank. The cash may remain in circulation can not be used by banks for credit creation.
SUMMING UP:
We can say that creation of credit is an important function of commercial banks. However the power of credit creation by the bank is not unlimited. ===============================================================
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ANSWER:
The import and export of things take place between different countries. A letter of credit is a mean of making payment for the import of goods. It is issued by the buyers bank In favour of the seller. The terms and conditions of the sales are also stated in it. It is also known as documentary credit.
ACCORDING TO PRITCHARD:
A letter of credit is a commitment on the part of the buyers bank, to pay or accept draft, drawn upon it, provided such drafts, do not exceed specified amount.
3. APPLICATION FORM:
Application from, usually known as application and agreement for irrevocable letter of credit, is filled up by the banker and signed by the importer. All terms and conditions of the sale agreement are recorded in it.
85 The letter of credit form is filled by the banker as per information provided by the applicant. The banker completes the form and scrutinizes the documents.
5. DOCUMENTARY L.C.:
It is a letter of credit in which payment is made only after receiving the following documents: a. Bill of lading. b. Packing list. c. Invoice d. Insurance policy.
86 It is a letter of credit in which the credit is available for a fixed total amount payable in one or more than one draft.
3. IMMEDIATE PAYMENT:
The exporter presents the L.C. dismounts to the advising bank after the shipment / dispatch of goods. The exporters bill is immediately paid by the advising bank.
4 PRE-SHIPMENT FINANCES:
Sometimes the exporter may get pre-shipment finances for the packing, handling etc.
ADVANTAGES TO IMPORTER:
1. SATISFYING THE EXPORTER:
An importer of goods from abroad will have to satisfy the exporters that he will be paid for the letter of credit enables the importer to satisfy the exporter.
3. FACILITY OF PAYMENT:
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87 The importer has not to pay the price of goods until he receives the title to goods, by means of which he can take the delivery of goods.
4. BUSINESS EXPLOSION.
Letter of credit facilities foreign business and makes the payment of goods easy.
ADVANTAGES TO BANKER:
1. OWNERSHIP.
Until the payment of the amount, the ownership of goods remains with the bank. (Opening bank).
2. SOURCE OF INCOME:
Bank is a commercial institution; it charges commission to open letter of credit which is a source of income for the bank.
3. INCREASES BALANCE:
With the help of L.C. bank increases its balance as banks keep cash margin for opening for L.C.
5. GOOD WILL.
If importers bank serves effectively, promptly, the exporters bank reciprocates by sending a bulk of business.
CONCLULSION
By functioning of letter of credit, every deal and transaction gets documented. This helps in the overall documentation of the economy. It helps the governments authorities in the assessment of businessmen for tax purposes. ===============================================================
88 Q11: WHAT ARE THE DIFFERENT TYPES OF ADVANCES USUALLY MADE BY COMMERCIAL BANKS? WHAT IS THE PRECAUTIONS FOR BANK WHILE SANCTIONING LOANS?
ANSWER: INTRODUCTION:
A bank is a profit seeking institution. It attracts surplus balances from the customers at low rate of interest and makes advances at a higher rate of interest to the individuals and business firm.
FEATURE:
a. CURRENT ACCOUNT:
This facility is only available in current account.
b. APPLICATION:
Application has to be made to bank requesting to grant overdraft.
c. CREDIT ANALYSIS:
Bank examines the reason the dealing of the party before granting overdraft.
d. SHORT TERM:
Overdraft is short term finance but the term can be negotiated with the bank.
e. INTEREST:
Interest is charged by the bank (daily product basis)
f. SECURITIES:
Bank in order to secure advance usually keeps certain securities. The securities may fix deposits receipts, life insurance policies, saving certificates, shares and bonds of listed companies.
g. GUARANTEE:
In certain cases when party is of sound reputation the bank can grant facility without keeping any security or it can be granted on the guarantee of a third party.
89 Cash credit means that bank after deciding the amount of loans transfer the amount in an account. The customer is given a cheque book of that account and he can with draw any portion of the amount. Cash credit is similar to overdraft only difference is that current account is not need in this case.
b. SECURITIES:
The bank can demand securities against loan. E.g. shares bonds, bill of lading, cotton, rice, ware house keepers bill.
c. TERM FINANCE:
Cash credit can be granted for short or medium term.
d. INTEREST:
Interest is charged on the amount withdrawn by the client. It is charged on daily basis so client can save the interest by depositing money at any time.
e. PLEDGE:
Usually the cash credit is advanced against pledge or hypothecation of goods.
FEATURES: a. PURPOSE:
The purpose of demand finance is to meet the working capital requirements of the business people. b. INTEREST: Interest is charged on the whole amount and time period for which it is taken.
c. SECURITIES:
The loan advanced is secured by way of mortgage or pledge. Securities are government securities, shares, life insurance policy, fixed deposit receipts. Etc.
d. REPAYMENT:
The loan is repayable with in a fixed time period. However the bank reserves the right to call bank the loan after one year.
e. RENEWAL:
It can not be renewed. A customer in need of more funds can ask for other demand loans.
4. DISCOUNTING OF BILLS:
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90 By discounting of bills exchange, bank makes a payment to the holder of amount before the maturity date. Bank deducts an amount called discount for making early payments.
FEATURES: a. INCOME:
The discount constitutes the income of the bank.
b. FINANCE.
The holder of instrument can get finance (cash) from the bank. He does not have to wait until maturity.
c. TIME PERIOD:
The time period of the bill may be 7 days or more.
5. PROPER EVALUATION:
The banker should accurately ascertain the prices of the commodities pledged for loan. The can get information form bankers, Journals and newspapers.
7. POSSESSION OF GOODS:
In order to secure loan, the banker should take possession of the goods.
CONCLUSION
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91
Q12: WHAT IS PRIVATIZATION? WHAT ARE ITS OBJECTIVES? EXPLAIN ITS MERITS & DEMERITS? (2004, 2003) ANSWER: DEFINITION:
BY CHRIS COOK:
Privatization means selling of nationalized industries and other parts of the public sector to private businesses and individuals.
BY CHRISTOPHER PASS
Privatization is the denationalization of an industry transferring it from public to private ownership.
OBJECTIVE OF PRIVATIZATIONS:
1. IMPROVE PERFORMANCE:
The purpose of privatization of banks is to improve performance. When ownership is in private hands they work for profit. The operational efficiency increases due to proper control.
2. PROMOTE COMPETITION:
The purpose of privatization of banks is to promote competition. The owners are interested to increase the rate of deposits. The larger the deposits the larger the profit. The sense of competition develops among bankers.
ADVANTAGES OF PRIVATIZATION:
1. PROFESSIONAL MANAGEMENT:
The owners of privatized banks can hire services of professional management. If is large-scale business and requires the services of experts in the filed of banking. The professionals can run banking business on sound lines.
2. HEALTHY COMPETITION:
Privatization of banks is essential for healthy competition. Private Banks work for Profit. The sense of competition develops for increasing the rate of profit. The management must control wasteful competition.
3. OPERATIONAL EFFICIENCY:
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92 The efficiency of privatized banks increases due to reasonable pay, promotions and other facilities for employees.
4. REASONABLE PROFIT:
The main source of profit is lending. Moreover management can control its expenses in order to raise the rate of profit. The loans are provided at higher rate, and receive deposit at low rate. The difference is Profit of bank.
5. QUALITY SERVICES:
The banks are successful if they offer all services to customers. The like quality services in order to do their business. It is the age of competition so quality services are the need of the day.
6. EQUAL INCOME:
There is equal income distribution due to privatization of banks. The shares are sold to general public. The number of shareholders may be in million. The profit is distributed among shareholders.
7. PRODUCTIVE LOANS:
The banks can offer loans to deserving parties. The loans are provided for productive purposes. The banks may discourage consumption loans or speculative loans. Productive loans can increase the rate of economic development.
8. EMPLOYMENT OPPORTUNITIES:
The banks provide loans to businessmen and other peoples. They can set up new companies or expand their existing business. In this way employment is created for many people.
DISADVANTAGES OF PRIVATIZATION:
1. SURPLUS EMPLOYEES:
The draw bank of privatization is that employees are declared surplus. There is increase in the rate of unemployment. The jobless workers increase the worries of welfare state.
3. UNBALANCED GROWTH:
The management of privatized banks provides loans in particular areas. The result is that there is unbalanced growth in the country. The areas may remain underdeveloped where loans are not disbursed.
5. LOANS TO RELATIVES:
The management likes to lend money to persons who are relatives or friends of directors of banks. In this way only few people have approach for loans.
6. OWNERS ASSOCIATION:
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93 The owners of private banks can make information agreement for earning high profits. The bank can raise the rate of service charges. Such associations do not care for the customers.
TYPES OF PRIVATIZATION:
1. PARTIAL PRIVATIZATION:
Where a part of enterprise is transfer to PVT sector.
2. LIBERATION:
When the ownership of enterprise is transferred in full it is known as liberation.
3. FRANCHISING:
When got. Gives the right to PVT sector to use his name for business proposes for a specific period of time it is known as Franchising.
PRIVATIZATION IN PAKISTAN
After The nationalization of bank, it was hoped that it will play vital role in economic development but unfortunately in spite of showing remarkable performance, there was a large scale corruption, nepotism, and unbalanced growth, distribution of credit. The govt. therefore, decides to privatize banks. A privatization commission was set up on January 12, 1991. The bank ordinance 1991 was promulgated for the privatization of banks.
IMPLEMENTATION OF POLICY:
In first step of implementation MCB and ABP were privatized. Further more UBL, HBL, NBP has also been enlisted for privatization.
CONCLUSION
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94
Q12 (A) DEFINE CHEQUE & BILLS OF EXCHANGE? DISCUSS ITS FEATURES? ALSO POINT OUT THE DISTINCTION BETWEEN THE TWO:
ANSWER: DEFINITION: CHEQUE: (ACCORDING TO N.I ACT 1881.)
UNDER SECTION 6 CHEQUE HAS BEEN DEFINED AS A CHEQUE IS A BILL OF EXCHANGE DRAWN ON A SPECIFIED BANK AND NOT EXPRESSED TO BE PAYABLE OTHERWISE THAN ON DEMAND.
BILLS OF EXCHANGE:
Under Section 5 Bills Of Exchange Has Been Defined: In Instrument In Writing Containing An Unconditional Order, Signed By The Marker Directing A Certain Person To Pay A Certain Sum Of Money Only To Or To The Order Of A Certain Person Or To The Bearer Of The Instruments.
BILLS OF EXCHANGE
Bills of exchange can be drawn on any person. A B/E must be accepted by the drawee before it is presented for payment.
2. ACCEPTANCE:
A cheque does not require any acceptance.
Payment of cheque can be cancelled by the Payment of bills of exchange can be cancelled. notices of customer. A cheque can be crossed for the purpose of Bills of exchange cannot be crossed. safety.
6. DISCOUNT:
A cheque con not be discounted from any bank
Cheque is always payable on demand, so there is A grace days allowed in this case is of 3 days. no question of allowing grace days.
7. GRACE DAYS:
8. IN SETS:
A cheque is never drawn is sets.
There is no system of noting or protest in case of There is a system of noting or protest in case of dishonor of a bill. cheque
9. NOTING OR PROTEST:
The main purpose of a cheque is to minimize the A B.E is drawn for the purpose of receiving & giving credit. use of metallic money.
10. PURPOSE:
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95
A cheque drawn payable to bearer on demand is A B/E can be drawn to bearer on demand is void valid.
It must be drawn in printed form, issued by the A B/E can be drawn on any person and there is no printed from. particular bank.
The drawer of a cheque is discharged only if he The drawer of bill is discharged, if it is not suffers any damage by delay in presentiment for presented for payment. payment.
CONCLUSION
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ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
96 Q12 (B) DEFINE CHEQUE & PROMISSORY NOTE? EXPLAIN ITS FEATURES? ALSO POINT OUT THE DISTINCTION BETWEEN THE TWO?
ANSWER: DEFINITION
Cheque: UNDER SECTION 6 OF NEGOTIABLE INSTRUMENT ACT: A CHEQUE IS A BILL OF EXCHANGE DRAWN ON A SPECIFIED BANK AND NOT EXPRESSED TO BE PAYABLE OTHERWISE THAN ON DEMAND.
PROMISSORY NOTE:
ACCORDING TO SECTION 4 OF N.I. ACT 1881: A Promissory Note Is An Instrument In Writing (Not Being A Bank Note Or A Currency Note) Containing An Unconditional Undertaking, Signed By The Maker, To Pay A Certain Sum Of Money Only To, Or To The Order Of A Certain Person, Or To The Bearer Of The Instrument.
DISTINCTION:
CHEQUE 1. PARTIES. 2. PRINTED FORM:
It is drawn on a printed form, provided by bank.
PROMISSORY NOTE.
There are three parties in cheque i.e. drawer, There are two parties in promissory note i.e. marker and payee. drawee, & payee. It can be drawn on any paper and does not need any printed form. MAKER: Maker is payable of certain amount Crossing is not allowed in pro-note. Payment is not stopped in case of pro-note Payment is not stopped in case of pro-note. It can not be drawn Payable to Maker It is an unconditional promise. Maker of note cannot be payee.
3. DRAWER:
Drawer is the receiver of payment.
4. CROSSING:
Crossing is allowed in cheque
5. STAMPING DUTY:
No stamp duty is to be payable.
6. STOPPING OF PAYMENT:
Drawer can stop the payment.
7. PAYABLE TO MAKER:
Cheque can be drawn PAYABLE TO MAKER.
Drawer of cheque stands in an immediate relation The liability of maker of promissory note is primary. with drawee not payee.
The liability of drawer of cheque is secondary. He The liability of maker of promissory note is is liable only when the drawee. Does not honor the primary. cheque.
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97
Cheque can only be drawn promissory note can be Promissory note can be drawn on any person including bank. drawn on any person inducing bank.
Where a cheque has been dishonored then drawer A promissory note need not be protested. can protest on solid grounds.
14. protest:
CONCLUSION
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Q12 (C) DEFINES PROMISSORY NOTE AND BILLS OF EXCHANGE? DISTINCTION BETWEEN PROMISSORY NOTE AND BILLS OF EXCHANGE? 2001. ANSWER: Definition:
According to section 4 of N.I. Act 1881: ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
98 A promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of a certain person, ort o the bearer of the instruments.
DISTINCTION BETWEEN BILLS OF EXCHANGE & PROMISSORY NOTE: PROMISSORY NOTE 1. NUMBER OF PARTIES.
There are two parties in a promissory note name the maker and the payee.
BILLS OF EXCHANGE.
In a bill there may be three parties, the drawer, the drawee, and the payee.
A promissory note is written by principal debtor But a bill of exchange is written by the creditor who has to receive payment. who has to make payment of the note. A promissory note is an unconditional promise to But a bill of exchange is an unconditional order by the drawer to the drawee. pay. The liability of marker of a promissory note is The liability of drawer of a bill is secondary and unconditional. The drawer is liable only when the primary. acceptor does not honor it. A note requires no acceptance as it is signed by The bill must be accepted by the drawee before it is presented for payment. the person who is liable to pay. In case of promissory note, no notice is necessary In bill of exchange notice of dishonor must be given by holder to all prior parties who are liable to the maker in case of dishonor. to pay. In a promissory note the marker can not be the In a bill the drawer and payee may be the same payee because the same person cannot be both the person when bill is drawn pay to me or my order. promisor and promise. In a promissory note there is a promise to make In a bill of exchange there is an order for making the payment. the payment. The maker of a pro-note stands in immediate The drawer of an accepted bill stands in an immediate relation with the acceptor and not the relation with the payee. payee. A bill can be so drawn provided it is not drawn 10. PAYABLE TO BEARER: payable to bearer on demand. A pro-note cannot be drawn payable to bearer.
2. MAKER.
3. NATURE OF CONTROL
4. NATURE OF LIABILITY:
5. ACCEPTANCE:
6. NOTICE OF DISHONOUR:
11. COPIES:
A note cannot be drawn in sets.
12. PROTEST:
A note need not be protested.
A foreign bill can be drawn in sets. A foreign bill must be protested for dishonor, when it is required by law.
A note cannot be made payable to the marker A bill can be made payable to the maker himself as one person may become both drawer & payee. himself. The provisions relating to presentment for These provisions are applicable to a bill of acceptance, or acceptance for honor are not exchange. applicable. 15. POSSIBILITY OF CONDITIONAL: The acceptance of a B/E may be conditional with the consent of the holder. A pro-note cannot be made conditional.
CONCLUSION
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99 ===============================================================
Q12 (D) WHAT IS DIFFERENCE BETWEEN PROMISSORY NOTE, BILL OF EXCHANGE & CHEQUE? 2001(A) ANSWER:
PROMISSORY BILL OF EXCHANGE CHEQUE
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100
A promissory note is written A bill of exchange is written A cheque is written by the by the creditor. person who has account in the by debtor. bank. 2. NUMBER OF There are three parties i.e. the In cheque also the drawer and PARTIES: payee may be the same person. There are two parties in the drawer, the drawee and payee promissory note i.e. the maker and the payee.
1. MAKER:
The drawer and payee may be In cheque also the drawer and payee may be the same person. The maker and payee are the same person. different persons in promissory note. There is no drawee of a Drawee of a bill of exchange Drawee of a cheque is always may be anyone including bank. a bank. promissory note.
3. MAKER PAYEE:
&
4. DRAWEE:
A promise or order contains an A bill of exchange contains an A cheque also contains an unconditional order to pay. unconditional promise to pay. unconditional order to pay.
5. PROMISE ORDER:
OF
6. ACCEPTANCE:
A promissory note needs no acceptance as it written and signed by the person who is liable to pay. 7. NATURE OF RESPONSIBILITY:. The responsibility of a maker of a promissory note
A bill must be accepted by the A cheque does not require drawee. acceptance of the drawee before its payment. The responsibility of a drawer The responsibility of of bill of exchange drawer of a cheque to the the
CONCLUSION
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Q13: WHAT DO YOU MEAN BY NATIONALIZATION? EXPLAIN THE CAUSES OF NATIONALIZATION? EXPLAIN ITS MERITS & DEMERITS? (2000, 2002)
ANSWER:
INTRODUCTION:
Nationalization means the transfer of any property or institution from private to state ownership. It refers to the process where by through legal and legislative approach, the private institutions are taken up by state or government. The government then manages and controls such institutions. A private commercial bank is opened by private persons. The ownership and control remains in their hands. But sometimes the ownership of private bank is taken over by the government. It is called nationalization of commercial banks.
BY ALAN ISAACS:
Nationalization is the process of bringing the assets of a company into the ownership of the state. Govt. of Pakistan nationalized all commercial bank on 1st January 1974. There were 23 scheduled banks in the country that time with 2942 braches. The banks which were nationalized are SBP, all commercial banks, IDBP, the government set up Pakistan banking council (PBC) to run the administration of all commercial banks.
2. USE OF LOANS:
Commercial bank used to give loans to those persons who were in a position to repay the loans and was little bothered about use of loans. So loans were used for black marketing hoarding & speculations etc.
5. PROFIT MOTIVE:
The banks changed their priorities and preferences. In spite of aiming at the macro economic growth, development, and prosperity, they aimed to maximize profit. The saving of the people was utilized according to the personal interests and not the national interest.
6. WASTEFUL COMPETITION:
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102 Banks engaged themselves in a wasteful competition race. This badly hampered the pace of economic growth. Heavy expenditures were made by all banks for wide scale advertisement and publicity.
9. CREATION OF CREDIT:
Credit up to a certain limit is fruitful for the economy but in those days commercial banks were creating credit just for the sake of their profit.
10. FAVORITISM:
Bank owners used to appoint their own relatives to high portion in banks and gave them heavy salaries.
ADVANTAGES OF NATIONALIZATION:
1. FAIR DISTRIBUTION OF WEALTH:
Commercial banks give loans in accordance with the credit policy of SBP. Along with big industrialist, small businessmen can get credit facilities.
6. DEVELOPMENT OF AGRICULTURAL.
Commercial banks gave special attention to agricultural sector. Now more tan Rs. 10 billion is given to agriculture to purchase inputs e.g. fertilizers, seeds, machinery etc.
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DISADVANTAGES:
1. UNBALANCED DISTRIBUTION OF CREDIT:
In spite of the claim that more credit facilities would be provided to farmers, it has not been done so far. The distribution of credit is still unbalanced. According to statistics industrial and agricultural sectors get 45% and 9% respectively, which shows that agriculture sector is still neglected.
3. FAVORITISM:
Employment in banks is now provided by Ministry of Finance under rules formed by the government. Govt. officials in the ministry favour their kith and Kin for job in the banks promotion in bank is largely depends on Push & pull for the officers and not on merit. So a lot of people are being deprived of them job opportunities.
CRUX:
The objectives of nationalization have not been achieved yet. Favoritism, Nepotism, and malpractices have destroyed the commercial banks. The total amount of stuck up loans of banks and DFIs is standing at Rs. 260 billion by the end of 2000. ===============================================================
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Q14: WHAT IS THE IMPORTANCE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF A COUNTRY? ALSO DISCUSS THE ROLE OF BANKS FOR THE DEVELOPMENT OF A COUNTRY? ANSWER: IMPORTANCE OF COMMERCIAL BANKS:
Commercial banks are considered as the back bone for the economic development of a country. They are the dealer in debts. They operate as lenders and deposit administrators. The economic significance of the commercial banks is given below:-
1. INCREASE IN SAVINGS:
Saving is necessary for increasing the national income and employment. The bank offer reasonable rate of profit on deposits. The people are motivated to increase their savings. The amount so saved becomes a source of income for depositors.
2. INCREASE IN INVESTMENTS:
The banks collect small savings from the people, the amount collected is lend to businessmen for increasing the rate of investment. The result is that there is increase in production of goods and services. The increased production leads to higher national income and employments.
3. TRANSFER OF MONEY:
The bank transfer money from one place to another, it helps to make business receipts and payment. There is increase in dealing and mobility of goods. There is increase in demand and supply of goods.
4.INDUSTRIAL DEVELOPMENTS;
the banks are important for industrial development. They provide short term as well as long term loans. The businessmen are encouraged; they take the business risk and use latest technology. The economic development.
5. FOREIGN TRADE;
The banks provide facilities in foreign trade. They provide guarantee to honor the bills of exchange of their customers. They deal in foreign exchange; they pay for imports in foreign currency and receive export from abroad. Therefore, the commercial banks promote foreign trade.
6. LOCAL TRADE:
The banks provide financial advice to their customers. They arrange to buy and sell, shares & certificates, they also provide business expansion loans. Thus the banks play an important role for the development of local trade.
7. LOANS TO GOVERNMENT:
The bank provides loans to the govt. by purchasing bills and bonds. The government collects money to complete public works program.
8. EMPLOYMENT LEVEL:
A large part of money supplied in the economy is the credit money, created by commercial banks. The credit money is used for production purposes. More people are hired at reasonable wage rate. Therefore, employment level moves upward.
9. NEW PRODUCERS:
The commercial bank provides business start loans to the people who have technical skill and experience but no funds. The bank offers credit facility to put the creative mind on work. The new factories are established for increasing production and national income.
ROLE OF BANKS:
The role of banks for the development of a country is as under: (a) Out put increase. (b) Income increase. (c) Change.
(A) OUTPUT INCREASE: ARFAN SHAHZAD KHAN M.COM, M PHIL 0314-4467754 MUHAMMAD NADEEM RAZA MBA M.PHIL 0321-5603554
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1. AGRICULTURAL PRODUCTIONS:
The banks increase level of agricultural production. The bank loans are granted to purchase seeds, fertilizers, and payment of other expenses. The agricultural sector provides raw material to industrial units.
2. INDUSTRIAL PRODUCTION:
The banks increase industrial production. The loans are granted for raising level of production. During peak season funds position of every business is tight. At such times banks plays their part in prosperity of nation.
4. FOREIGN TRADE
The banks raise level of foreign trade. The banks open letter of credit for import goods. Foreign trade is possible though banks only.
2. INVESTORS INCOME:
Income of investors goes up due to banks. The stock exchange provides investment opportunities to holders of money. The banks play their part for raising income of investor.
3. OWNERS INCOME:
The owners increase their income due to effective working of banks. The owners earn more profit due to better performance.
(C) CHANGE:
1. USE OF COMPUTER:
There is structural change due to use machines and computers. The banks prepare their accounts through computers. Moreover banks can sell their time on computers for preparing accounts of people who can not buy computers.
2. TECHNOLOGY TRANSFER:
The banks play their role in transferring of technology. The banks make payments for purchase of technology. Automatic machines provide quality products. The banks can grant loans to such people who have courage to lead the business world
3. SPECIALIZATION:
The banks play their role for specialization. The increase in activities is possible due to loans and advances. The increased work requires division of work or placement of workers on the basic of their abilities. There is maximum output with minimum cost due to specialization or division of labor.
4. MOBILITY OF LABOUR:
The banks play their role in the development of the economy. The banks provide funds for raising value of production. The mobility of labor may be vertical and horizontal. The establishment of new businesses attracts people who want better pay and other benefits. The work is provided according to their qualification and training. CONCLUSION
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Q1: WHAT DO YOU MEANS BY BUSINESS FINANCE AND WHAT IS THE IMPORTANCE OF BUSINESS FINANCE?
ANSWER: INTRODUCTION: Finance is the lifeblood of every business. It flows in mostly form sale of goods & services. It flows out for meeting various types of expenditures. The activating element in any business which may be an industrial or commercial undertaking is FINANCE. FINANCE IS NEEDED FOR TWO PURPOSES: 1. For initial expenditure such as land, building, plant, machinery, fixed assets. 2. for carrying out the current transactions i.e. WORKING CAPITAL
DEFINITION:
ACCORDING TO B.O. WHEELER:
Business finance is that business activity which is concerned with the acquisition and conservation of capital funds in meeting the financial needs and overall objectives of the business enterprise.
IMPORTANCE:
The success and failure of a business in the private sector is linked with finance. Business without finance is just like a fish without water.
1. PURCHASE OF ASSETS:
When business is set up many assts such as land, building, plant & machinery etc are purchased. The purchase of these assets is possible with finance.
2. MAINTENANCE OF ASSTS:
For the proper working of assets repair, renewal and maintenance is necessary. This work cannot be done with out finance. So importance of finance cannot be over looked.
3. BUSINESS EXPANSION:
The increase in the size of business is due to finance. It puts the men, machinery and material on work. The large amount of finance can produce desired results.
4. CHANGE IN BUSINESS:
The businessmen can change the nature of the business. The finance helps to complete the sale of old assts and purchase of new assets.
5. PURCHASE OF GOODS:
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107 The purchase of goods, raw material, import of goods, stock of stationary and many other items are necessary for doing the business. The purchase of these items are made by means of finance.
6. COMMUNICATION:
The business manager use telephone & telegraphic facilities, medium of advertisement like radio, T.V, newspaper as a tool for increasing sales. The importance of finance is increased during these days.
7. INSURANCE:
The businessmen are not free from risks, there are chances of loss due to theft, fire, flood, war, earthquake. But the finance helps the people to cover the risk of loss through insurance.
8. INCOME:
The finance in excess of business need becomes the source of income to the business. There are many way to employ extra funds for short period.
9. DAILY EXPENSES:
The business dealing is carried on though out the business life. These expenses include salaries, wages, carriage, rent, repair, interest, commission. The payment of these expenses is possible with Finance
10. TAXATION:
The claims of the govt. in the shape of sales tax, income tax, excise duty are to be paid in money. Finance is needed to adjust these dues.
14. TECHNOLOGY:
The finance helps to start research work to search for new knowledge. The innovation and technological changes are possible with finance.
108 Capital is required for spending on purchasing patent rights or goods will etc.
CONCLUSION
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Q2: WHAT ARE THE DIFFERENT TYPES/ KINDS COMPONENT OF BUSINESS FINANCE? DISCUSS THE FACTORS: WHICH AFFECT THE SIZE OF WORKING CAPITAL?
ANSWER: KINDS OF BUSINESS FINANCE:
Following are the important kinds of business finance: a) Short term financing. b) Medium term financing c) Long term financing The tree types of finance along with their sources are now discussed in brief.
Short term financing have maturity period of less than one year. Short term capital is needed for meeting the day-to-day expenses of business such as payment of wages, gas electricity bills, seasonal peaks of business etc.
1. COMMERCIAL BANKS:
Commercial banks receive the savings of people and lend it as short term finance to the businessmen. The bank advance loans in shape of cash or overdraft.
2. DISCOUNTING OF BILLS:
Banks may also give credit on short term to its trusted customer by discounting their bills of exchange.
5. TRADE CREDITORS:
Trade creditors including wholesalers, retailers, manufactures, supply their goods to customers on credit basis. Trade credit is usually granted for 7-90 days.
7. FINANCE COMPANIES:
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110 These are the specialized financial institutions whose primary reason for existence is to lend money for short period.
9. COOPERATIVE SOCIETIES:
These societies also provide short term funds to rural businessmen against some security.
(5) DEBENTURES:
A company may raise a part of medium term capital by issuing debentures. Under Islamic mode of financing, debentures have been replaced by TFC. (Term finance certificate)
2. BONDS:
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111 This is an important source of long-term finance. Under this system large size business issue secured & unsecured bonds. These bonds may be disposed off directly or though agents.
3. EQUITY SHARES:
The issuing of equity shares is the most important source for raising the long term capital by a company.
4. TFCS:
Term finance certificates are also issued by the companies for increasing long term capital.
5. INSURANCE COMPANIES:
Insurance companies invest a portion of their funds in providing loans for long period to industries.
6. INVESTMENT TRUST:
These trust are specialized in the field of investment at first they sell their own shares in the open market and then the amount collected is utilized to purchase the securities of other companies.
7. INCORPORATE SAVINGS.
A company does not distribute its entries profit among the shareholders. Instead, some portion of the profit is transferred to reserve funds every year, which can be used as capital, when needed.
8. NEW PARTNERS:
The capital volume of a business may be increased by admitting new partners in business.
9. PTCS:
A company is authorized, under companies ordinance to issue participation term certificate to scheduled banks and financial institution.
1. NATURE OF BUSINESS:
The working capital requirement of an business basically depends upon the nature of its business. A trading concern requires large amount of working capital for investment in stocks, receivables and cash etc. it requirement less amount in fixed assets. A business where the proportion of cost of production is high, he amount of working capital required is large.
112 If the goods are tied up for a longer period of time in production process, it requires a large amour of working capital to complete the manufacturing process i.e. Aero planes, heavy armaments.
7. RISK IN BUSINESS:
A business involve great risk needs huge amount of working capital i.e. oil exploration etc.
CONCLUSION
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Q3: WHAT ARE THE INTERESTS BASED MODES OF FINANCING? EXPLAIN ITS ADVANTAGES & DISADVANTAGES?
OR WHAT ARE THE SOURCES OF BUSINESS FUNDS? OR WHAT DO YOU MEAN BY EQUITY FINANCING AND DEBT FINANCING? ALSO EXPLAIN SOURCES OF EQUITY FINANCING AND DEBT FINANCING. EXPLAIN ITS MERITS AND DEMERITS? (1998, 1999, 2003, 2004, (S) , 2004 (A).
1. EQUITY FINANCING:
The finance provided by the owners is called equity financing. Or we can say that: The finance provided by the man who plans for business and makes permanent investment in the form of land, building, machinery etc. is called owners finance or equity finance. This finance provides a base to the capital structure of the enterprise. Normally the owner does not withdraw his investment unless the business flopped.
A company can raise owned capital by issue of ordinary shares called equity shares. The equity shares are a goods source of long term finance.
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5. NO FEAR OF REPAYMENT:
A business having equity financing has no obligation to repay or return during the life of business.
6. INCREASED BORROWING:
Equity finance enables the business to raise its funds by borrowing because it easily offers its assets as security against loans.
115 In case of equity financing the borrower pay more tax because no interest is deducted from profit.
2. DEBT FINANCING:
The borrowed funds for business needs are known as debt financing Debt financing is obtaining of funds by borrowing. If the owned capital of an enterprise is not sufficient to meet the financing requirement of business, it is the forced to borrowing. Borrowing is also adopted for covering period of peak operations of business, meet urgent current expenses, gaining tax advantage and saving the business from dissolution. Or the object of the business is achieved.
The main sources of debt financing are creditors, investors of financial institution. The loans are obtained from the creditors for: i. ii. iii. Short-term financing. Medium-term financing. Long-term financing.
116 This loan is usually for long term or derangement basis that mature in more than 05 years. Long term loans are obtained for acquiring fixed assets and making extension and improvement in the business. The main long-term sources of a company organization are: i. Debentures. ii. Mortgagee. iii. leasing
INSTITUTE LIKE:
a) IDBP b) ICP c) NIB etc.
2. HIGHER PROFIT:
Large capital due to debt financing enables the enterpriser to operate at a high profit.
3. LOW TAXATION:
Interest is paid on debt financing, which is deducted from profits. Therefore profit reduces and business enjoys the low taxation.
2. PAYMENT OF INTEREST:
Another drawback of debt finance is that interest is to be paid on it. At is an additional expense.
117 If a business is not in a position to repay its loans on time then creditors can file suit against. The result is harmful for the reputation of the business.
4. LOSSES:
During depression period a business having de financing will not be in a position to bear the burden of interest. So its losses increased.
CONCLUSION
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II: QARD-E-HASANA:
Under this scheme, interest free loans are granted to students who do not sufficient funds to continue their education. Qard-e-Hasana is given to the students who are less than 35 years of age and available for post intermediate studies in engineering, medicine, agriculture, Economics, Commerce etc. Loans given will be in the name of student (Principal Debtor) and secured by guarantee of parents, guardians, for repayment of loans a grace period of two years is granted after completion of studies.
I. MARK UP:
The mark up or Bai Muajjal is a purchase of goods by banks and their sale to clients at an appropriate mark up in price on deferred payment basis. The mechanism is as follow: i. The customer contacts the bank for financing the purchase of goods. ii. The bank purchases the required goods and sells these to him on a price mutually agreed between the bank and the customer. The price is based on the banks cost plus profit margin of the bank (mark up) iii. Payment can be made in installments or lump sum over a specified period of time.
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III. LEASING:
Leasing also called IJARA is a medium and long term financing mode. In this mode the Lessee acquires the use of an asset from the Lessor for fixed period of time on payment of specified the title of property remains with the Lessor and asset is given back to the Lessor after specified period of time.
IV. HIRE-PURCHASE:
The state bank of Pakistan (SBP) has allowed the commercial banks to provide finance for the purchase of machinery to their clients in trade and industry on the basis of hire purchase. In this deal, the purchases the specified goods at eh request of customer and hires them to the client, on the payment in periodical installments. The bank charges fair return from the goods.
V. DEVELOPMENT CHARGES:
It is a very useful mode of trade financing. The bank makes advances to customers for the development of land or property. It then shares in value addition of property. This share is known as development charges.
I. MUSHARIKA:
It is an agreement between the bank and the client to participate in a business as temporary partner by providing agreed amounts of funds for sharing profit and losses during a specified period of time. i. Business is run by the client but the bank will examine the feasibility and profit projection so as to monitor and supervise the business transactions. ii. Profits are to be shared as agreed. iii. Losses will be shared strictly in the ration of their respective investment. iv. This mode is applicable to finance working capital needs of a business.
II. MODARABA:
Modaraba means the business in which the subscriber participates with money and manager with knowledge and skill. The features are: i. It is an agreement in which one party invests funds and other part with managerial efforts.
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120 ii. iii. iv. v. vi. Modaraba must be registered under the modaraba ordinance 1980. As per rule, the partner who puts in managerial skills must have at least 10% share in modaraba. Profit is shared in agreed ratio. Modaraba certificates are transferable. It may be perpetual or for a specified time.
CONCLUSION
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