MONEY AND BANKING

By the end of the lesson you should be able to clearly explain:

- The functions and characteristics of money
- The role and importance of central banks and commercial banks
 MONEY
What is money?
• A medium of exchange of goods and services.
Why do we need money?
• We need money if we are to exchange goods and services with one another. This is because we aren’t self-
sufficient- we can’t produce all our wants by ourselves. Thus, there is a need for exchange.
• In the past, barter system (exchanging a good or service for another good or service) prevailed. This had a lot
of problems such as the need for the double coincidence of wants (if the person wants a table and he has a
chair to exchange, he must find a person who has a table to exchange and also is willing to buy a chair), the
goods being perishable and non-durable, the indivisibility of goods, lack of portability etc.
 THE FUNCTIONS OF MONEY:

• Money is a medium of exchange, as explained in the previous slide.

• Money is a measure of value. Money acts as a unit of account, allowing us to compare and state the worth of
different goods and services.
• Money is a store of value. It holds its value for a long, long time, allowing us to save it for future purposes.
• Money is a means of deferred payment. Deferred payments are purchases on credit- where the consumer can
pay later for the goods or service they buy.
 QUALITIES OF “GOOD MONEY”

• Durability
• Divisibility
• Portability
• Scarcity
• Acceptability
 BANKING

• Banks are financial institutions that act as a intermediary between borrowers and savers.
• Commercial banks are those banks that have many retail branches located in most cities and
towns. Example: HSBC. While there is only one central bank that governs all other commercial
banks in a country. Example: The Central Bank Of Myanmar.
 FUNCTIONS OF A COMMERCIAL BANK:

• Accepting deposits of money and savings.

• Aid customers in making and receiving payments.
• Giving loans to businesses and private individuals.
• Buying and selling shares on customer’s behalf.
• Providing insurance (protection in the form of money against damage/theft of personal property).
• Exchanging foreign currencies.
• Providing financial planning advice.
 FUNCTIONS OF A CENTRAL BANK:
• It issues notes and coins for the nation’s currency.
• It manages all payments relating to the government.
• It manages national debt. Central banks can issue and repay public debts on the government’s behalf.
• It supervises and controls all the other banks in the whole economy, even holding their deposits and
transferring funds between them.
• It is the lender of ‘last resort’ to commercial banks. When other banks are having financial difficulties, the
central bank can lend them money to prevent them from going bankrupt.
• It manages the country’s gold and foreign currency reserves. These reserves are used to make international
payments and adjust their currency value (adjust the exchange rate).
• It operates the monetary policy in an economy.
 TYPES OF BANKS
• Commercial Banks are those banks that have many retail branches located in most cities and towns. They were
originally set up to provide financial services for small businesses but now they provide services for everyone
from private individuals to both large and small businesses.
• Credit unions are member-owned non- profit organization/financial cooperative, controlled by members and
operated on the principle of people helping people, providing its members credit at competitive rates as well as
other financial services
• Mutual societies are organisations owned by members. Profits are usually reinvested to help improve the service,
rather than paid out to external shareholders as they would be in a public limited company
• Investment Banks deal primarily with the creation of capital for other companies, governments, and other entities.
• Islamic Banks refers to finance or banking activities that adhere to shariah (Islamic law). Two fundamental
principles of Islamic banking are the sharing of profit and loss, and the prohibition of the collection and payment
of interest by lenders and investors.