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Presentation on
Non Negotiable instruments
Foreign Exchange Transaction
Money Market
Banking System in Pakistan
Islamic Banking

Presented by
Asif Sohail
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Non Negotiable instruments

🞑 Commercial Letter of credit Definition
🞑 Stages to get a Commercial letter of Credit
🞑 Kinds of Commercial letter of Credit
🞑 Advantages of Commercial Letter of Credit
🞑 Travelers Letter of Credit Definition
🞑 Parties of commercial letter of credit
🞑 kinds of Bankers letter of credit
🞑 Define postal order
🞑 Circular note
 Topic outline
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◻ Define money order

◻ parties of money order and postal order
◻ Define i.o.u
Foreign exchange transactions
◻ meant by foreign exchange
◻ method for making foreign payment
◻ Define exchange rate
◻ types of exchange rate
◻ spot exchange rate
◻ causes of change in exchange rate
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◻ objectives of exchange control

◻ Define interbank exchange rate
◻ advantages of exchange control
Money market
◻ Define capital market and money market
◻ institution of money market
◻ qualities of organized money market
Banking system in Pakistan
◻ Islamic banking
◻ concept of riba
◻ What is qarz-e-hasna
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◻ Islamic investment modes of financing

◻ What is nationalization
◻ three specialized banks
◻ merits and demerits of nationalization
◻ methods of interest free banking system suggested by Islamic ideol
council.
◻ Conclusion
 Non Negotiable instruments
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Banker’s Letter of credit

Introduction
By bankers letter of credit we mean the letters which a bank
issues in the Favor of a particular person, so that he may get a certain
amount of money from its any other branch. Bank issues these letters to
the people for their transactions, trade dealings and recreational
journeys.
 Letter of Credit Process
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 kinds of Bankers letter of credit
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Two kinds of bankers letter of credit.

1. Commercial letter of credit

2. Personal/private letter of credit.
 Commercial letter of credit
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Definition

“The letter of credit is a written instrument issued by the

buyers bank authorizing the seller to draw in accordance
with certain terms and conditions”
 Some Samples of Commercial letter of credit
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 Stages to get a Commercial letter of Credit
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o Preparation of documents
o Contact with the bank
o Import license
o Application form
o Scrutiny of the application
o Undertaking from importer
o Margin requirement
o Issuance of letter of credit
o Confirmation
o Payments
o Delivery of goods and documents
 Kinds of Commercial letter of Credit
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a) Documentary letter of Credit

b) irrevocable letter of Credit
c) revolving letter of Credit
d) Revocable letter of Credit
e) green clauses letter of Credit
f) fixed letter of Credit
g) Red clauses letter of Credit
h) back-to-back letter of credit
 Kinds of Letter of Credit
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Clean Letter of Credit

It is that letter of credit in which no condition attached to
the bill and the exporter has no need to deposit the bill of
lading invoice and the papers of insurance policy to get his
money.
Documentary letter of Credit
A documentary letter of credit provides that the draft drawn
under it are to be accompanied by different documents relating
to the merchandise e.g, bill of lading, invoice and insurance
policy etc.
 Irrevocable letter of Credit
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The payment of this letter of credit is confirmed because bank

or trader cannot cancel or alter it before payment. So this letter of
Credit is more reliable in international trade.

Revolving letter of Credit

Although this letter of credit is issued for the payment of a
specific amount, but at the completion of all the transactions it is
automatically renewed for the same specific amount.
 Fixed letter of Credit
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This letter of credit is issued for a particular transaction or for

the payment of fixed amount and it is automatically cancelled at
the completion of transaction of payment.
Red clauses letter of Credit
In this letter of credit intermediate bank can provide loan to
exporter for packing and transportation of goods before the
shipment of goods. The statement containing the detail of order
is specially written with red ink
 Back-to-Back letter of credit
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In this letter of credit the receiver of money is not the sender of

goods. It means the beneficiary is not the actual supplier. He
produces or open his own letter of credit to his bank and on the
strength of it gets opened another letter of credit in the favor of the
actual suppliers. Thus the beneficiary buys the goods from the actual
supplier and supplies the same to the buyer.
 Revocable letter of Credit
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The payment of this letter of credit is not confirmed because

the bank or importer may cancel or alter its contents at any
time due to any reason. Therefore the use of revocable letter of
credit is very less is international market
Green clauses letter of Credit
It is the developed form of red clause letter of credit in which
the exporter can get loan not only for packing or transportation
but also for storage as well. The statement containing the detail of
order is specially written with green ink.
 Advantages of Commercial Letter of Credit
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◻Pre shipment finance

◻income of bank
◻progress of international trade
◻Legal protection
◻compensation
◻confirm payment
 Travelers Letter of Credit
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Definition
It is a letter which is issued to any traveller to
facilitate him financially during journey. In this letter,
a banking order it's many other branches of other
countries to pay a particular amount to a specific
person.
 Parties of commercial letter of credit
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◻ Importer is a person who buys goods from other countries.

◻ Exporter is the person who sells goods to another country.

◻ Importer's bank is the bank which issues letter of credit and assures the exporters bank
for the payment. It is also called an issuing bank, opening bank or a buyer's bank

◻ Exporter's bank is the bank in whose name the letter of credit is issued. The bank also
advises the exporter for sending goods. It is also called an advising bank or negotiating
bank or paying bank.
 kinds of Bankers letter of credit
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Two kinds of bankers letter of credit.

1. Commercial letter of credit

2. Personal/private letter of credit.
 Postal order
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Definition

Postal order is a very easy mode of transferring money from

one place to another with the help of post offices. The holder of
postal order can receive the money from post offices. Postal
order can also be crossed.
 Postal order Specimen
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 Circular note
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Definition

The circular note is such non-negotiable instrument that at a

bank issue to all to its branches and office of other countries.
This note is issued to give financial aid to the traveller during
their journey.
 Circular note Specimen
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 Money order
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Definition

“Money order is an order drawn by one post office on

another for the payment of money”
 Money order specimen
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 Parties of money order and postal order
◻.
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1.Sender of money
2.Drawer (post office)
3.Drawee (post office)
4.Payee (receiver of amount)
 i.o.u
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Definition
“It is a written document in which the debtor writes
these words with his signature that “i owe you”, which
means “i am your debtor”. In this statement neither credit
period nor promise for payment is written”
 Foreign exchange transactions
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Foreign exchange

“Means the method by which rights to wealth

expressed in term of the currency of one country are
converted into rights to wealth in term of the currency
of another country or known as foreign exchange”
 Method for making foreign payment
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Following are the methods

◻Letter of credit
◻ foreign bill of exchange
◻foreign bank draft
◻Mail transfer
◻telegraph transfer
◻traveller check
◻ international money order
◻Dealers of Foreign Exchange
 Mail transfer
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This refers to a transfer of fund to a foreign country by writing

a letter through mail. usually ,a bankers writes the letter to his
branch office or agent or correspondent in the country where
money will be payable. The debtor deposits the money in his
home currency with a bank. The bank transfers the fund to the
creditor through its branch or agency.
Telegraphic Transfer
It means transfer of funds from one country to another by
means of message through telegraph. Money is remitted through
telegraphic transfer for quick payment.
 Traveller cheque
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It is an order drawn by a bank upon itself to pay a specified

sum of money on demand to the purchaser of cheque. The
paying bank in foreign country after comparing the signature
of purchaser with specimen signature on the cheque makes
the payment.
 Exchange rate
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Definition
“The foreign exchange rate or exchange rate is a rate at which
the one currency of exchanged for another.”
“The exchange rate is the price of one unit of foreign currency
in term of domestic currency.”
 Types of exchange rate
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Following are the types of exchange control:

◻Spot rate
◻forward rate
◻buying/selling rate
◻interbank rate
◻official rate
 Spot exchange rate
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Definition

“It means the rate of the amount prevailed in market. For

example, if you go to currency dealer and ask him about
exchange rate the rate told by currency dealer is called spot
rate”
 Causes of change in exchange rate
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Change in price
change in export and import
capital movements
influence of banks
influence of speculations
stock exchange influence
structural influence
political conditions
 Objectives of exchange control
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◻Sufficient supply of foreign exchange

◻to check the flight of capital
◻Stability in exchange rate
◻to appreciate home currency
◻To increase foreign exchange reserve
◻to promote economic growth
◻To protect home industry
◻favourable balance of payment
◻To reduce exchange rate
 Interbank exchange rate
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Definition

“The rate at which the central and commercial banks

sell and buy foreign currency to each other is called
interbank rate”
 Advantages of exchange control
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◻sufficient supply of foreign exchange

◻to check the flight of capital
◻stability in exchange rate
◻to appreciate home currency
 Importance of Foreign Exchange
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◻Financial Strength
◻Balance of Payment
◻Predetermined Rate
◻Stability in Exchange Rate
 Money market
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Define capital market and money market

“The money market is a market for short term loans the period of
borrowing and lending in the money market is one year or less. On the
other hand in the capital market is a market for long term loans it is a
market in which funds or borrowed and length for a period over one
year”
 Institution of money market
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Central bank
commercial bank
non-bank intermediaries
discount houses
bill brokers
acceptance houses
 Qualities of organized money market
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◻A central bank
◻organized banking system
◻specialized sub-markets
◻existence of near-money assets
◻uniform interest rate elasticity.
 Banking System in Pakistan
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Islamic banking
concept of Riba

‘riba’ is an Arabic word. It means increase, addition, expansion or growth.in

banking and economic scenario, it means the additional amount which a
lender recovers from the borrower according to the fixed rate over and
above the principal sum.
 What is qarz-e-hasna
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Definition

“The banks give qarz-e-hasna to deserving persons for their

genuine consumption requirements such as marriage, education and
health etc. In this financing only principal amount is payable to bank
by the end of agreed period, provided that the borrower is in a
position to repay the loan”
 Islamic investment modes of financing
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Musharika
Modarba
Participation term certificates (ptc).
Investment in the basis of equity participation.
Investment on rent sharing basis.
 Musharika
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It is an agreement between the bank and its client

participation in a business as temporary partners by providing
agreed amount of fund for sharing profits or losses during a
specified period of time.
Modarba
Modarba means the business in which the subscriber(bank)
participates with the money and the manager(client)with the
knowledge and skill.
 Participation term certificates (ptc)
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Participation term certificates is an instrument of finance

issued by company for meeting its medium and long term capital
needs.
Investment in the basis of equity participation
equity participation means sharing risks and rewards of
ownership. under this the bank or financier purchases the shares
of the company at market price or at an agreed price. Profit will
be shared in the form of interim or annual dividend. Loss will be
borne in the form of reduction in the market price of the shares
purchased.
 Investment on rent sharing basis
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Rent sharing is generally applicable to financing for the purchase

or construction of house. The bank and the client will contribute
funds, as agreed to purchase or construct the house. Rent of the
building will be estimated area wise, and will be shared in the
ratio of their investments or as agreed upon.
 What is nationalization
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Nationalization means the transfer of any property or institution from

private to state ownership. In Pakistan 13 commercial banks of Pakistani
origin were nationalized on January 1, 1974. Under this scheme the smaller
banks were merged with big banks and as a result 5 units were formed ̶
national bank of Pakistan, Habib bank ltd., united bank ltd., Muslim
commercial bank ltd. And allied bank of Pakistan ltd.
 Three specialized banks
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List of any three specialized banks

1.Zarai taraqiati bank limited

2.Industrial development bank limited
3.Federal cooperative bank
 Merits and demerits of nationalization
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Merits
1.fair distribution of loan
2.effective banking management
3.more branches in rural areas
Demerits
1.low efficiency of employee
2.low level of competition
3.plitical pressure
 Methods of interest free banking system suggested by
Islamic ideology council.
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1.service charges
2.leasing
3.hire purchase
4.special facilities
 Conclusion
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In the above slides we learn about the Non

Negotiable instrument, Foreign Exchange
Transaction, Money Market , Banking System in
Pakistan and Islamic Banking.
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Thanks