Money Banking and Finance Notes For B Com ADC Part 1 Written by Mirza Shaban Zafar

Money, Banking & Finance (2016-17 Edition) For B.
Com Part I
1
Money, Banking & Finance (2016-17 Edition) For B.Com Part I
‫ش‬
‫ابلطءواطابلتہروسالوکنادرکےکوخدزناینںیھکل۔نادرےہہکویوینریٹسےکااحتمنںیمویوینریٹسش رپوساالتلحرکناوہےتںیہ۔اتکوبںیکداکوونںرپویوینریٹس یٹسناآاسیندایتسبںیہ۔آپ‬
‫ت‬ ‫ت‬ ‫ت ت‬ ‫ش‬
‫تابلطءوکناچنوساالتلمکمآےتںیہنکیلراگنٹئسڈہنوہےنیکوہج‬ ‫وکاچےئہہکامتموساالتوکایہنویوینریٹس یٹسرپںیھکل۔یباکمںیمسےسزنادہلکشماکاسانموقیکوہجےس ا‬
‫وہنےہ۔زنادہ ر‬
‫ٹنمںیمناآاسین‬36‫یفوسال‬،‫ٹنم‬180‫ناچنوساالتلمکمںیہنرکناےتایکسسےستریوہجرپسٹکیاکہنوہناےہ۔ارگآپزنایننادرکےکےنھکلیکاعدتڈالںیلےگوترھپویوینریٹسںیمرقمرہ‬
)‫ابلطءواطابلتونسٹےکآخررپدےئےئگویوینریٹسےکناسرپیپزاکاطمہعلرضوررکی لمکموساالتلحرکںیلےگاورربمنیھبتہباےھچآںیئےگ(اناءاہلل‬
Index
Page No.
Banking Portion
Q. 1 Define Bank- Difference Between Commercial And Central Bank 3
Q. 2 Different Kinds Of Banks 5
Q. 3 Commercial Bank -Functions -Importance Of Credit 7
Q. 4 What is the procedure for opening a bank account? 9
Q. 5 Central Banking System - Functions -State Bank 11
Q. 6 Commercial Bank Create Credit - Limitations 13
Q. 7 Banker Must Refuse To Honor The Cheque- May Refuse To Honor The Cheque 15
Q. 8 Differentiate Between Promissory Note, Bill Of Exchange And Cheque 17
Q. 9 Letter Of Credit - Type -Procedure Of Opening A Letter Of Credit -Advantages 19
Q. 10 Relationship Between Banker And Customer - Right And Duties Of A Banker And Customer 21
Q. 11 Privatization Of Banks -Advantages And Disadvantages 22
Q. 12 Employment And Sources Of Funds -Principle 24
Q. 13 Nationalization Of Bank -Advantages And Disadvantages 26
Q. 14 Write a note on E-BANKING 28
Q. 15 Write a note on Islamic Baking / Traditional Islamic Banking 32
Money Portion
Q. 16 Inflation-Causes And Measures 37
Q. 17 Evolution Of Money-Qualities Of Good Money 39
Q. 18 Barter System-Effects And Removals 41
Q. 19 Paper Money-Advantages And Disadvantages 43
Q. 20 Principles Of Note Issue-Methods Of Note Issue 45
Q. 21 Index Number-Limitation-Measurement Of Value Of Money 47
Q. 22 Money Market And Capital -Differentiate 49
Q. 23 Foreign Exchange -Factors Causing Changes In Exchange Rate 51
Q. 24 Money-Functions And Qualities Of Money 53
Q. 25 Characteristics And Phases Of Trade Cycle 55
Q. 26 Quantity Theory Of Money Given By Fisher 57
Q. 27 Monetary Policy And Discuss Its Various Tools -Methods Of Credit Control 60
Finance Portion
Q. 28 Business Finance- Importance And Types 65
Q. 29 Debt Financing-Merit And Demerits 68
Q. 30 Equity Financing-Merit And Demerits 70
Q. 31 Islamic Modes Of Financing 72
SHORT QUESTION AND ANSWERS 74
PUNJAB UNIVERSITY PAST UPTO DATE PAPERS 76
In Mirza Commerce Academy
1. MBF will be taught in 45 days.
2. After every 5 Questions, test shall be held.
Q. 1 Define Bank? What is the difference between commercial and central bank given examples?
2
vs.
“A bank is public company that deals in money ‫ےسیپاکاکروابررکاتےہ‬for profit
‫انمعف امکےن یک رغض ےس‬. It accepts deposits ‫ہی ولوگں ےس ہسیپ ووصل رکات ےہ‬from general
public. It provides loans to businessmen and other persons.”
The bank pays interest on deposits and it receives interest on loans and advances. It also
deals in foreign exchange‫زرمبادلہ‬, transfer money from one place to another, purchases and sells gold,
securities, shares etc. There are many other functions a bank performs for its clients.
Difference between Commercial and Central Banking
‫انمعفامکےنواےل)اوررمکریکنبںیمفرق‬/‫رمکلش(اجتریت‬
1. Formation‫لیکشتاکرطقیاکر‬ The commercial bank is formed under the
companies law.
The central bank is formed under an Act of parliament
or ordinance.
2. Ownership‫یکلم‬ The share capital of the commercial bank is owned
by the people.
The share capital of the central bank is owned by the
govt. or people.
3. Management ‫ااظتنیم‬ The management and other employees are
appointed by the board of directors.
The management and Other employees are appointed
by the Govt.
4. Number of bank‫وکنبںیکدعتاد‬ There are many banks in every country.
There is only one central bank for every country.

5. Branches‫شاںیخ‬ The commercial banks have both inland and
foreign branches.
The central bank has only in land branches it has no
foreign branch.
6. Aim‫دصقم‬/‫رظنہی‬ The sole aim of commercial bank is to earn profit.
The aim of central bank is to maintain monetary and

economic stability.
7. Issue of money‫رکیسنونٹاجریرکنا‬ The commercial banks cannot issue currency but
can issue plastic money, cheque, card and credit
The central bank can issue currency money like Rs. 10,
cards only.
20, 50, 100, 500, 1,000 and 5,000.
8. Account Holder‫اھکہتدار‬ General public and individual ‫ االیک صخش‬, partnership,
The government and commercial banks are the account limited companies are the account holders.
holders.
9. Advisor‫وشمرہدےنیواال‬ The commercial banks advised their customers for
investment business consultancy.
The central bank advises the govt. on financial matters.
3
10. Nature of account‫ااکونیکونتیع‬ The commercial bank open current, saving, PLS,
fixed deposits accounts.
The central bank opens the govt. accounts under various
heads of accounts.
11. Money market ‫ینمامرٹیک اےسی اکروناروں وکےتہک ںیہ ہک وج ای اسل ےس‬ The commercial banks are the member of money
‫ت‬ market.
‫زنادہدمتےکفرےضاجریرکےتںیہ۔‬
It is the leader of money market.
‫ت‬ The commercial banks create according to money
12. Credit Controller‫رکنےہ‬‫وپرےکلمےکاداھرےکاظنموکرٹنکول ا‬
available.
The Central bank controls the volume of credit through
various methods‫رطقیاکر‬.
13. Exchange controller)‫زرابمدہلاکاکروناررکےنواال(رکیسناجنیچسکیوریغہ‬ It is the authorized dealer in foreign exchange
It is the controller of foreign exchange. under the supervision of central bank.
14. Winding up‫کنباکاخمت‬ The commercial bank can be closed up if the

management so decides due to unsuccessful
The central bank cannot be closed up even if working at
business.‫اصقننیکوصرتںیمااظتنیمدنبیھبرکیتکسےہ۔‬
loss.‫اسکنبوکدنبںیہنایکاجاتکساچےہاصقننرپیہویکںہنلچراہوہ۔‬
15. Foreign payment‫ریبویناداایگیئں‬ It makes the foreign payments for customers due to
import and export of goods and services.
It makes the foreign payments on behalf of the
government.
16. Transfer of money‫رمقیکیلقتنم‬ It transfers the money from place to place for the
people.
It transfers money from one place to another for the
government and banks.
‫ت ت‬
17. Loans‫وکحموکفرہضدانی‬ It provides loans, cash credit and overdraft to the
people.
It arranges loans for the government and provides loans
‫ت‬
to commercial banks as lender of last resort‫ںیہکاورےسفرہضہن‬
‫ت‬ ‫ت‬
‫اجنےہ‬
‫ےلموترھپرٹنسلکنبےسفرہضایل ا‬.
‫ت‬ It discounts the bills of the customers.
18. Discount of bills‫ابمدہلڈنہیوکباگلناےہ‬
It discounts the bills for the commercial banks.
19. Evening banking‫شامےکاواقتںیماکنبری‬ The commercial banks provided evening banking
services for the customers.
The central bank does not provide evening banking
services.
4
Q. 2 Define bank discuss in detail the different kinds of banks.

Bank
“Bank is an institution which accepts
deposits and advances loans to the people
who need ‫ ت‬it.” ‫ت‬ ‫ت‬
‫رکنےہاورانولوگںوکفرےضداتیےہںیہنجفرےضیکرضورتوہیتےہ‬
‫کنبایااسیادارہےہوجولوگںےسےسیپووصل ا‬
Banks are doing many functions ‫اکم‬to facilitate the different type of people in a country. They accept
deposits from people and lend ‫اداھردانی‬money to people. It is very difficult for banks to perform all the
functions in a single bank. So the banking experts have divided the banks according to their
importance and functions. Banks having different features ‫رفنمدوصخایصت‬can be divided as follows:
1. Chartered bank‫شایہفرامن(نادشاہناہکلم)ےکمکحےکتحتاقمئایکایگکنب‬
These are the banks which are established by the order of King’s order. They are like other
commercial banks. For example Chartered Bank of England.
2. Banks according to registration‫ررٹسجنشیےکاحلظےساقمئےئکےگکنب‬
1. Scheduled Banks‫ڈیشویڈل(ررٹسجڈ)کنب‬
The banks which are registered in the list of central bank are bound ‫نادنب وہنا‬to follow ‫لمع رکنا‬the
instructions and policies of central bank are called scheduled bank e.g. HBL & MCB.
2. Non-scheduled Banks‫ریغررٹسجڈکنب‬
These are the banks which are not registered in the list of central bank e.g. Punjab Provincial Corp
Bank.‫اجنپبرپاولشناکروپرنشیکنب‬
3. Banks according to ownership‫یکلمےکاحلظےساقمئکنب‬
1. Government Banks‫رساکریکنب‬
‫ت‬ ‫ت‬
These are the banks which are owned ‫امکل وہنا‬by central ‫رمکری وکحم‬or provincial ‫وصنایئ وکحم‬government.
The Government is responsible to make policies of these banks e.g. BOP, NBP etc.
2. Private Banks‫یجنکنب‬
The banks owned by the people of any country are called private banks e.g. HBL, UBL.
4. Money creative banks‫ےسیپےسہسیپانبےنواےلکنب‬
1. Central Banks
Every country has its central bank. Its function is to manage monetary ‫امیل‬and banking system ‫وکنبںاکاظنم‬
of the country. Profit is not objective ‫دصقم‬of this bank. It has authority ‫اایتخر وہنا‬of note issue e.g.
SBP‫اٹیٹسکنبآفنااتسکن‬.
2. Commercial Banks
These are profit seeking ‫انمعف امکےنیکرغض ےس‬banks. They accept deposits and provide short term ‫ای اسلےسمک‬
‫ت‬ ‫ت‬ ‫ت‬
‫دمت اک فرہض‬, medium term ‫ای اسل ےس دس اسل یک دمت اک فرہض‬, and long term loans ‫دس اسل ےس زنادہ دمت اک فرہض‬. These are
called the heart of an economy e.g. RBS‫رالئکنبآفاکسٹڈنیل‬, ABL‫االڈیئکنبڈٹیمل‬, MCB.
5. Saving & exchange banks‫تچباوررکیسندبتیلیواےلکنب‬
1. Savings Banks‫اےسیکنباہجںولگتچبرکےکفلتخمومیکسںںیمہسیپعمجرکوارکانمعفاحلصرکےتںیہ‬
These are the banks which are established to encourage and to collect the savings of poor and middle
class people. They also give profit to depositors e.g. Post office, NSC.
5
2. Exchange Banks ‫ایسیکنبناادارےاہجںولگفلتخموکلمںیکرکیسندبتلیرکواےتںیہ‬

Bank which provides foreign exchange to importers and exporters is called exchange bank. They
convert local currency into foreign currency and issue traveler’s cheques etc. For example Khannani
& Kalia, Dollar East etc.
‫ت‬
6. Development banks‫ترایقیتکنب‬
‫ت‬
1. Agricultural development banks‫زریعترایقیتکنب‬
These banks develop the agriculture sector of the country. They provide loans to purchase modern
‫ت‬
machinery, fertilizers and seeds etc. e.g. ZTBL‫زریعترایقیتکنبڈٹیمل‬.
‫ت‬
2. Industrial development banks‫یتعنصترایقیتکنب‬
These banks support the industrial sector of the country. They give loans to make new industries and
helps to sick industries ‫ایسیںیتعنصوجاصقننرپلچریہوہں‬e.g. IDBP‫انڈرٹسلیڈویلپمٹنٹکنبآفنااتسکن‬.
‫ت‬
3. Regional development banks‫العاقیئترایقیتکنب‬
They develop particular region of the world and improve the living standard and helps in obtaining
modern technology e.g. Asian Development Bank.
‫ت‬
4. International development banks‫نیباالوقایمترایقیتکنب‬
‫ت‬
They provide assistance ‫رکن ےہ‬ ‫دمد فرامہ ا‬for progress and economic development of all the countries e.g.
World Bank.
7. Investment banks‫رسامہیاکریےکےیلاقمئےئکےئگکنب‬
These are the banks which deal in the purchase and sale of securities and they also provide loans for
this purpose e.g. ICP‫ & اونٹنمٹساکروپرنشیآفنااتسکن‬NIT‫لنشیناونٹنمٹسرٹس‬.
8. School banks‫وکسلےکوچبںےئلیکنبیکوہسایلت‬
To develop the habit of saving in school children these banks are formed. Bank officials ‫کنب ےک المزنیم‬
provide banking facilities to students at their schools. They are not in Pakistan.
‫ت‬
9. Mortgage consumer and cooperative banks‫اجدیئاداوردرگیاایشءرگویرھکرکفرہضدےنیواےلکنب‬
‫ت‬
1. Mortgage banks‫اجدیئاداوردرگیاایشءرگویرھکرکفرہضدےنیواےلکنب‬
These banks give loans to people against their movable and immovable property. People mortgage
gold, silver and financial documents and house, shop and land etc to get loans.
2. Cooperative banks
‫ت‬
These banks provide credit facilities ‫اداھر یک وہسل‬to small farmers ‫اکاکتشر‬and industrialists ‫اکتعنصر‬to raise
income level e.g. PCB‫اجنپبوکآرپوٹیکنب‬,
10. Banks according to countries‫یکلماحلظےسوکنبںیکااسقم‬
1. Home banks‫یکلمکنب‬
Banks owned and controlled by the government or the people of that country are called home banks
e.g. NBP, UBL.
2. Foreign banks‫ریغیکلمکنب‬
These banks are owned and controlled by the government or people of a foreign country e.g. City
Bank, Bank Alflah Ltd. RBS , Samba Bank etc.
6
Q. 3 Define Commercial Bank. Explain basic functions of a modern commercial bank and
briefly narrate the importance of credit‫ـ‬
Commercial Bank)‫اجتریتکنب(انمعفامکےنواےلکنب‬
“Banking means the accepting for the purpose of lending or investment of deposits of money from
public repayable‫ واسپرکنا‬by cheque, draft, order or otherwise”. (Banking companies ordinance 1962)‫نبےس‬
‫ڈراٹفنایسکاوررطےقیےسرکدانی‬،‫رمادولوگںےسرسامہیاداھرنارسامہیاکریےئلیکووصلرکنااورواسپچ‬
The commercial banks do all kinds of banking business. The functions of commercial bank may be discussed
in the following groups.
Primary Functions‫اینبدیاکم‬
1. Receiving of deposits‫ولوگںےسرسامہیووصلرکنا‬
The primary functions of commercial banks are as follows
‫ت‬
1. Fixed deposit accounts‫ایوصخمصےبملرعےصیےئلیکرسامہیووصلرکنا‬
Fixed deposits are for a fixed period decided at the time opening this account. High rate of interest is paid.
‫ت ت‬
Account holders cannot withdraw ‫رمقولکنانا‬money before end of fixed period‫ےطدشہوق‬.
2. Current accounts‫تلچاھکہت‬
‫ت‬
On current account no interest is given. Businessmen and salaried persons ‫وخنتاہ دار افراد‬prefer ‫ترحیج دانی‬this kind of
account. There are some banks that pay interests on such current accounts.
3. Saving accounts‫تچباکاھکہت‬
Person with little savings ‫دحمود ںیتچب‬deposit their money in the saving account. Money can be withdrawn upto a
‫ت‬
certain limit‫وصخمصدحی‬. Interest ‫وسد‬is paid on reaming balance‫اقبنارمق‬.
‫ت‬
2- Advancing loans‫فرےضفرامہرکنا‬
Received money is advanced to the people who need it. High rate of interest is charged from borrowers ‫اداھرےنیل‬
‫واےل‬and low interest is paid to depositors‫عمجرکواےنواےل‬. Following are different loans as under:
‫ت‬
1. Running finance‫ایھچرہشترےنھکواےلااکونوہڈلرزوکوھتڑےرعےصےئلیکفرہضیکفرایمہ‬
The banker can give facility to selected customers to meet their working capital needs from their current
accounts after settlement ‫اعمالمتےطرکنا‬with the banker.
‫ت ت‬ ‫ت‬
2. Demand finance‫ااسیفرہضکنبیسکیھبوقواسپامناتیلےہ‬
The bank can lent money to needy persons for short period and loan is repayable on demand at any time.
This is also called call loans.
‫ت‬
3. Educational loans‫یمیلعتاخرااجتےئلیک رفہض‬
Educational loans are granted to the financially week students ‫امیلوطررپزمکورابلطء‬to meet the financial requirement ‫امیل‬
‫رضورتوپرارکنا‬to get their education and repayable after their getting job as per terms ‫رشائطس‬of bank.
3. Discounting of Bills of exchange‫ابمدہلڈنہیوکباگلنا‬
Discounting of bills of exchange means that bank accepts the bill as security ‫ظفحت‬for granting loan. It is also a
source of income ‫آدمناکذرہعی‬for the bank.
‫ت‬
4. Mortgage‫رگویرھکرکفرہضدانی‬
Banks grant loan against the security of different assets like land, property and gold etc. Generally loan is
granted for a long period of time under mortgage.
7
‫ت‬
5. Agricultural loans‫زریعفرےض‬
Banks grant loan to the agriculturists to meet their financial requirement for cultivation and also for cattle.
Secondary Functions‫ناونی(درگیفلتخم)اکم‬
Agency services‫اھکہتداروںےکامندنئےےکوطررپاکمرسااجنمدانی‬
1. Collection and payment of Cheques‫وکیچںیکووصیلاورادایگیئ‬
Commercial banks collect and make payment of cheques on the behalf of their customers.
2. Dividends‫ینپمکیکرطفےسشرزوہڈلرزوکدناایگانمعفیکووصیل‬
Commercial banks collect dividend and interest on shares on the behalf of their customers.
3. Security (Trustee))‫وگرٹنمنیکرسامہیاکریےئلیکاجریرکدہوکیسریٹ(رسٹنفیکنٹ‬
Customer directs ‫مکح دانی‬his bank to purchase and sale securities on his behalf bank at nominal commission ‫ااہتنیئ‬
‫ومعمیل‬
4. Agent (Representative)‫امندنئہ‬
Bank also acts as an agent or representative of customer at home and abroad‫ادنورنوریبونکلم‬.
5. Instructions‫وصخیصدہانات‬
Bank also does on instructions of his customers by charging nominal charges. Orders for non-payment ‫ادایگیئےس‬
‫روانک‬of cheques can be given to bank.
6. Transfer of Fund‫روقمیکیلقتنم‬
Bank also performs the function of transferring funds from one place to another at nominal commission.
(WUMT)‫ورٹسینوینینینمرٹارفسن‬
Utility Services‫درگیوہسایلت‬
1. Credit Instruments
Banks issue various credit instruments e.g. Cheques, draft and L/C. etc.
2. Foreign Currency
Banks deal in foreign currencies and facilitate foreign trade and foreign traveling.
3. Precious Articles ‫ناناباوریگنہماایشء‬
Banks accept valuables ‫یگنہم اایشء‬of people. For example gold and silver ornaments ‫وسےن اور اچدنی ےک زویرات‬,
documents, securities, insurance policy, etc. for safe custody.
‫ت‬
4. Underwriting ‫وہنوتینپمکےتسسداومںاےنپشرزدنچوصخمصاداروںوکچیبرکاانپاکمالچیتےہ‬
‫جینپمکوکادتبایئوطررپرسامہیااھٹکںیہن ا‬
Banks underwrite for shares and debentures in order to raise capital or fund or loan.
5. Trade Information ‫اجتریتولعمامت‬
Banks collect useful trade information for their customers.
‫ت‬
6. Easy Medium of Exchange ‫وہنےہ‬ ‫وکیچںےکذرےعیےسروقماکنیلدنیآاسن ا‬
Issued cheques of banks are considered as an easy medium of exchange
7. 24 Hours Cash Service (ATM‫آوٹکٹیمرلیٹنیشم‬/ ADM‫)آوٹکٹیمڈاپیزٹنیشم‬
Modern commercial banks use computerized counters to provide 24 hour cash service through automated
teller machines (ATM) to their customers.
8
Q. 4 What is the procedure for opening a bank account?‫ایرمکلشکنبںیمایاکرونارناآدیمےسیکاھکہت(ااکون)ولھکااتکسےہ‬
An individual ‫ االیک صخش‬, business

and any organization opens a
bank account. Opening a bank
account is a contract ‫اعمدہہ‬with
customer and banker. One
should be very careful while
opening a bank account.
Everybody is not allowed to
open bank account; bank does
inquiry ‫وپھچ ھچگ‬about every new
‫ت‬
customer. If applicant ‫دروخاس‬
‫زگار‬is trustworthy ‫ اقب اامتعد‬, then
account is opened otherwise
application is rejected.
Procedure for opening a bank account‫کنبںیماھکہتولھکاےناکرطقیاکر‬
1. Account opening form‫ااکونوھکےنلاکافرم‬

A person can open an account in a particular branch of any bank. He should ask for the printed
account opening form on which he provides his all details required by the bank.
2. Introduction‫اھکہتداراکاعترف‬
The account is opened on proper introduction. The old customer introduced the applicant ‫کنباکوموجدہاھکہت‬
‫ت‬ ‫ت‬
‫رکوانےہ‬
‫دارےئندروخاسزگاروکاعتمرف ا‬to the bank. The application can be accepted or rejected.
3. Submission of documents‫رضوریداتسوتراتفرامہرکناوہیتںیہ‬
Every customer has to provide necessary documents. Individual has to provide identity card,
9
partnership has to provide partnership deed and company Memorandum of Association ‫ینپمک اک‬
‫(آنیئ‬MOA), Articles of Association (AOA) ‫ینپمکےکوقادعووضاطب‬or any other documents.
4. Specimen signature‫ومنےنےئلیکدطختس‬
The banker gets the specimen signature of the customer on the printed card having four portions and
keep it with it to confirm when any document or cheque is present for payment.
5. Account number‫اھکہتاکربمن‬
After approving the form of a customer, bank allots ‫اجریرکنا‬an account number for every new account
opened.
6. Pay in slip‫ کنبںیمرمقعمجرکواےنےئلیکاامعتسلوہےنوایللس‬Every account is opened with money. Customer fills

out pay in slip and deposits the money at the time of opening with cashier of bank.
7. Initial deposit‫مکازمکینتکرمقاھکہتولھکاےنےئلیکدراکروہیگ‬The initial deposit is an amount which is paid into the

bank at the time of opening on account. The current account is opened with Rs. 1,000. A profit and
loss account sharing account is opened with Rs. 100.
‫ت‬ ‫ت‬
8. Bank pass book‫اجنےہ‬
‫اجنےہاوراسںیمامتمنیلدنیاکراکیرڈراھک ا‬
‫ ااسیاتکہچبوجہککنبیکرطفےساھکہتدارےکناماجریایک ا‬The passbook is a
small booklet issued by bank to customer. The bank makes entries of the transactions into this book.
9. Cheque book‫ چی‬The cheque book contains printed forms known as cheques. The cheques are
used to withdraw the amount for the bank. A cheque book has serial numbers.
Operating a bank account ‫کنبںیماھکہتالچےناکرطہقیاکر‬

When a bank account is properly opened, then a customer can easily deposit and withdraw money.
Deposits are made through pay in slips and withdrawals are made through cheque or any other
instruments like pay order, drafts or standing orders or instructions in the name of banker.
10
Q. 5 What do you mean by central banking system Indicate the main functions of a central
bank / state bank?
Central Bank ‫رمکریکنب‬

‫ت‬
“A central bank is a bank which controls credit.” ‫رکنےہ‬
‫(رمکریکنبااسیکنبےہوجہکاداھروکرٹنکول ا‬W. A. Shaw)
‫ت‬
“A central bank is that which the lender of the last resort is.” ‫رمکری کنب ااسی کنب ےہ ہک ج ںیہک ےس فرہض ںیہن اتلم وت‬
‫ت‬
‫(رمکریکنبفرہضداتیےہ‬R.P. Kent)
PRINCIPLES OF CENTRAL BANKING

1. Effective Policy
Central bank implements effective policies to control the credit in the country.
2. Legal limits
Central bank works according to set rules of the government and its all dealings are within the said
rules.
3. Economic Stability
Central bank works for financial needs and economic stability and for the growth of banking.
4. National Interest
The object of central bank is not to earn the profit. It works in the best interest of the nation.
FUNCTIONS OF CENTRAL BANK

The activities of central banks are different from the activities of the commercial banks. Central bank
of a country looks after the national interest.
1. Banker to the Government

1. Accounts
The central bank keeps the deposits and makes payments of the central and provincial governments.
2. Financial Advisor
It also advises the government on economic matters such as controlling inflation and revaluation of
the currency.
3. Foreign Loans
Central bank makes arrangements to get foreign loans on the demand of government.
4. Transfer of Capital
Central bank transfers capital of central & provincial governments from one place to another.
5. Govt. Securities
It is the custodian of government securities, Treasurer bills and bonds. It also works for their sale
and purchase.
2. Sole Right of Note Issue

In every country central bank has sole right of note issue. This authority has been given to central
bank for uniformity, expansion of notes, regulate demand etc.
3. Bankers’ Bank
As a banker for the commercial banks the central bank performs the following functions
1. Custodian of Cash Reserves
The reserves of commercial banks are kept with the central bank.
2. Clearing House
11
As a banker’s bank the central bank acts as a clearing house for the settlement of mutual claims of
commercial banks (NIFT)
3. Lender of Last Resort
Central bank lends to the banks in times of stress to save the financial structure of the banks.
4. Opening of New Bank
A new bank or a branch cannot be opened without the permission of central bank.
5. Advance Policy
Central bank makes policies of advancing loans and rate of interest for commercial banks.
4. Controller of Credit
Central Bank controls the money and credit supply in the country for economic objectives.
5. Controller of Foreign Exchange

It is responsible for the management of foreign exchange and maintenance of external value of the
home currency. (Foreign Exchange Control Act, 1947)
6. Miscellaneous Functions
1. Staff Training (NIBAF)
Central bank provides modern training of banking to staff and establishes training institutes.
2. Growth to Saving
Central bank makes plans and adopts various methods to promote the habit of saving.
3. Industrial and Agricultural Development
Central bank gives loans of different kinds to develop the industrial and agriculture sectors.
4. Representation in International Institutions
It acts as the representative of government for International institutions like World Bank etc.
5. Membership Fee
If the government wants to become the member of international institutions then central bank pays
membership fee.
7. Leader of Capital Market

Central bank is the leader or guardian of capital market because it makes policies and takes decisions
of credit and to stable the monetary system in the country.
8. Exchange Rate Stability

The central bank fixes the exchange rates of the domestic currency in terms of foreign currencies.
9. Representative of Foreign Trade

Central bank acts as the representative of government in international trade. Besides making
investment in international market it also provides foreign exchange to importers and exporters of
the country.
12
Q. 6 How does a commercial bank create credit? Indicate the limitations on the powers of a
bank to create credit.
‫ـــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ‬
Credit creation
“The important work of bank is to provide
easy medium of exchange for the payment
and receipt to people. Banks are considered as
manufacturer of credit. It means they are not
only the dealer of money but in actual
meaning they are the creator of credit.”
(Prof. Crowther)
Example
A customer deposits Rs. 2000 in Bank A. Now bank A grants loan of Rs. 1600 to another customer
after keeping Rs. 400 (20%) as reserve. The customer deposits the amount of loan Rs. 1600 in its
bank B. Now the bank B will grant Rs. 1280 as loan after keeping Rs. 320 (20%) as reserve. This is
how a chain process of credit creation takes place.
Credit Creation by banking system
Banks Primary Deposits Ratio of Reserve Cash Reserve Credit Creation

A 2,000 20% 400 1,600
B 1,600 20% 320 1,280
C 1,280 20% 256 1,024
Total 4,880 976 3,904
Explanation
For the explanation purpose we have to take the following assumptions:
1. Primary new Deposit Rs. 2000.
2. All the payments and receipts are made through banks or cheques.
3. There is no leakage in the process of credit creation.
4. Ratio of cash reserve is 20% which remains constant through all the stages of the credit
creation process.
Formula of Credit Creation

If we want to know the expansion of credit for Rs. 2000 the following formula can be applied or
used. = New Deposit x 1 / Reserve Ratio
= 2000 x 1 / 20% = 2000 x 100 /20 = Rs. 10,000
Process of Credit Creation

The single bank cannot create credit. It is the banking system as a whole which expands loans many
times of its excess cash reserves. Commercial banks can create credit in following two ways:
1. Discounting of Bills
A bank also creates credit through discounting of bills of exchange. In this method the bank
discounts the bill and issues a cheque book after the opening of account instead of giving cash.
13
2. Supply of Loans
When a bank agrees to grant loan to a borrower against the securities then it opens an account for the
granted amount instead of giving cash. Borrower makes payment through cheque only. In this way
the process of credit creation goes on.
Limitations of Credit Creation

The power of commercial banks to create credit is limited. There are many limitations on the power
of banks for the creation of credit
1. Primary Deposits
Banks can create credit only if they get a primary new deposit that is why it is said that "deposits
create credit and credit creates deposits".
2. Willingness to Borrow
Bank has to find customers who are willing to borrow money otherwise credit creation is not
possible.
3. Shortage of Securities
Banks demand the securities from borrowers for granting loan. If borrower is not in a position to
fulfill this requirement then the bank will not grant loan.
4. Cash Reserve
A bank cannot lend all of its funds. It has to keep a reasonable portion of its funds to meet the
demand of its customer’s depositors.
5. Central Bank Policy

The commercial banks are not independent while lending money. The central bank of the country
can impose certain restrictions on banks to create credit.
6. Economic Conditions
If there is economic stability in the country then there will be more chances of profit for traders and
people will borrow loans from banks.
7. Types of Deposits Demand deposits result in credit but sometimes there are more fixed deposits
which damages the chain of credit, because bank has to keep more reserves to meet sudden demands.
14
Q. 7 Indicate the cases in which a banker MUST refuse to honor the cheque. Q. Indicate the
cases in which a banker may refuse to honor the cheque.
Cheque
“A cheque is a bill of exchange drawn on a specified banker and not expressed to
be payable otherwise than on demand.”
Bank Al Falah Limited Date: 01-08-2009

Paris Road Branch, Sialkot
Pay Mirza Shaban Zafar or bearer
Rupees Ten Thousand rupees only . B

a
Signature
n
A/C No. 01245169871 k
Muhammad Aslam
A
When Bank Must Refuse Payment
l
1. Cheque not signed by account holder
F on such a
The account-holder can draw cheque for making payments. He can forget to put signature
cheque. The bank has right dishonor unsigned cheque in this case. a
l
2. Signature differ a
Every bank takes signatures of every account holder at the time of account opening. h
The account
holder may forget the original signature to sign on cheque similar to specimen signatures and in case
bank must dishonor the cheque. L
i
3. No date on cheque m
The account holder must write date on cheque. The paying bank refuses to honor the cheque if date
i
is not written on cheque.
4. Mutilated cheque t
Mutilated cheque means a torn cheque. When mutilated cheque is presented toe banker is
dishonored. In absence fresh instruction such cheque has no value. d
5. Death of customer
D
After death of account holder relationship with bank comes to an end. The bank has righta to dishonor
all outstanding cheques after receipt of notice of death of an account holder. t
e
6. Insolvency of drawer :
A person can be declared as insolvent by the court. The court serves notice to banker, keeping in
0
view this notice, banker has right to refuse payment of cheque. 1
-
7. Insanity of account-holder 1
The customer may become mad. The doctor decides about insanity of an account holder. 2 After
-
receipt of this notice banker refuses all cheques issued by such person later become mad.
2
0
8. Different amount 0
9
Paris
Road
Branch,
15
Sialkot
Pay Mirza
A customer has to write same amount in words and figures. If he may writes different amount in
words figures, the bank refuses to make payment of such cheque.
9. Order of court
The court of law may pass an order to stop payment as punishment. When bank receives such orders,
payment of cheque is refused.
10. Closed account

An old customer cannot issue cheque against closed account, if there is any balance in such account.
The bank cannot honor cheque as account is already closed.
13. Crossed cheque

A crossed cheque is not payable at bank cash counter. The bank will collect the amount from another
bank on behalf of his customer.
14. Payee fails to provide identity

Order cheque is issued in the name of any natural person. The name of payee must be written in the
cheque. The drawee bank has right to dishonor cheque if identity of payee is not available.
15. Worn-out cheque / Stale Cheque

A cheque may remain in circulation for six months from date issue. The cheque may become worn
out during its life. The entries in cheque may not legible. The banker has right to refuse payment of
worn out cheque.
16
Q. 8 Define and differentiate between promissory note, bill of exchange and cheque.
Promissory Note
“A promissory note (not being a bank note or currency note) is an instrument in writing
containing an unconditional undertaking signed by the maker to pay a certain sum of
money only to or to a certain person or to the bearer of the Instrument.”
(Section 4 of Negotiable Instruments Act, 1881)
Rs. 5,000/- Sialkot , 12 September, 2008
Sixty days after date, I promise to pay to Mr. Mirza Shaban Zafar or
order the sum of rupees five thousand or for value received.
To, Muhammad Aslam

9/208 Islampura, Sialkot Stamp / Sd.
Abdur Rehman Janjua
Bills of exchange
“A bill of exchange is an instrument in writing containing an unconditional order
signed by the maker 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 instrument.” (Section 5 of
Negotiable Instruments Act, 1881)
Rs. 10,000 Sialkot , 12 September, 2008
Three months after date, pay to Jamil or order the sum of Rs. Ten
Thousand only for value received.
To Mirza Shaban Zafar

Stamp / Sd.
9/208 Islampura, Sialkot Abdur Rehman Janjua
Cheque
“Cheque is a bill of exchange drawn on a special banker and not expressed to be payable
otherwise than on demand.” (Section 6 of Negotiable Instruments Act, 1881)
Bank Al Falah Limited Date: 01-08-2009

Paris Road Branch, Sialkot
Pay Mirza Shaban Zafar or bearer
Rupees Ten Thousand rupees only . B

a
Signature
n
A/C No. 01245169871 k
Muhammad Aslam
A
l
Reason Promissory Note Bills of Exchange Cheque
1. Persons There are two persons in a There are three parties in There are two persons in
promissory note. They are a bill of exchange. They a cheque. F are
They
maker and payee. are drawer, drawee and account holder and a bank.
payee. l
a
h
17
L
i
m
Reason Promissory Note Bills of Exchange Cheque

2. Promise There is a promise on the There is an order on the There is an order to a
part of debtor to make part of creditor to make bank to pay the certain
payment as agreed. payment as agreed. amount to payee.
3. Liability The liability of maker is The liability of drawer is The liability of a banker
absolute and primary. The conditional and to pay is primary. A
maker is principal debtor. secondary. The drawer is banker has to make
surety in case of a bill. payment if there is no
objection.
5. Bearer A promissory note cannot The bills of exchange can A crossed or order
be made payable to bearer. be payable to bearer. cheque cannot be
payable to bearer.
6. Copies A promissory note cannot A bill of exchange can be A cheque is a single
be prepared in sets. It has drawn in sets. The document. It cannot be
on e copy only. foreign bills have three drawn in sets.
copies.
7. Payee The make of promissory The drawer of bills of Any person, company,
note cannot become exchange may be payee. firm, can be payee in
payee. case of a cheque.
8. Relation The make has direct The drawer has direct The banker and customer
relations with payee. relationship with drawee have direct relations.
but not with payee.
9. Notice A notice of dishonour is The notice of dishonor is There is no need to give
not given to the maker. given to drawee and notice of dishonour to
endorsers. customer.
10. Responsibility The makers are jointly and The acceptors are jointly The banker is singly
severally responsible for responsible for payment. responsible for payment.
payment.
11. Noting Noting and protesting is Noting and protesting is There is no need of
not applicable in this case. necessary for recovery of noting and protesting in
amount of bill. cheque’s dishonour.
12. Maker The debtor is person who The creditor is a person The account holder of a
can make or write it. who can make or write it. bank can make and write
it.
13. Area A promissory not is used A bill of exchange may A cheque is a usually
in the country only. The be used in the country drawn within a country.
area of working is limited and abroad. The area of But some payments can
to national boundaries. working may be across to also be made through
borders. foreign cheques.
14. Payment A promissory note can be A bill of exchange can be A cheque can be use for
used for making payments used to settle at world domestic and foreign
at local level. level. payments.
15. Kind Promissory note is A bill of exchange may A cheque can be payable
payable in rupees in one be payable in rupees or in local and foreign
country. The legal any other currency. currencies.
covering is rupees.
18
Q. 9 Define letter of credit. Briefly discuss its type and procedure of opening a letter of
credit also discusses the advantages.
Letter of Credit
“A letter of credit is a written instrument issued by the buyer’s bank authorizing the seller to
draw in accordance with certain terms and conditions.” (Frank)
PARTIES
1. Importer/ Buyer / Opener
The person who buys goods from a foreign country is called importer and he opens L/C.
2. Exporter / Seller / Beneficiary
The person who sells sends goods to another country is called exporter.
3. Importers Bank / Opening bank / Issuing Bank
The bank which issues L/C and assures the exporters bank for payment.
4. Exporters Bank / Seller’s Bank/ Beneficiary Bank
It is the bank in whose name the L/C is issued.
PROCEDURE OF OPENING AN L/C
1. Agreement
The importer and exporter make an agreement for the purchase and sale.
2. Performa Invoice
Performa invoice is a bill in which description and quantities are mentioned and are changeable as per terms
of the contract.
3. Contact with the Bank
After finalizing the agreement, the importer makes contact with the bank to open L/C.
4. Import License
Bank while issuing L/C requires the import license and the proforma invoice from importer.
5. Application Form
If bank is satisfied then it provides him an application form.
6. Inspection of the Application
The bank inspects the application, examines the customers credit standing etc.
7. Under Taking from Importer
After accepting the application, the bank obtains an undertaking from the importer that he will buy all the
documents from bank at mark up fixed by the central bank.
8. Margin Requirement
The bank asks the importer to deposit a certain proportion of total value and it may be as per the reputation of
the customer.
9. Issuance of L/C
After getting satisfaction the bank issues a L/C to Exporter’s bank.
10. Confirmation
Firstly the L/C is confirmed by fax or other telecommunication and then actual letter of credit is sent.
11. Delivery of Goods and Documents
The exporter delivers the goods after the confirmation of L/C and his bank sends the concerned documents to
the importers bank.
12. Payment
19
The importers bank clears the payment after examining documents and hands over all the documents to the
importer after receiving payment.
ADVANTAGES
The L/C is providing following advantages to the international trade.
1. Confidence
Traders from different countries don’t know each other. The letter of credit creates an environment of
guarantee and confidence by declaring the financial position.
2. Increase in Accounts of Bank
Customer opens bank account to obtain L/C which results in the increase of bank accounts.
3. Facility for Importers
Importers deposit some amount of total value of goods into bank and gets less burden of payment.
4. Facility for Payment
L/C is an easy mode of international payments because only documents are exchanged.
5. Pre-shipment Finance
Exporter can get pre-shipment finances for packing, handling and even for the purchase.
6. Easy Transfer
The L/C has made the transfer of money from one country to another country very easy.
7. Income of Bank
L/C increases income of banks. Banks charge reasonable amount as commission.
8. Facility for Exporter
The L/C helps the exporters in a way that they can easily export the goods.
9. Legal Protection
The L/C provides legal protection to exporter for the receipt of payment.
10. Economic Development
Better exports will always give goods foreign exchange to the country.
11. Tension Free
The L/C makes the importer and exporter tension free from the payment and receipt.
KINDS OF LETTER OF CREDIT
1. Revocable L/C The revocable credit can be changed or cancelled at any time without prior notice to
seller. The issuing bank can inform to advising bank for any change.
2. Irrevocable L/C The irrevocable credit cannot be changed or cancelled by issuing bank himself. The
consent of parties is to be taken first.
3. Transferable L/C Where credit can be transferred by the original party to letter of credit to any other
person is called transferable credit.
4. Documentary L/C When opening bank asks for attachment of necessary documents to be attached with
the letter of credit is called documentary letter of credit.
5. Open or clean L/C When there is no condition to attach the documents with L/C is called open or clean
L/C.
6. Fixed L/C The amount of this type of L/C remains same within fixed period is called fixed L/C.
7. Red clause L/C To provide funds to exporter for purchasing raw materials for manufacturing of
goods is written with red ink to draw special attention is called red clause L/C.
8. Green clause L/C When the bank provides funds to seller specially to purchase and store wool from
Australia is called green clause L/C.
9. Packing L/C Bank grants packing credit to exporters to assist them in meeting pre-shipment requirements.
10. Circular L/C This type of L/C is issued to visitors and travelers needing funds in many countries. The
issuing bank can require different foreign banks to honour drafts of customers.
20
Q. 10 What is the nature of relationship between banker and customer? Explain briefly the
right and duties of a banker and customer?
Banker
“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.” (JA. Gilbert)
Customer
“A customer is one who has an account with a banker or for whom a banker habitually
undertakes to act as such.” (Dr. Hart)
RELATIONSHIP BETWEEN BANKER & CUSTOMER

1. Principal and Agent
When a banker collects payment of negotiable instrument, pays any expense or buys and sells securities on
behalf of customer, he acts as his agent customer becomes principal.
2. Purchaser and Seller
In financed sale with mark up, the banker is the seller of the goods and the customer is the purchaser of the
same.
3. Trustee and Beneficiary
When a banker receives securities, and valuable goods for the custody, the banker’s position is that of a
trustee. When banker receives money then banker becomes beneficiary.
4. Debtor and Creditor
The primary relation of account holder and customer is of debtor and a creditor. Where bank lends money he
is creditor and borrower is the debtor.
5. Bailer and Bailee
When a banker takes valuable goods of customer, he becomes a bailee. The customer who deposits property is
a Bailer.
6. Cardinal (Friendly) Relation
Sometimes the banker is in a position to establish friendly relation with his customer by providing reliable
and confidential information about the general standing of people.
7. Mortgager and Mortgagee
When a banker accepts immovable property of customer as security for mortgage, the customer becomes
mortgager and bank is mortgagee.
8. Lesser and Lessee When a banker provides finance to a customer on the basis of lease financing the
relationship becomes that of a lessee and lesser. In this case the banker is lesser and the customer is lessee.
9. Pledger and Pledgee When a customer pledges an article goods and documents with the banker as
a security for payment of debt, the relation between customers becomes pawnor and banker is Pawnee.
10. Aamal and Modarib When a banker provides finance to customer under the agreement of
Modaraba, the relationship becomes that of Modarib and Aamal. The banker is Modarib and the customer is
Aamal.
11. Hirer and Owner In case of hire purchase financing the banker is the owner of the asset and the
customer is hirer.
21
Q. 11 Discuss the privatization of banks in Pakistan. Explain its advantages and

disadvantages.
Denationalization / Privatization of Bank

“Privatization means selling nationalized industries and other
parts of the public sector to private businesses and individuals.”
(Cook)
OBJECTIVES OF PRIVATIZATION
1. Improve performance
The purpose of privatization of banks is to improve performance. When ownership is in private
hands they work for profit.
2. Promote healthy competition

The purpose of privatization of banks is to create healthy competition. Larger the deposits the larger
the profit.
3. Reduce burden of government

In privatization business is run by private sector. The government can make rules for proper
working and reduces burden the government.
4. Funds for social sectors

The privatization of banks provides funds to the government. The capital invested in bank is
available for social sectors and government can set up schools and hospitals.
5. Speed up rate of industrialization

The sale of banks to private people is helpful to accelerate speed of industrialization. The fund
invested in banking sectors become free for development.
6. Promote capital market

The privatization of banks is useful for promotion and increase of capital market. The share of
market becomes strong due to increase in strength of shareholders.
ADVANTAGES OF PRIVATIZATION
1. Professional management
The owners of privatized banks can hire services of professional management. 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.
3. Efficiency
The efficiency of privatized banks increases reasonable pay, promotions and other facilities for
employees.
4. Reasonable profit
22
The main source of profit is lending. The loans are provided at higher rate, and receive deposit at
low rate. The difference is profit of bank.
6. Quality services
The banks are successful if they offer all services to customers. It is the age of competition so quality
services are the need of the day.
7. Equal income
The shares are sold to general public. The number of shareholders may be in million. The profit is
distributed among shareholders.
8. Productive loans
The loans are provided for productive purposes. The banks may discourage consumption loans or
speculative loans. Productive loans can increase economic development.
9. Employment opportunities
The banks provide loans to business and other people. New companies need people and this
provides employment for people.
10. Earning foreign exchange

The management can open branches in other countries. The banks earn foreign exchange.
DISADVANTAGES OF PRIVATIZATION
1. Extra employees
The drawback of privatization is that employees are declared extra and increases unemployment.
Jobless workers increase the worries of state.
2. No branch in rural areas

The banks hesitate to set up branches in rural areas. So a large part of population can not get help.
3. Unbalanced growth
The management of privatized banks provides loans in particular areas unbalance growth in the
country. The areas may remain underdeveloped where loans are not distributed.
4. Jobs for relatives
The management of privatized banks may provide jobs to friends and relatives.
5. Loans to relatives
The management likes to lend money to persons who are relatives or friends of directors of bank. In
this way only few people have approach for loans.
6. Owners association The owners of private banks can make informal agreement for earning
high profits. Such associations do not care for the customers.
CONCLUSION
The privatization of banks in Pakistan has removed many problems but not in full. There are certain
chances of difficulties which were present before nationalization of banks in Pakistan. State bank of
Pakistan will have to make effective policies to control working of commercial banks.
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Q. 12 What do you understand by the employment and sources of funds in relation to the
banking system? In this connection explain the principle or factors taken into an account of
the bank.
Employment of funds
“Investment or advancing of funds by commercial banks in order to
get profitable returns.”
FORMS OF EMPLOYMENT OF FUNDS
1. Cash Reserves
To make higher profits bank should utilize its funds that it can also fulfill the needs of cash of its
account holders. Every bank is required to maintain 18% of its total demand deposits in Pakistan. In
addition to this, banks are required to keep 7% of its total demand deposits with SBP which amounts
to 25% collectively. Besides these requirements banks should keep reserves depending these points
also like Habits of depositors, Nature of account, clearing house facility, the size of reserves etc.
2. Advances / Loans
After fulfilling allowance the requirements by the SBP, the reaming amount is used by the
commercial banks in such a way that there is maximum return and advances are the most profitable
option for the commercial banks. Usually a bank makes advances in the following ways:
a) Bank overdraft
Overdraft means a facility provided by a bank to account holder to withdraw money from his
account more than the actual amount. Bank charges interest on the money overdrawn.
b) Discounting bills
Bank provides money to a person holding a bill of exchange. Bank deducts rate of interest for the
period which is still outstanding remaining amount is transferred to the customer’s current account.
c) Cash credit
Cash loans are long term loans issued against securities (fixed assets). Amount of the loan is
transferred to the current account of the borrower. The interest is charged only on the amount
withdrawn.
d) By opening loan account
These loans are issued against securities (liquid assets.). These are short term loans. The bank
opens loan account in the name of the borrower. Interest is charged on the full amount of loan.
e) Money at call/ Short notices
Such kinds of loans are given for a very short period of time. Usually for 7 days. These loans are
provided to the bank in order to maintain their liquidity requirements and also to the brokers of stock
exchange.
3. Investments
Banks invest a large percentage of their funds in the government and stock exchange securities.
Most of the investments of the banks are in central bank and government securities because these
securities involve lesser risks. The large portion of banks funds deposits repayable on demand, so
banks mostly invest in short and medium term securities which are as Public debts, Semi
government securities, securities of public companies, industrial securities.
SOURCES OF BANK FUNDS
A commercial ban is a profit seeking institution and in order to achieve this objective it offers a
varied to securities packed with the interest bearing options to the customers. These obligations of
the banks towards the customer are the sources of fund for the bank and usually these are shown on
the liability side of the balance sheet. The main sources which supply funds to the bank are as
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follow:
1. Bank own funds
Usually the banks have three own funds as under:
a) Paid up capital
The amount with which the banking company in Pakistan has been registered is called authorized
capital. The Paid up Capital is that portion of capital which the banking company has actually
received from the public. The banks in Pakistan raise capital by issuing ordinary shares of Rs. 10
each. No banking business shall be constructed by the banking company unless is fulfills following
conditions as law says about it.
b) Reserve funds
At the time of declaring dividend, a certain portion of profit is transferred to the reserve fund. This
reserve belongs to the shareholders and at the time of liquidation, the share holders are entitled to
these reserves along with the capital. The main purpose of setting aside the part of capital is to the
meet the unforeseen expenses of the bank.
c) Profits
Profit is another major source to a bank for the purpose of conducting business. Profit signifies to
the credit balance of the profit and loss account which has not been distributed.
2. Borrowed funds
The other major sources of the bank funds for the banking business are the borrowings. Banks main
borrowing mostly consists of deposits from its customers. The larger the deposits, the larger will be
the funds. However, the borrowing sources are mainly divided into the following categories:
1. Deposits
a) Current deposits
These are payable to the customers when they are needed. The customers can withdraw amount
from these accounts at any point in time.
b) Fixed or Term deposits
The deposits can be withdrawn after a specified period of time is referred to as fixed or term
deposits. The period for which the bank keeps these deposits normally varies from 3 months to 5
years.
c) Saving deposits
Saving deposits were introduced to encourage the saving habits and in Pakistan, these can be opened
with a very small amount of money and depositors are issued a cheque book for the withdrawals.
d) Foreign currency account
Government of Pakistan has introduced many reforms in foreign exchange control in the country
since February 1990 and foreign currency accounts is one of those reform so that the foreign
exchange position can be easily strengthened. Any individual, firm or a company whether resident
or non-resident can open this account in current saving and term deposit account nature respectively.
2. Borrowing from Central bank
The commercial banks in time of emergency borrow loans from central bank of a country. The
central bank extends help as and when the financial help is required by the commercial banks
because it also acts as a lender of last resort.
3. Other sources
Bank also raise funds by issuing bonds, debentures, cash – certificates etc. though it is not a common
source but it is dependable source of borrowing by commercial banks.
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Q. 13 What are the causes of nationalization of bank in 1974? Explain the advantages and
disadvantages of such nationalization.
Nationalization of Bank
“Nationalization is the act of converting privately owned resources into
one owned by central government.” (Millard)
Nationalization of bank means the transfer of any bank from private to government. Government of
Pakistan nationalized all commercial banks on 1st January, 1974. There were 23 scheduled banks in
the country that time with 2942 branches. The government set up Pakistan Banking Council (PBC)
to run the administration of nationalized banks.
CAUSES OF NATIONALIZATION OF BANKS
1. Concentration of wealth
200 families borrowed 75% of total loans and advances at that time. Many small producers were
unable to get loan. The result was concentration of wealth in few hands.
2. Use of loans
Banks were giving loans to persons who were in a position to repay the loans and were careless
about use of loans. Loans were used for black marketing & speculation etc.
3. Unbalanced distribution of credit
A major portion of credit was given to industrial sector and agriculture sector was ignored badly.
Only 10% credit was given to agriculture.
4. Protection of black money
Private Banks protected black money in their account because the government was not legally
allowed to know the deposit figure.
5. Profit motive
In spite of aim of growth and development, banks aimed to maximize profit. The savings of the
people were utilized according to the personal and not for the national interest.
6. Wasteful competition
Banks engaged themselves in a wasteful competition race. This badly hampered the pace of
economic growth. Heavy expenditures wee made by all banks.
7. No uniformity in job rules
There was no uniform pattern of job rules. The promotions and increment were given on the
personal will of bosses and there was no security of jobs.
8. Creation of credit
In those days commercial banks were creating credit just for the sake of their profit and not for the
public interest.
9. Favoritism / Nepotism
Bank owners used to appoint own relatives and gave them heavy salaries.
ADVANTAGES
1. Fair distribution of wealth

Now commercial banks gave loans in accordance with the credit policy of SBP to big industrialists,
small businessmen.
2. Proper distribution of loans
Now there is a proper distribution of loans and credit is given for agriculture sector, construction of
house, small business. Distribution is more balanced.
3. Better administration of banks
Government has setup an executive board for each commercial bank to run the administration of
banks. On top of it there is Pakistan Banking Council also.
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4. Growth of the level of the employment

After nationalization many vacancies were announced and new jobs were created by opening new
branches of banks.
5. Benefit to bank employees
After nationalization the employees got many benefits. There jobs were protected, salaries were
increased and allowances were raised.
6. Development of agricultural sector
Commercial banks gave special attention to agricultural sector. Now more than Rs. 10 billion is
given to agriculture sector.
7. Protection of national interest
Now a huge amount of money is spent on development projects to benefits the whole nation.
8. Better working of foreign bank branches
Now only the most experienced bankers are transferred to foreign bank branches on merit.
9. Effective monetary policy
The SBP has now an effective control over commercial banks. There is uniform credit policy for all
banks. Commercial banks are bound to cooperate with SBP.
DISADVANTAGES
1. Unbalanced distribution of credit

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.
2. Low efficiency of the employees
Bank officers have now become government officers. So they are not very commercial minded
these days.
3. Favoritism
Employment in banks is now providing by Ministry of Finance. Government officials in the
Ministry favour their kith and kins for jobs in the banks.
Conclusion
The objectives of nationalization have not been achieved yet. Favoritism has destroyed the
commercial banks. The total amount of bad debts of banks is standing at Rs. 260.
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Q. 14 Write a note on E-BANKING

INTRODUCTION:
E (Electronic) Banking Is an important modern banking facility. Almost all the banks are providing
this facility to their accountholders and customers by using computer technology. The evolution of
electronic banking started with the use of automated teller machine (ATM) and has included
telephone banking, direct bill payment, electronic funds transfer and online banking. E-Banking
system enables the banking customers to access the accounts, withdraw amount from accounts, bill
payments and obtain information about the banking products and service during 24 hours through
network.
DEFINITION:
‘’ E-banking can be defined as the automatic delivery of banking products and
services to customers through interactive electronic communication “.
ETO 2002: The central bank of Pakistan ( State bank of Pakistan) issued Electronic Transactions
Ordinance 2002 to meet the modern requirements and tends of banking sector. The main objective
of the said ordinance was to provide better, modern and instant facilities to their customers.
PERSPECTIVE OF E-BANKING
The perspective of E-banking is based on the following factors:
1. Communication Perspective: The motive of communication is to get familiar with the client
and help the client getting familiar with you. Communication leads to information which is an
important commercial weapon. E-banking has made the information about a product more
important than a product itself. The new IT products like internet, web advertisement, online
system have increased opportunities to inform the world about the products.
2. Business Perspective: The commercial purpose comes next that the use of IT products for
business dealing and operations makes the business easy. With the help of IT products the
businessmen can record the transactions and generate required reports immediately.
3. Service Perspective: Think of the best can get out of IT products. Don’t just think about
business. Let your mind go to the factors like customer satisfaction, customer support, reputation
etc. All these factors illuminate the service perspective.
4. Online Perspective: It means doing online business where there is no physical contact between
customer and bank. It makes the banking business cross all borders and boundaries.
ADVANTAGES OF E-BANKING
The benefits of E-banking can explained under following three heads.
1. Benefits to customers
2. Benefits to bankers
3. Benefits to economy
BENEFITS TO CUSTOMERS
I. Customer can withdraw cash at any time through ATMs
II. Besides withdrawing cash customers can also have mini bank statements at these ATMs.
III. Through internet banking customer can operate his account while setting n his office or
home.
IV. E-banking has also greatly help in payment of utility bills. Now there is no need to stand in
long queues outside banks for this purpose.
V. The growth of credit card usage also owes greatly to E-banking. Now a customer can shop
worldwide without any need of caring paper money with him
BENEFITS TO BANKERS
I. The growth of E-banking has greatly helped the banks in controlling their overheads and
operating cost.
II. Now, the customers can make payment, obtain bank statements and information about
different bank schemes through ATMs and websites of the banks, which helps the banks in
improving their performance.
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III. E-banking provides not only modern banking facilities to the people but also helps in making
their business tasks easy. Due to this, the dealings of the people with banks have increased to
a great extent and led to the growth of banking industry.
IV. Electronic banking has greatly helps the banks to reduce the paper and manual work. Due to
this, now the banks can keep their records more accurate and up to date.
BENEFITS TO ECONOMY
I. E-banking has greatly service both the general public and the banking industry. This has
resulted in creation of a better enabling environment that supports the growth of productivity
and prosperity.
II. The people are getting more employment opportunities due to the growth of economic sector
and banking system in the country. Moreover, the standard of linking of the people is also
improving due to increased n their income
PRODUSTS OF E-BANKING
The commercial banks are providing following services (products) to their customers through E-
banking
1. Credit Card
“ A credit card is part of system of payments, issued to users of system. It is a small plastic card
entitling its holders to buy goods and services based on the holders promise to pay for these goods
and services.
CHARACTERISTICS
Following are the characteristics of credit card.
I. Magnetic strip: Magnetic lining is drawn on credit cards, which contains specific
number or secret code. It is also called DATA STRIP.
II. Electronic Chip: It is a data storage device, which is built in the card to record particular
data like reward points and redeemable points.
III. Specific Number: Every card has a specific number, which is usually of 12 to 16 digits.
IV. Picture: Bank also issue such credit cards, which possess the photograph of the cardholder.
V. Signature: Credit cards also contains the signature of holder.
VI. Name: The name o the holder is written on the card.
VII. Non-Transferable: Credit card is non-transferable and only card owner can use it.
VIII. Name of Bank: Every credit card has the name of issuing bank.
IX. Fixed amount: Bank fixes the limit of amount according to the financial position of the
customer. This limit is called floor limit and a customer cannot buy more than the fixed
amount of this card.
X. Payment to Bank: Every cardholder pays minimum fixed amount from monthly bills ans on
balance interest is charged at the various rate from 2.5% to 3%.
XI. Renewal: Credit card is issued for a year and can be renewed after a year.
XII. Scope: This card is useful for both local and foreign payments.
XIII. Cancellation: If cardholder does not make the payment to bank on due date then firstly his
fixed limit of amount is reduced and the card is cancelled afterwards.
MERITS
The credit card issued by commercial banks provide following benefits.
I. Easy Payments: The credit card holder can make immediate payment of goods purchased
without using cash (paper money).
II. Facility of Payment: Banks allows a specified time to credit cardholder for the payment of
goods purchased. This allowed period might extend to about fifty days.
III. International Payments: The credit cards are not only used for domestic payments but also
used to buy goods and services in foreign countries.
IV. Loan Facility: The credit cardholder can obtain cash loan from banks in the hour of need
through credit card up to a certain limit.
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V. No Need to Carry Cash: If a person is carrying cash then there may be a chance of its theft
or loss. Thus, the person who transacts through credit card gets himself free from the
protection of money (cash).
VI. Proof of Payment: The person (buyer) who makes payment by credit card gets the proofs of
his payment because the transactions made through credit card are clearly written on the bill
of credit card.
VII. Growth of Banking System: The use of credit card makes the transaction easy. So, the
people are getting maximum benefits to its use and banking sector is growing.
2. Debit Card
“ A plastic card issued by a bank to a depositor, encoded so that it may be used in
ATMs or in POS (point of sale) systems, like swapping machine”.
(MERITS)
I. Easy Payments: The debit cardholder can make the payment goods purchased on the spot
without using money (cash).
II. No Cash Required: The user of debit card does not need to keep money (cash) with him.
Thus, he gets himself free from the tension of protecting money.
III. International Payment: Debit card is useful in making payment of goods purchased both
locally and internationally.
IV. Increased in Bank’s Income: The use of debit card not only increases the transactions
through bank but also augments the number of bank’s customers, which results in more
income for bank.
V. Proof of Payment: The payment made by debit card for goods purchased is actually a
payment through bank, which is recorded in the computer of bank. The customer gets the
detail of his transactions (payment) when he receives his bank statement.
3. Automated Teller Machine
“It is an unattended computer terminal that performs basic teller functions when a
card holder inserts a card into A.T.M (Auto Mated Teller Machine) and enters the
correct pin code on 24 hour basis “.
HOW DOES ATM WORK?
An ATM is simply a data terminal with two inputs and four output device. Like any other data
terminal, the ATM has to connect to, and communicate through, a host processor. The host processor
is analogous to an internet service provider (ISP) in that it is the gateway through which all the
various ATM networks become available to the card holder (The person wanting the cash).
Most host processors can support either leased-line or dialup machine. Leased-line machine connect
directly to the host processor through a four-wire, point-to-point, dedicated telephone .The Dial-up
machine connect to the host processor (through a normal phone line using a modem and a tool-free
number, or through an internet service provider using a local access number dialed by modem.
Leased-Line ATM are preferred for very high volume locations because of their thru-put capacity,
and dial-up ATMs are preferred for dial merchant locations where cost is a greater factor than thru-
put. The dial cost for a dial-up machine is less than half that for a leased-line machine.
The host processor may be owned by a bank or financial situation, or a may be owned by an
independent service provider. Bank operated processors normally support only bank owned
machines, whereas independent processors support merchant-owned machines.
ATM Card:
A card used to withdraw money from automated teller machine is called ATM card. A person
having sufficient amount in the bank account can use this card. A specific number is printed on
every ATM card. The card holder is also allotted a pin code to use ATM cards. Only the card holder
knows the allotted pin code. The customer has to enter pin code after inserting the card in ATM to
withdraw money. The customer withdraw money only up to a certain limit from ATM at one time.
Withdrawal through ATM:
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The following steps are taken to withdraw money from an ATM:

I. ATM card is inserted in specified part of the machine.
II. Pin code is entered when a massage appears on the screen of machine.
III. After this, the customer selects an account from different account appeared on the screen.
IV. To withdraw the required amount, the customer selects one amount from the different amount
appeared on screen.
V. The machine will send the card out from the specified part after completing a particular process.
VI. When the customer gets his card from specified part, the required amount comes out from another
specified part immediately.
ATM Services Charges:
The bank receives nominal service charges from account holders for providing ATM facility. Different banks
receives service charges at different rates for example:
Bank’s Name ATM service charges
I. Muslim Commercial Bank RS. 200 per annum
II. Allied Bank Limited RS. 250 per annum
III. National Bank of Pakistan RS. 3 per transaction
(MERITS OF ATM)
I. Easy Use:
The use of ATM is very easy and even an illiterate person easily withdraw the money through ATM.
II. Round the Clock FACILITY:
The amount can be withdrawn from bank account not only during banking hours but also after banking hours.
III. From any Branch of Bank:
The customer keeping in view his own convenience can withdraw money from ATM of his bank and its
branches but also from any other bank.
IV. Time saving:
The customer spends very less time to withdraw money from ATM because he does not need to write any
cheque and wait for his turn.
V. Mini Statement:
The customer can check his balance with bank through ATM. Moreover, he can also obtain mini statement to
collate his previous transactions.
4. Online Banking
“ Online banking/Internet banking allows customers to conduct commercial transactions on a secure
website operated by their retail of all bank credit union or building society”.
On line banking is another important facility or product of E-banking. The commercial banks provide
following facilities through on line banking.
Depositing the Money:
In on line banking the customer can deposit money in his account in any place or city provided that the branch
in which he is depositing the money has on line banking facility.
Withdrawal from Bank:
In on line banking, the accountholder of bank’s one branch can withdraw money by presenting cheque to
another branch. The branch of the bank where cheque is presented for payment certifies the balance and
specimen signature of the accountholder through fax machine or internet and then makes the payment of
cheque.
Transfer or payment of Money:
In on line banking, an accountholder can transfer money from his account to another account without using a
cheque. Thud an amount can also be transferred from one account to another to settle the transaction or the
payment.
6. Mobile Phone/ Phone Banking
Under E-banking, the customers can deal or pass orders to their banks through mobile phones / phone without
visiting the bank. The customers can check their account balances, and make various payments sending SMS
(Few required the voice) through mobile phones / phones. Mobile phone / phone banking services are
available to customers around the clock.
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Q. 15 Write a note on ISLAMIC BANKING.

RIBA AND INTEREST
INTRODUCTION:
Why does GOD permit trade and forbid usury? Capital invested in trade brings excess called profit. Capital invested in
banks also brings excess called interest. GOD disallows one-excess and permits another. The difference is that profits are
the result of initiative, enterprise and efficiency. Profits results after a definitive value creating process, which is not the
case with interest. The interest may even handicap a value creating or productive process and very often it does.
Another fundamental difference between interest and profit is that the interest is fixed while the profit fluctuates. In the
case of interest, return is predetermined and one can be sure of it. In case of profit, one has to put in effort in order to
ensure it.
If a banking structure could be worked out in such a way that the return for capital would fluctuate according to the
actual profits accrued from it, ISLAM would have no objection to it. In that case, it would be a developed form of
“SHIRKAT” , which is already recognized in ISLAMIC Jurisprudence.
What the Holy Quran forbids in a fix return for the use of money, irrespective of the profit gained or the loss sustained
by the borrower. In short, Riba or interest means fixed return for the use of money. It is always prohibited whether it
results from the “loans of gold and silver” or “economic credit”, which is the product of modern banking and finance.
RIBA :
‘ RBBA’ is an Arabic word. It means increased, 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.
Interest:
I. “Interest is the charge for the use of money”. (American Encyclopedia)
II. “Interest is the price paid for the use of credit or money.”(Britain Encyclopedia)
PROHIBITION OF RIBA IN THE QURAN
Riba or interest has been prohibited in Islam. The following verses from the Holy Quran prove this fact.
“O ye who believe! Devolve not riba, doubled and multiplied; but fear Allah; that ye may (really prosper): [3 : 130]
“That they took riba, though they were forbidden; and that they devoured men’s substance wrongfully. We have
prepared for those among them who reject faith , a grievous punishment.” [ 4 : 161 ]
PROBLEMS OF INTEREST BASED SYSTEM

1. Interest Frustrates Goal Realization:
Financial intermediation on the basis of interest frustrates the realization of the humanitarian goals such as need-
fulfillment, full employment, equitable distribution of income and wealth and economic stability.
It allocates financial resources among borrowers on the criteria of their ability to provide acceptable collateral to
guarantee the repayment of the principal and sufficient cash flow to service the debt. End use of financial resources does
not normally constitute the main criteria. Financial resources hence go mainly to the rich who fulfill both these criteria,
and to governments, which, it is assumed, will always be able to service their debts.
Islam therefore, prohibit interest like other major religions do and organizes financial intermediation on the basis o profit
or loss sharing. The financier is not assured of a fixed, pre-determined rate of return. His return is linked to the ultimate
outcomes of the business finances.
2. Injustice and Exploitation:
It can be on the part of the lender or the borrower. For example, if a loan has been obtained at 15% and the borrower,
utilizing this capital, makes a profit of 40% then the lender is being exploited because the profit has been shared justly.
On the other hand, if the borrower sustains a loss of 40%, the borrower gets exploited, because in effect he loses 55%
(40% loss on interest + 15% interest).
3. Inequitable Distribution of Wealth:
The interest-based financial intermediation relies heavily in the collateral, giving inadequate consideration to the
strength of the project or the ultimate use of financing. Thus, while deposits come from a cross-section of society, their
benefit goes mainly to the rich.
The Islamic financial system can be more conductive to the realization of equity. Risk/ reward sharing would compel the
financier to give due consideration to the strength of the project, thus making it possible for even the poor but competent
entrepreneur to get financing if they have worthwhile projects.
4. Economic Instability:
The rate of interest has become one of the most important destabilizing factor in the present day world economy. The
high degree of interest rate volatility injects an uncertainty in the total return on invested capital (interest + profit). This
makes it difficult to take long-term investment decisions with confidence. It drives borrowers and lenders alike into the
shorter end of the financial market.
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In a wholly equity-based system, the entrepreneur’s share in the total return on capital would depend on the profit-
sharing ratio and the ultimate outcome of the business. The profit-sharing ratio between the entrepreneur and the
financier cannot fluctuate from day to day or even from month to month like the rate of interest does. The profit sharing
ratio fluctuates with the change in economic conditions.
PAKISTAN & ISLAMIC BANKING

Pakistan was founded on the basis of the two-nation theory. The ultimate desire was to have a homeland where Muslims
could lead their lives according to the eternal and shining teachings of Islam. The father of the nation, Quaid-e-Azam
Muhammad Ali Jinnah, made it clear on number of occasions with Islamic theme of social justice, welfare and
contentness. Afterwards the Objective Resolution of 1949 further highlighted the matter in a definite way. A part of this
resolution read as follows.
“And the Muslims shall be enabled to order their lives in the individual and collective sphere in accordance with the
teachings and requirements of Islam as set out in the Holy Quran and Sunnah.”
But unfortunately, the whole banking system in Pakistan was based on interest. Depositors were paid interest on these
loans. So, there was a need to establish an interest free banking system in the country. It was a challenge, because all
banking system is being operated on the basis of interest in all over the world. But in 1977, the process of Islamization of
banking system was started. In October 1977, Council of Islamic Ideology was charged with responsibility of bringing
about Islamic economic and banking system. The council constituted a panel of economists and bankers, which was
assigned to prepare a plan for non-interest system.
Report of Council:
The panel of experts submitted its report to the Council in February 1980 and after considering the suggestions given in
the report, the Council gave its formal report to the Government in June, 1980. The report stated that:
1. Real alternative to the interest under an Islamic system is profit or loss sharing deposits and Qarz-e-
Hasana.
2. To make successful interest free banking system, the government will have to carry a thorough
appraisal and reforms of tax system.
3. Elimination of interest is important for interest free economy but it Is a part of overall value system of
Islam, some other reforms will have to be make.
4. Council suggested following method of non-interest banking system:
a. Service charges.
b. Leasing.
c. Hire purchases.
d. Special facilities.
5. Report also gave important suggestions in respect of commercial banks, specialized credit institutions
and for insurance companies.
Criticism on the report:
Many scholars and Islamic experts criticized the final report of Islamic Ideology Council. The critics were of the view
that council has taken a very superficial a view of state of affairs and confronting problems. They stressed the fact that
unless basic legal and legislative reforms are made and a huge coactive effort is made to promote particular set of value,
elimination of interest alone would not serve the purpose. The critics also expressed the fear that although many of the
strategies purposed by the council are remarkable, yet there are serious hurdles in making them practicable. Some
experts also showed reservations that some of the plans and schemes given by the council are not fully in accordance
with the Islamic principles.
SBP DIRECTIVE 1984:
After detailed study of the plan purposed by the council of Islamic ideology and criticism that was raised from different
circles. SBP issued directives for elimination of interest from the economy. The directives were issued in June, 1984 and
they included the following :
a) From July 1,1985 local currency deposit shall be accepted on PLS basis.
b) Banks were directed to promote the Islamic modes of trade and financing. Moreover, the banks were
also advised to open special counters for this purpose.
A JUDGMENT OF FEDERAL SHARIAT COURT:
In November, 1991 Federal Shariat Court on Pakistan announced a judgment that interest understood as Rida is totally
prohibited. The court in its judgment also declared that various prevailing laws or their provisions are completely against
the injunctions of Islam and therefore, must be changed.
HISTORIC RULING OF SUPREME COURT:
The supreme court of Pakistan, on the matter of interest and Riba finally gave verdict on December 23, 1999. In
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judgment, honourable court clearly declared Riba as un-Islamic and, therefore, directed the government to eliminate
interest from all transactions. The court declared a dead line of June 30, 2001 by which the government ordered to
reframe rules and to create environment for the working of interest free economy.
COMMISSION FOR TRANSFORMATION:
After the judgment of supreme Court, a commission for the transformation of the economy was setup in SBP. The task
of that commission was to devise the strategy in order to change the financial system to bring it in conformity with
Islamic banking.
IMPLEMENTATION OF ISLAMIC BANKING IN PAKISTAN
Stage 1: Interest was first eliminated from July 1979 from the transactions of NIT, HBFC, ICP and SBFC.
Stage 2: From first January, 1981, profit and loss sharing saving and term deposits were introduced by commercial banks
in place of simple saving and fixed deposits scheme.
Stage 3: In August, 1981, HBFC was allowed to provide finance on rent sharing basis for house building. Students were
allowed Qarz-e-Hasna without interest.
Stage 4: In 1983, hire purchase system of financing was introduced.
Stage 5: From July 1, 1984 to December 31, 1984 all banks in the country were to make finance available also on the
basis of Islamic modes of financing in addition to existing interest based system.
Stage 6: From January 1985, all types of finances provided by the bank to the government and their agencies were
permissible on Islamic basis only.
Stage 7: From April 1985. All types of finances provided by the banks to all clients were to be on Islamic basis only.
Stage 8: From July 1985, all deposits were to be on the basis of participation in profit and loss of banks except current
account.
INTEREST FREE MODES OF FINANCING

State Bank of Pakistan has prescribed several modes of interest free financing, which can be categorized into three
groups:
1. FINANCING BY LENDING
i. Interest Free Loans with Service Charges:
➢ It is new concept of lending and is based on ‘Ijtehad’.
➢ The banks are permitted to lent money free of interest and to recover only the actual service charges
from the users of money.
➢ The maximum service charges permissible to each bank is determined by the State bank of Pakistan.
➢ The banks for financing of exports are using this mode of financing.
ii. Qarz-e-Hasna:
➢ Qarz-e-Hasna is for the benefit of an individual and the society at large.
➢ The banks give loans to deserving persons for their genuine consumption requirements such as
marriage, education and health etc.
➢ Loans may also be given for setting up small businesses.
➢ 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.
➢ This financing is termed as “loan to Allah” which will be rewarded by Him.
iii. Istisna:
In this mode of financing, the bank lends money to the manufacturer or industries like aircraft and shipbuilding
etc. for producing or provided goods and machinery on its behalf.
2. TRADE RELATED MODES OF FINANCING

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 system of financing on the basis of mark up in price of deferred basis is as follows:
➢ The customer contacts the bank for financing the purchase of goods.
➢ The banks purchases the required goods and sells to him on the price mutually agreed between the bank and
customer.
➢ The agreed price of goods is to be paid in future on a specified date by the customer to the financer or bank.
➢ The agreed price, which is based on the bank’s cost plus a profit margin (mark up) of the bank.
ii. Mark down:
➢ It is a purchase of moveable or immovable property by the bank with Buy Back Agreement or otherwise.
➢ Under this mode of financing, the customer sells the moveable or immovable property to the bank with a
promise to buy back from the bank on a future date.
iii. Leasing (Ijra):
➢ Leasing is a medium or long term financing instrument.
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➢ I this trade mode of financing, the lessee (Mustagir) acquire the rights for the use of an asset from the lesser
(Aajir) for a fixed agreed period of time, on the payment of a fixed amount, which may be on yearly, half-
yearly or on monthly basis.
➢ The title of the property remains with the lesser.
iv. Hire Purchase (Ijrah-Wa-Iqtina):
➢ In a hire purchase deal, the bank purchases the specified goods at the request of the customer and hires them to
the client on the payment of periodical installments.
➢ The agreed periodical hire installments are worked out in such a manner that the bank covers a fair return as
well as the actual cost of the goods on full payments.
➢ The rights of ownership are handed over to client on the payment of full amount.
v. Development Charges:
➢ It is also called “Diminishing Musharaka”.
➢ In this mode of trade financing, the bank makes advances to the customers for the development of land and
property.
➢ The bank takes a share in the value added to the property.
➢ This share in the value added to the developed property is named as development charges.
vi. Salam:
➢ Salam is a sale whereby the seller undertakes to supply some specific goods to the buyer at future date in
exchange of advance payment if price.
➢ Salam is allowed by the Holy Prophet (PBUH) subject to certain conditions.
➢ The basic purpose of this trade was to meet the need of the small farmers who required money to grow their
crops and feed their family upto the time of harvest.
3. INVESTMENT MODES OF FINANCING

i. Musharaka:
➢ It is an agreement between the bank and its client to participate in a business as temporary partners by providing
agreed amount of funds for sharing profits or losses during a specified period of time.
➢ The client runs business under Musharika.
➢ The bank examines the feasibility and profit projection so as to monitor or supervise business transactions.
➢ The proportion of profit to be distributed between the participants must be agreed at the time of contract. If no
proportion is decided then the contract in not valid.
➢ The loss is shared in the ratio of capitals provided by the participants.
ii. Modaraba:
Modaraba means the business in which the subscriber ( Bank-Zarib) participates with the money and the manager ( Client-Modarib)
with the knowledge and skill. The chief features of Modaraba are:
➢ Modaraba must be registered under Modaraba (Floatation and control) ordinance, 1980.
➢ Profit is shared in agreed ratio.
➢ Loss in suffered, being the investor, only by Zarib.
➢ Modaraba certificates are transferable.
➢ Modaraba may be for “Specific purpose” or for “Multiple purpose”.
➢ It may be perpetual or for a specified period.
iii. Participation Term Certificates (PTC’s):
Participation term certificate is an instrument of finance issued by company for meeting its medium and long-term capital needs. The
salient features of PTC’s are:
➢ PTC is an instrument of medium and long-term financing which has been evolved to replace debenture
financing.
➢ The instrument Is transferable.
➢ Profits are shared in agreed ratio while losses are shared in the ratio of bank’s and company’s investments.
➢ Only (JSC) Joint Stock companies can raise funds for by issuing PTC’s
iv. Equity Participation:
➢ Equity participation means sharing risks and rewards of ownership.
➢ Under this scheme, the bank are financer 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.
v. Rent Sharing:
➢ 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.
➢ Rent may be revised after every three years.
35
MONEY
PORTION
36
Q. 16 Define inflation. What are its causes and measures to control?
Inflation
1. “Inflation is nothing more than a sharp upward movement in the price
level.” (R. P. Kent)
2. “Too much money chasing too few goods.”
KINDS OF INFLATION
On the basis of rate
a) Creeping inflation
It is a situation where the increase in the price level is very slow. E.g. 2% p.a. (Japan, USA, Singapore)
b) Walking inflation
in this situation, increase in the price level is more than the creeping inflation. E.g. 5% p.a.
c) Trotting inflation
IN this situation, prices are more than they are in creeping and walking inflation. E.g. 5% to 20%.
On the basis of degree of control
a) Open inflation
It is a situation when the inflation gets out of control and can’t be controlled by government price control or
similar measure.
b) Suppressed Inflation
It is situation when the inflation can be controlled by the government price control policy.
On the basis of causes
a) Demand Pull inflation
Inflation that occurs due to high demand in the economy called demand pull inflation. The higher
consumption causes aggregate demand to grow, while aggregate supply lack behind. In this situation.
b) Cost pull inflation
It is the inflation that is the result of high cost of production. Production cost consists direct material and
direct labour as well as factory overhead. In this situation, the supply decreases due to increase in cost of
production.
c) Budgetary inflation
When the government covers the budget deficit by borrowing then there will be budgetary inflation.
d) Monetary inflation
Where there is an expansion in the currency notes in circulation then there will be monetary inflation.
c) Income inflation
The inflation that occurs from high income level. Income may increase due to change in salary or foreign
remittances.
d) Profit inflation
Profit inflation is the result of the greed of businessmen. It usually occurs in such economy which is
dominated by monopolies.
CAUSES OF INFLATION
1. Increase in salary or wages
Increase in salary has increase the purchasing power of the people. Wages and price follow each other. When
wages are increased then prices are also increased which causes inflation.
2. Increase in export of consumer goods
When there is increase in export of consumer goods and raw goods to foreign markets, the quantity of goods
is decreased in the country and price level has increased.
3. Overseas aid
The volume of foreign aid also increasing with the passage of time. Therefore when this aid is used inside the
country, the quantity of money is increased and it increases the inflation.
4. Deficit financing
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In Pakistan, the surplus currency is issued by the State Bank Pakistan is spent for the constructional and
development work in the country which creates inflation.
5. Decrease in production
Due to agricultural and industrial backwardness, there is less production of commodities in the country. Due
to which the prices have increased in the country.
6. Increase in population
The growth of population is very high which is resulting in the shortage of commodities, therefore prices have
increased in the country.
7. Devaluation
Devaluation refers to the fixation of low rate of exchange of the national currency in terms of foreign
currency. Due to devaluation price level increases and import becomes costly.
8. Construction of houses
Since 1970, the people are spending their savings on the purchase and construction of houses. So this
expenditure has also contributed towards inflation.
9. Nationalization of industries
After the nationalization of industries in Pakistan, the investors’ class is hesitated to do investment due to fear
of nationalization. So hoarding is increased and prices has increased.
10. Using habits
In Pakistan, urban population feels proud in spending money on those items which are used in the advanced
countries. So there is a demonstration effect also in Pakistan.
MEASURES TO REMOVE INFLATION (CONTROL)
1. Check against smuggling
The monetary punishment should be given so that the artificial shortage of commodities may be controlled
and inflation can be removed.
2. Discipline
Discipline should be restored in factories and offices to improve the output of the country.
3. Change in taxation system
The taxation system should be revised in order to encourage the private sector by giving tax concession or
rebate or by charging low rate of taxes on consumer goods.
4. Useful administration
The administration should be made effective and clear to increase the output of the country.
5. Restriction in expenditure
There should be a cut on the non-productive expenditure not only by government but also by the people.
6. Restriction on the import of luxury items
The import of luxury items must be restricted. It will protect us from international inflation and will be
favorable for the balance of payment.
7. Increase in investment
The public and private investment in the country should be increased so that the Supply of money is equal to
the supply of good in the country. Then inflation may be removed.
8. Sick industries problems
Sick industries should be handed over to private sector to promote their efficiency or productivity.
9. Check on unplanned cities
The unplanned and unregulated growth of cities should be checked which will put a check on inflation.
10. Management between monetary and fiscal policy
Government should coordinate the monetary and fiscal policy in such a manner that it should check the
inflation.
38
Q. 17 What do you know about the evolution of money? Also discuss the qualities of good
money?
Evolution of Money
To solve the problems or remove the difficulties of barter system such means of exchange were
needed that could facilitate the trade or dealing of goods. In different eras, variety of goods have
been using in search of such means of exchange. The detail of which is as follows:
States of Evolution
1. Commodity Money
2. Metallic Money
3. Paper Money
4. Credit Money
1. Commodity Money
In 2200 B.C. Getting fed up with barter system, the people began to use different goods as means of
exchange like skins of animals, sheep, shells, goats, bows and arrows etc. These means of exchange
also had most of the defects of barter system. Therefore, this system could not prevail for long time
and the people found metallic money.
2. Metallic Money
Metallic money is the right solution of most for the difficulties of barter system and is the real
beginning of money. In 500 B.C. the people used gold and silver as means of exchange for sale or
purchases. Then standard coins of gold and silver came into use.
3. Paper Money
In the beginning, in order to transfer money safely, economically and conveniently, the people
deposited their metallic coins to trustworthy persons and got receipts in this regard. These receipts
could be used for the purchase of goods on other places. Since these trustworthy people had good
reputation so that receipts were accepted as money. Thus, these receipts were primal paper money.
Afterwards, when the use for these receipts spread then government gook the responsibilities of the
work of these trustworthy people. In 1700 A.D government organized this work and started issuing
currency notes. These notes were declared to be accepted legally. In this way, paper money
prevailed.
4. Credit Money
In the present age, credit money i.e. cheque, pay order, draft, traveler cheque and credit card etc. in
addition to paper money is also used in order to make business dealings more economical, easier and
safer. The acceptance of credit money (bank money) is not legally compulsory. But its use is
increasing day by day due to convenience, economy and safety.
Qualities of good money

1. Acceptable
Good money is accepted by all because it serves as medium of exchange. Gold and silver coins are
generally acceptable.
2. Transportable
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Good money must be transferable easily. It should have more values in small quantity. Passengers
can easily carry due to small weight.
3. Durable
Money should be durable. The good money must not lose its value with the passage of time.
4. Homogeneous
Good money must be of the same quality and quantity. The color size of money should be different
to easily identifiable.
5. Divisible
Money should always be divisible. Small units of money are needed d for making the small
payments.
6. Malleable
Good money must be malleable. Malleable money has impression on its face and back for
recognition.
7. Stable
Money should be stable in its value. A change its value will bring changes in the prices of goods and
services.
8. Recognizable
Good money should be recognized by touch or sight. Paper money should be good quality coloring.
9. Scarce
Money must be limited in supply as compared to demand for it. The quality brings the people to
have more and more for meeting their basic needs.
10. Storable
The storability is the quality of good money. The rupee notes and coins have this quality.
11. Elastic
The good money has the quality of elasticity. The business needs change season to season. The
paper money has this quality of increase and decrease.
12. Economical
The good money has economical quality. The cost of printing currency notes and minting coins
must be lower.
40
Q. 18 What is Barter System? Discuss its effects and removals.
Barter System
1. “The direct exchange of one commodity for another without the
use of money.” (H. S. Sloan)
2. “Barter is the direct exchange of goods and services without a means
of payment or a unit of account” (R.H. Parker)
There is no involvement of money in this system. In this form of business only commodities and
services is exchange with one another. Barter is the system of trade that existed in the economy
before the invention of money. For example if Ahmed gives me his cow in return for my two goats,
the transaction so taking place between myself and Ahmed will be termed as barter. Barter is the
direct exchange of goods for goods was the stage of monetary development.
Barter is possible if following conditions are fulfilled

1. Wants should be very limited.
2. People must be living in a limited area.
INCONVENIENCE OR DEFECTS OR PROBLEMS
As the growing culture, society and growing wants some difficulties were felt in the barter system of
exchange. The following are the difficulties found in this system and were the reason of failure of
this system.
1. Measurement problem
Barter system is the old system in which there was no concept of economy. Under barter system
there was no proper system to measure GDP on macro level.
2. Double Coincidence of Wants
Trade in barter requires double coincidence of wants. For example, If a cow has to be exchanged for
three goats, no trade will take place unless a person is found who not only has three goats but also
wants exchange them for a cow.
3. Lack of Storing Wealth
Business and people both need to get their wealth be stored. In barter economy wealth has to be
stored and saved in the form of goods which was very inconvenient and costly.
4. Common Standard of Value
In a barter system there is no common standard by which the value of goods to be exchanged can be
measured.
5. Transferred Wealth
The transfer of goods from one place of another was very difficult if not impossible and costly.
6. Subdivision
In barter there is always a problem of lack of subdivision. Animals were traded for goods so it was
impossible to subdivide them. For example a person has a horse and he needs a piece of cloth. Now
what part of his horse is equivalent to piece of cloth.
7. Deferred Payments
There was great difficulty in lending goods under the barter. The value of goods may decrease with
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the passage of time by which one may suffer loss.

8. Revenue Collection
If commodities are collected by revenue department, the goods particularly perishable will not be
stored for a longer period. They will lose their value as time passes.
9. Exchange
There was no proper method of exchange. Flow of commodities was difficult and sometimes
impossible. Due to this difficulty barter system was failed.
REMOVAL OF PROBLEMS
Due to difficulties in barter system, there is only one solution for these problems. The use of money
has removed many inconvenience of barter as discussed under:
1. Subdivision
Money has solved this problem by functioning as a medium of exchange.
2. Storing Wealth
This problem has been removed by money because wealth can be easily stored in the form of money.
3. Measuring Value
Money has removed this difficulty by performing as a common standard of value. The value of
goods can be easily stated in money prices.
4. Future Payments
Money has removed this problem because when future payments are stated in monetary units, every
thing is quite clear.
5. Transferring Wealth
There is no such inconvenience when money is used and wealth can easily be transferred.
6. Double Coincidence of Wants

Money has removed this problem by serving as a medium of exchange.
7. Revenue Collection
When money is used and revenue can easily be collected through money.
8. Exists at large
If someone wants to expand the scale of trade, he cannot do so under barter system.
Conclusion
Barter was adopted in old days but it prevails these days too. Barter system has many difficulties
and problems, so it is better for every one to use money. In this time many developing countries are
using to the barter system. Even Pakistan is doing barter trade with counties like China & Russia.
42
Q. 19 What is paper money? Describe its advantages and disadvantages.
Paper Money
“Paper money means document with a value stated on them but having no value in them”
(Greener)
Paper money means the notes of different values issued by the central bank or by the governmet.
Papers was used in China for the first time. Iran used the paper money after China. Now in all
developed and under developed countries of the word, paper money is used
Classes of paper money
1. Convertible paper money

The convertible paper money is that which can be exchanged for full-bodied money and can be
issued by having reserve of gold and silver etc. The government does not maintain hundred percent
reserves against such money.
2. Inconvertible paper money
The inconvertible paper money cannot be exchanged for gold and silver. The money is issued on the
written promise of the government. The example of this money is that in fist world war German mar
was issued.
3. Fiat money
A form of money declared as a medium of exchange by the central authority is known as fiat paper
money.
Advantages
1. Easy counting
The counting of paper money is easier than metallic money.
2. Easy holding
The paper money has lesser weight than metallic money. It is easy to handle paper money than coins
if people want to keep large amount with them.
3. Low cost
The printing cost of paper money is lower than the minting charges of metallic money.
4. Metal saving
Metal saving is possible due to issue of paper money. Metal can be used for other purposes like
making jewelry etc.
5. No loss due to depreciation
The metallic money depreciates due to wear and tear. The paper money helps to control such loss.
6. Elastic system
Paper money makes the monetary system more elastic than metallic money. The volume of money
supply can be increased or decreased.
7. Stable value
The value of paper money can be kept stable by regulating the issue of paper money.
8. Easy transfer
The transfer of paper money from one place to another is easy and cheaper than metallic money.
9. Emergency needs
Paper money is a friend in peace and war. Whenever there are crises the government or central bank
can issue notes easily.
10. Better use of metals
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The paper money helps to use metallic reserves for productive purposes. The metal can be used for
making jewellery or other purposes.
11. Less storage expenses
The inconvertible paper does not require cent percent gold reserves behind it. A part of reserve is
kept behind issue.
Disadvantages
1. Limited circulation
Paper money is used within one country. It cannot be used for making international payments.
2. Short life
Paper money is less durable than metallic money. The life of a paper note is six months while coins
remain for sixty years.
3. Unfit for small value
The change of 1 rupee note is not available in paper money. The metal is suitable for small value.
4. Fiat money
Paper money is accepted by order of government only. Due to automatic decrease in the value of
money, government cannot do anything in this regard.
5. Over issue
Printing of paper money is very ease for government when they need it. The prices are increased
and value of money goes down.
6. Declining exchange rate
Value of paper money is always fluctuating day by day. This can be the reason for change in
exchange rate with the other currencies.
7. Unfavorable balance of payments
The import of goods is possible through foreign currency. More money is needed to buy foreign
currency when there is devaluation.
Conclusion
It is fact that paper money has some defects but it is better than metals and helpful for removing
economic problems. It is a source of blessing for mankind. However, when it is not properly
managed, it becomes source of danger and confusion.
44
Q. 20 What are principles of note issue? Discuss the methods of note issue. Which method is
best and why?
1. Currency Principle
Mr. Overstone member of English parliament presented this principle. He says that paper notes are
better than metallic money. The central bank keeps gold for full value of notes issued. The quantity
of notes can vary as per quantity of imports and exports. When the gold reserves decrease the notes
issued are taken back by the bank. There is no danger of over-issue. There can be stability in price
level and exchange rates.
Advantages
If this principle is adopted, the value of money will be kept stable because over issue is not possible
due to security of gold. It will provide confidence to the public because it is full convertible money.
The increase in gold will increase the quantity of notes in circulation and vice versa. The cost of
printing the paper money is low as compared to minting of coins.
Disadvantages
This principle is inelastic because without gold reserve currency notes cannot be issued. It is also
very expensive because it will need gold for reserve and gold will be stuck up and will be used for
other productive purposes.
2. Banking Principle
J. W. Gilbert was a leading banker in England. He says that a percentage of notes in circulation
should be covered by gold. The total money supply can expand or contract according to the needs of
trade and industry. This system is elastic and suitable for the requirements of the country. A part of
the paper currency is covered by gold so the inflow and the outflow the gold do no affect the total
money supply.
Advantages
This is an elastic system in which 100% gold reserve is not required. It is considered better for the
development. It is economical because it needs less gold reserves for the issue of notes. People still
enjoy confidence under this system. It is popular in entire world.
Disadvantages
Under this principle there is always a danger of over issue of currency notes. The money issued
beyond limit lead to inflation and increases the prices. During economic crises governments do not
follow this rule and over issue the currency notes. This principle can also be exercised by the note
issuing authorities in emergencies which lead to economic crises.
Methods of Notes issue
1. Fixed Fiduciary System
The central bank of the country is allowed to issue a fixed amount of notes without any metallic reserve. This
portion is called fiduciary issue. It is backed by government securities. The notes issued above this amount
are covered by 100% gold reserve. This method was adopted by United Kingdom, Norway and Japan.
Advantage
This system provides security for the convertibility of notes. It is fit for those countries where the people use
cheques for making payments and requirements of currency do not change from season to season.
Disadvantage
This is not suitable for developing and poor countries where expansion and contraction is needed from season
to season.
2. Bond deposit
The central bank issues notes against 100% backing of government bonds. The bonds are written promises of
45
the government to pay the amount on due date. In U.S.A. some banks were permitted to issue national bank
notes unto the amount of approved government bond held as well as paid up capital of these banks.
Advantages
It is worth while to note that metallic reserves were not needed for issue of notes. There was a saving of
metal, which could be used elsewhere. The monetary authorities and the government were in a position to
manipulate the situation.
Disadvantage
It was rigid system because the banks were not allowed to issue notes beyond value of government bonds and
their paid up capital. It was a maximum limit so this method was considered inelastic.
3. Fixed maximum issue
In this method a maximum amount of notes is fixed which can be issued without metallic reserves. This limit
is usually well above the annual average requirements of the country. This maximum can be raised from time
to time to meet the growing needs of the country. France has used this system before 1928.
Advantages
This method is economical because metallic reserves are not needed. It is flexible because the government
can raise the maximum limit. It spares metallic reserves various other uses.
Disadvantages
The flexibility encourages the government for over-issue. The inflation affects the purchasing power of the
people.
4. Proportional reserve system
The central bank keeps a percentage in gold and remaining portion in government securities against notes
issue. Generally 25% to 40% is kept in gold or silver before issue of money. A percentage of money is to be
kept in gold for new issue of money. This method was applied in Germany in 1875 and U.S.A in 1914.
Advantages
It is elastic method so money can be expanded and contracted to meet the requirements of trade and industry.
It is suitable for the developing countries.
Disadvantages
The contraction of money in this method is not always possible. The metallic reserves remain idle. During
emergencies notes are not convertible into gold because cent percent reserves are not kept.
5. Minimum Proportional reserve system
Under this system the central bank is allowed to keep a percentage of reserve in gold, foreign exchange,
foreign bills and deposits in foreign countries working under gold standard. This method is a variation of the
proportional reserve system. This method was used in India before October 1957 and of the total currency
issued 40% was kept in gold coins, gold and sterling securities.
Advantages
There is economy of gold because whole reserves are not in gold. This method is elastic because expansion
and contraction is possible whenever it is needed. The stability in exchange rates may be maintained because
over issue without reserve is not allowed.
Disadvantages
This method has all the defects of the proportional reserve system.
Method of note issue adopted in Pakistan
Pakistan has used minimum reserve system upto 1965. Under this method 30% was kept in gold coin, god
and silver bullion but after 1965 minimum reserve system was adopted.
The right principle of note-issue
From the above discussion, it appears that a sound system on note-issue should ensure elasticity, economy,
and simplicity, internal & external stability. The right method is that which easily be changed according to the
needs of current situation with illegal and illogical reasons.
46
Q. 21 Define index number. Explain uses and limitations. OR How the value of money is
measured?
Index number
“Index number is a measure of relative changes occurring in a
series of values compared with base year.” (D. Greenwald)
CREATION OF INDEX NUMBERS

1. Base year
First of all base year is selected.
2. Commodities
The second step is the selection of commodities.
3. Prices
The retail prices are used to prepare cost of living index number. These prices can be consumer
prices also.
4. Price relatives
The prices of goods are converted into percentage. The price of current year is divided by prices of
base year. The result is known as price relatives or index.
5. Averages
The rate of changes in prices is not the same. It is necessary to take the average prices changes to
get the central idea about changes in price level.
6. Choice of weights
The amount used to buy such goods is different. There is a need to use weight on the basis of its
importance in terms of money value.
SIMPLE INDEX NUMBERS
Commodities Unit Prices in 2000(Rupees) Prices in 2009 (Rupees)

Sugar Kg. 20 40
Milk Litre 20 40
Cloth Metre 40 50
Total 80 130
Index Number = Current Year Price x 100 = 130 x 100 / 80 = 163%
Base Year Price
WEIGHTED INDEX NUMBERS
Year 2000 Year 2009

Weighted
Price Price
Commodity Prices Weight Price Price Relative Weight Price
relative Relative
Relative
Sugar 20 100 8 800 40 40/20x100=200 8 200x8=1,600
Milk 20 100 5 500 40 40/20x100=200 5 200x5=1,000
Cloth 40 100 3 300 50 50/40x100=125 3 125x3=375
Total 16 1600 16 2,975
Index No. Average= 1600/16=100 Average = 2,975/16= 185.94
Now we can see that the prices have been increased 186 times than the base year prices.
ADVANTAGES
1. Changes in price level
Through index number consumers can check the rate of inflation and can adjust their income.
2. Change in production level
Business can measure the level of their production as compared with base year. Government can
47
also decide the level of import and export.

3. Change in volume of trade
Index numbers help to note the volume of local and foreign trade.
4. Forecast business conditions
Index numbers are useful to forecast business conditions of any country.
5. Changes in investment
Index numbers are helpful to note the changes in investment. The stock exchange prepares index
number to show the investments made by people from period to period.
6. Wages measurement
The living standards of workers can be checked with the help of this tool. The revision in wages can
be made after certain period.
7. Performance of students
The teachers can check their efficiency through such index. The government can note the results to
take remedial action for improving the efficiency of the teachers and students.
LIMITATIONS OR DISADVANTAGES
1. Not suitable for all objectives
It is not suitable for all purposes. Price index number cannot give information about quantity of
goods to be produced by manufacturers.
2. Results differ due to different methods
Different results are available due to different methods of calculation index numbers.
3. Not reliable over long period
The comparison of facts and figures in the short period can provide their results. The exact
comparison is not possible due to diverse conditions in both periods.
4. Not free from errors due to sampling
The collection of data requires complete accuracy which is not possible in index number.
5. Approximation
The index numbers provide rough results or approximation. In the absence of exact results one
cannot plan his activities.
6. Various weights
The use of various weights provides different results. The person cannot get exact information. The
diverse answer due to different weight can put the people in poor position.
7. Few commodities People use large number of goods and services in their daily life. Few
numbers of goods are used to prepare index number.
48
Q. 22 Discuss money market and capital in detail and also differentiate between capital
market and money market.
Money Market
“Money market is a collection of short term scattered financial institutions engaged in
the buying & selling of short term securities.”
Examples: Treasury bills, commercial papers, banker’s acceptances, Euro/Dollar Accounts
Essentials of developed money market

There should be a central bank, specialized financial institutions and proper banking system in the
country for development of a money market.
Players of money market

Central bank, commercial banks, discount houses, saving banks, stock exchange, finance
corporations and other financial institutions are players of money market.
Instruments of money market

Promissory note, bills of exchange, treasure bills, bank acceptances and deposit certificates are
instruments of money market.
FUNCTIONS OF MONEY MARKET

1. Supply of funds
Money market provides funds and a source of income for its members.
2. Earn reasonable profit
Funds are issued for earning profit. Low rate is charged on short term funds and high on long term
funds.
3. Recall loans
When banks need loans they call back the short term loans instead of borrowing from central bank.
4. Resource allocation
The available resources are allocated for agriculture, industry, import, export and investment.
5. Funds transfer
The customers can ask members for transfer of money from one area to another.
6. Near money
Near money is that which can be quickly converted into currency.
7. Government borrowings
Money market buys and sells government securities. Members buy treasury bills for providing loans
to the government.
Importance of money market It deals in bills of exchange and treasury bills. Commercial banks
can invest their excess short term funds in profitable areas. Money market provides guidance for
central bank for its policies. It affects the rate of capital market also. Money market keeps the rates
of interest within certain limits.
Capital Market
“A part of financial market dealing in long term securities is categorized as capital
market.”
Examples: Stock exchange (KSE, LSE, ISE)
Instruments of capital market
49
Investment bonds, shares of companies, term finance certificates, certificates of investments, term
deposits and saving schemes are the instruments of capital market.
Players of capital market

Central bank, commercial banks, development banks, investment banks, leasing companies, stock
exchanges, pension funds and insurance companies are players of capital market.
FUNCTIONS OF CAPITAL MARKET

1. Allocation of resources
The savings of people is allocated among different sectors of the economy. They collect funds from
general public and provide loans to businesses.
2. Monitoring
Members monitor the working of capital market. The research and development section of capital
markets can monitor the activities of the capital market.
3. Distribution
The capital market is responsible for distribution of available funds. The funds must be available for
all business and in all areas of the country.
Role of capital market
It mobilizes the savings of general public. Stock market encourages people to invest their saving for
earning income. It also increases the size of stock market. Capital market can attract foreign
investors. It keeps prices of shares stable. It provides information to information wing of stock
exchange.
Difference of Money and Capital Market
Reason Money Market Capital Market
It provides funds for meeting working The capital market provides
1. Supply of Funds capital requirements. funds for meeting fixed capital
requirements.
Discount houses, bill brokers, accepting Stock exchange, development
houses etc. are players. banks, mortgage banks, insurance
2. Market Players
companies are players in capital
market.
Money market deals in short term Capital market deals in medium
3. Life of instruments
instruments. and long term instruments.
Rate of interest is low due to short Rate of interest is high due to
4. Rate of interest
period. medium/long period.
The borrowers of money market are Private limited companies, public
5. Borrowers government, producers, manufacturers, limited companies and
traders, importer and exporters. government are borrowers.
The instruments of money market are The instruments of capital market
highly liquid so these are transferable are not highly liquid so these are
6. Transferable
from member sot another member of not easily transferable from one
market. member to another
Promissory note, bills of exchange, Shares, debentures, PTC, TFC
7. Instruments treasure bills and deposit certificates and bonds are its instruments.
are its instruments.
50
Q. 23 What is meant by foreign exchange? Discuss the factors causing changes in exchange
rate.
Foreign Exchange
1- “Any currency other than local currency is called foreign currency.”
2- “A currency which is not a legal tender currency is termed as foreign currency.” (€, £, ¥, $,
Rs. )
METHODS OF FOREIGN PAYMENTS
1. Foreign Bills of exchange

It is used for international payments for purchase and sale of goods and services.
2. Foreign Bank draft
Bank drafts are purchased from bank. Draft is sent through post office.
3. Mail transfer
The order letter is sent through mail by the bank. After receipt payment is made.
4. Foreign currency
The importer can buy foreign currency from open market and can be given to exporter.
5. Telegraphic transfer
The bank receives amount from his customer and sends a telegraphic message to his agent.
6. Cheque
The account holder can draw cheque on his bank for foreign payment.
7. Credit Card
The bank can issue credit card to its customer. He can go abroad and make payments by signing the
vouchers.
8. International money order
The customer can buy cheque from bank for making small payments in foreign countries.
9. Letter of credit
The importer opens an account with his bank in favour of exporter. The amount is paid into the
bank. The payment is made after receipt of documents of title to goods.
10. Gold
Import can make payment in gold bullion to export.
11. Traveler’s cheque
The bank can issue travelers cheque to customers who are going abroad.
12. Internet
The debtor can make foreign payments through internet. The exporter can get payment from
merchant account or credit card.
Foreign Exchange market

“Foreign exchange market is a market where foreign currency can be purchased and
sold.”
1. Payments in other countries

Foreign exchange is a market fro making payments against letter of credit, circular notes and credit
cards.
2. Acceptance of bills of importers and exports
The members of foreign exchange market accept the bills of exporters and imports.
3. Discounting bills of importers and exporters
Bills of exchange are discounted on some fewer amounts by exporters through banks.
4. Speculation
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Speculation is a function of foreign exchange market. Speculators are buyers and sellers of foreign
currency. They take part to earn profit through buying and selling of foreign currency.
FACTORS AFFECTING FOREIGN EXCHANGE MARKET
1. Balance of trade
The position of balance of trade affects the rate of foreign exchange market. When this balance is
favorable, foreign exchange rate increases. The rate will decrease due to unfavorable balance of
trade.
2. Speculation
The work of foreign exchange market is affected due to speculation. The speculators can upset
exchange rate in foreign exchange market. Purchase of foreign currency can raise the rate of
exchange. Sale of foreign currency can decrease the rate of exchange.
3. Interest rate
The rate of interest affects the foreign exchange market. The change in interest rate brings change in
foreign exchange market.
4. Central bank intervention
There are ups and downs in foreign exchange market due to central bank intervention. Central bank
can buy and sell foreign currencies. Therefore foreign exchange market is affected by actions of
central bank.
5. Economic conditions
Foreign exchange market is affected by economic conditions. The change in economic activities
brings change in foreign exchange market.
6. Political conditions
Favorable political conditions do not disturb the foreign exchange market. In case of political unrest
there are ups and down in foreign market.
52
Q. 24 What is the best definition of Money, support with reasons? Discuss in detail the
functions and qualities of money.
Money
1. “Money is what money does” (Withers)
2. “Anything, which is widely acceptable in payment of goods or in discharge
of other kinds of obligations.” (Robertson)
It is assumed that word Money has been made from the Latin word “Moneta” the goddess of Rome.
The invention of money is has made due to the difficulties of barter system. Money has removed
most of the problems of barter system. Money has always been important to the people and
economy. It is considered like the blood of human body for the economic development of any
country.
PRIMARY FUNCTIONS
1. Medium of Exchange
Money has the qualities of general acceptability. In the modern money exchange system, the prices
of all goods and services are expressed in terms of money.
2. Measure of value
The second important function of money is that it measures the values of all goods and services.
SECONDARY FUNCTIONS
1. Deferred Payment
Both borrowings as well as lending are done in terms of money. Money acts as standard of deferred
payments.
2. Store of Purchasing Power
Savings were so difficult under barter system but with invention of money, this difficulty has
disappeared.
3. Purchasing Power
In barter system it was very difficult to transfer the purchasing power. Money performed this
function easily and quickly.
4. Market Mechanism
Money is the base of market. In other words market mechanism works only because of money.
5. Modern Economy
All the economic policies are applicable only because of the fact it is possible to state the prices of
everything in terms of money.
6. Economic Activities
Economic activities such as investments, savings, credit, advances, purchases and sales are made in
terms of money. It has facilitated the process of expansion of trade and commerce.
CONTINGENT FUNCTIONS
1. Basis of Credit
Credit has increased in all the countries of world. Use of cheques, bills of exchange etc. has gone
up. Without money, credit instruments cannot circulate.
2. Marginal Productivity
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Money plays an important role in equalizing the marginal utility of the consumer because the prices
of all commodities are expressed in terms of money.
3. Production of Capital
Money is the most liquid type of capital. It can be put to any use. On the account of this liquidity of
money, capital can be transferred from less productive to more productive uses.
4. Repayment Capacity
Money possesses the quality of general acceptability. So to maintain its repayment capacity, every
firm has to keep some amount of liquid money in its assets.
5. Purchasing Power
Punching power stored in terms of money can be put to any use. It is not essential that money should
be used for the purpose for which it has been saved.
6. Money gives Liquidity of Capital
Money is the most liquid form of capital. It can be put to any use. From this point of view, money is
highly important.
Conclusion
Money is has removed many difficulties of barter system. It is always been main part of an
economy. Money in economy is like the blood of human body. It is much important in the
developed world.
54
Q. 25 Describe the characteristics and phases of trade cycle.
Trade cycle
“A trade cycle is composed of periods of good trade characterized by rising
prices and low unemployment percentages alternating with periods of bad
trade characterized by falling prices and high unemployment percentages.”
(Prof. Keynes)
There are ups and downs in the economic activities. The government can adopt measures to control
economic fluctuations. Sometimes these measures may be poor than forces of trade cycles.
Therefore the result is that there is change in the business activities. A trade cycle can consist of
eight to ten years.
CHARACTERISTICS OF TRADE CYCLE
1. Financial Crisis
The financial crises are connected with trade cycle. The most severe financial crisis began in the
USA on October 29 1929.
2. Difference in level
Sometimes capital goods industry are affected and sometime consumer goods industry are affected
because there is a difference of level.
3. Effects the whole economy
Trade cycles affect the whole economy of a country. In fact their effects reach even social and other
matters of a community.
4. International
The world is knit in one economic unit through international trade that if there is prosperity or crisis
in one part of the world it is shared by all other countries of the world too.
5. Continuous
The phases of trade cycle follow each other and it is completed between 8 to 18 years.
7. Self Generating
The business cycle is self generating. Each phase contains in the forces which bring an end to it and
generate the next phase.
Phases of Trade Cycle
Time Period
Economic Activity
55
PHASES OF TRADE CYCLE
1. Boom / Prosperity
The business activities are at peak level during boom. It a period of increased demand output,
employment and income. There is general increase in demand for goods. Therefore prices show an
upward movement. But wages, salaries interest rate and taxes do not rise in proportion to the rise in
prices. The profit margin increases due to gap between prices and costs. The increased profit
increases the value of stock exchange securities. The businessmen are hopeful. The liberal bank
credit and more profit expectations help to increase investment. The investment is made in fixed
capital goods like plant, machinery and equipment. They lead to expansion in economic activity by
increase in the demand for consumer goods and the price level goes up. The manufacturers and
middlemen try to increase their stocks. The expansion process continues till there is a peak level or
boom.
2. Recession
The boom does not last for along period. When boom is over there is recession. It is an upper
turning point from prosperity to depression. Ti lasts for a shorter period of time. It marks the point
at which the forces that make for contraction finally win over the forces for expansion. Its outward
signs are liquidation in the stock market, strain in the banking system and some liquidation of bank
loan, and the decline of prices. The stock market feels downfall and there will be sudden change in
allowance areas of business. A wave of pessimism begins to prevail in the economy. The
investment is reduced. The production of capital goods industries falls. The profits decline further
because costs overtake prices. The poor firms close their business while others reduce production
and try to sell old stocks.
3. Depression or Contraction
it a period of difficulties. There id decline in production employment, income demand and prices.
The production of both consumer and capital goods falls. The costs are high and prices are low so
there is fall in profits. The people are not willing get bank loans even at low bank rate. There is
mass un-employment during the period. There is general fall in prices, profits wages, interest rates,
consumption, expenditure, investment and bank loans. The factories are closed and workers become
jobless. The capital goods industries suffer more than consumption goods industries. Al business
activates are at its lowest point. The level of real income consumed real income produced and the
rate of unemployment reach subnormal levels due to idle resources and capacity.
4. Recovery or Revival
During this period constructional and development works are started by the government. In this
period depression is removed and there is the beginning of boom and expansion. There is complete
agreement between cost and price. Profit begins to reappear in the business. The repairs and
replacement of capital equipments start. There is a re-employment of labour. The commercial banks
also expand the credit. The marginal efficiency of capital begins to rise and rate of investment
increases.
56
Q. 26 Critically examine the quantity theory of money given by Fisher.
There are various theories which have been put forward for explaining the determination of the value
of money. Jean Bodin presented the quantity theory of money in 1568 for the first time. Afterwards,
John Law, David Hume, Henry Thornton, David Ricardo, J.S. Mill and Simmon Newcomb 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 A.D. This theory is based on medium of
exchange function of money. Monetary policy is the basis of ups and down in value of money and
price level. Here, we explain the following important theories of Quantity theory of money as under:
1. Quantity Theory of Money

According to this theory, the value of money is dependent on the quantity of money in circulation.
Any change in the total quantity of money in country affects prices and the change in prices of goods
affects the value of money. In simple words, quantity theory of money states that changes in general
price level occur due to changes in quantity of money in circulation i.e. an increase in quantity of
money raises the price level or contraction in the quantity of money will lead to fall in general price
level.
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 the value of money decreases and vice versa”.
According to F.W. Taussing:

“Double the quantity of money and other things being equal, price will be twice as high as before,
and the value of money on hold. Half the quantity of money and other things being equal, prices
will be half of what they were before and the value of money double”.
Explanation
Thus we see that according to the above given definition, the change in quantity of money affects the
price level in direct proportion and since value of money and price level have inverse relation with
each other, we can say that quantity of money and value of money is inversely proportional.
Equation of Exchange:
Prof. Irving Fisher has expressed the quantity theory of money in a simple equation, which is called
equation of exchange. It is as:
Formula P=MV+ M’V’

T
P= General Prices Level.
M= Quantity of money or stock of money.
V= Velocity of money in circulation.
T= Volume of transactions i.e. number of goods to be bought and sold through money.
M’= Credit money
V’= Velocity of credit money.
In this formula (MV +M’V’) represents supply of money and demand for money equals to supply of
money. Prof. Fisher assumes that in short period T and V remain constant. Therefore P will change
directly with M.
Example
Suppose the initial position of the Economy is as:
M=300, M’=100 V=2, V’= 2, T=40
P= 300 x 2 + 100 x 2 = Rs. 20

40
57
Now to see the effect of change in quantity of money over prices and value of money, let double the
M, keeping velocity (V) and quantity of goods as constant.
P= 600 x 2 + 200 x 2 = Rs. 40

40
Thus we see that when M is doubled, price level is also doubled which means that value of money
has fallen to one half.
Now, we half the M:
P = 150 x 2 +50 x 2 = Rs. 10

40
Thus we see that if we half the M, the prices will also be half and
value of money will be doubled. Quantity theory of money can be
explained with the help of following diagrams:
When quantity of money is Q1, Price is P1 and when quantity of

money rises to Q2, means double, price also increases to P2 and so
on. It means there is direct relationship between the quantity of
money and price.
When the quantity of money Q1, the value of money is V1

when the quantity of money is Q2, means double, the value of
money reduce to V2 and so on. It means there is an inverse
relationship between quantity of money and value of money.
Assumptions
The quantity theory is based on following assumptions.
1. Full Employment
The theory is based on the assumption of full employment in the economy.
2. Price level is a passive factor

The theory assumes that price level (P) is affected by other factors of equation but it does not affect
them.
3. Constant Velocity of Money

In Fisher’s equation, the velocity of circulation of money (V) and bank money (V’) are assumed to
be constant.
4. Constant Volume of Trade

The total volume of transactions (T) remains unaffected by changes in M and M’.
5. Barter Transaction
Barter means exchanges of goods and services for goods and services without the use of money. The
barter dealing can be excluded altogether while dealing with quantity theory.
6. Long Period
The theory applies to the changes in prices only in long period, because quantity of money does not
affect price level and value of money in short run.
58
7. Constant relation between M and M’

In Fisher’s equation, it is assumed a proportional relationship between currency money (M) and bank
money (M’)
Criticism
1. Useless Assumptions
This theory is based on certain assumptions “Other things remaining the same” which are not always
true. Therefore, theory is not correct.
2. Dependent variables
All the assumptions are inter-linked. If one variable is changed the other is also changed. Therefore,
this theory is not correct.
3. Circulation of money
It is very difficult to measure the circulation of money in the country; therefore, velocity cannot be
calculated within the country.
4. Dynamic Theory
It is dynamic theory, which is not constant. Therefore, the value of money is not exactly
measureable.
5. Supply side
This theory is one sided because the quantity of money can be doubled but it is not possible to hold
the quantity of money.
6. Proportionate change
According to Fisher, the increase or decrease in the quantity of money brings proportionate change
in the price level while the history shows that it is not true.
7. Trade Cycle
According to this theory government can increase the quantity of money to remove the deflation and
decrease the supply of money to control inflation. But in 1930, when great depression took place,
every country tried his best to increase the quantity of money but the prices did not rise and
depression could not be removed.
8. Ignores the Rate of interest

Another serious defect is that this theory does not take into consideration the influences of the rate of
interest of cash balances.
59
Q. 27 Define monetary policy and discuss its various tools (Methods of Credit Control)
If the monetary system of the country is unorganized then the balance of demand and supply of
credit disturbs. Due to which the balance of demand and supply of credit disturbs. Due to which the
economic system of the country faces many difficulties. If the amount of credit increases in any
country the country becomes inflation stricken, which leads to the problem of dearness. On the other
hand, if the amount of credit decreases then the country becomes deflation stricken which leads to
the lower investment. Therefore, the central bank of any country takes various steps to maintain the
balance of credit in the best interest of the country. These steps are called the tools of controlling
credit or monetary policy.
“Monetary policy refers to the measures which the central bank of a country
takes in controlling the money and credit supply in the country with a view to
achiever certain specific economic objectives.”
“Monetary policy is considered as the regulation of cost and availability of

money and credit in the country”
Main points of definition
1. It is considered as a measure or regulation.
2. For controlling the money and credit supply.
3. For deciding how much money the community should have.
4. To achieve specific economic objectives.
Objectives
1. Full employment
The main object of monetary policy is not only to maintain the conditions of employment in the
country but also to create more opportunities of employment in less developed countries.
2. Price Stability
Maintenance of price stability does not mean to keep the prices fixed but to avoid inflation and
deflation. The monetary policy is directed towards controlling inflation by decreasing the total
amount of credit or containing its expansion with a desired limit and curing deflation by increasing
it.
3. Exchange Stability
This means maintaining relative stability in the exchange rate i.e. external value of the country’s
currency. It also means the maintenance of balance of payment in equilibrium or at least improves
its position.
4. Equitable distribution of credit

This is necessary for social justice because it helps lessening inequality of wealth and income, which
increases the standard of livening of people. thus the credit policy should be formulated in a ways,
which ensures increased flow of credit to backward areas and small borrowers.
5. Foreign value of currency

Monetary policy helps in consolidating the, external value of local currency which leads to growth in
trade.
6. Increase in investment
With the help of monetary policy, central bank plays a vital roe in the enhancement of investment,
60
which results in economic stability.
7. Deposits of gold
Economy of the country comes into trouble because of decreases or increase in the deposits of gold.
These effects can be removed with the help of monetary policy.
8. Stability in Capital Market

The development of any country depends upon its stable capital market. The central bank takes help
of monetary policy in order to create stability in capital market.
9. Production of wealth
The main object of monetary policy is not only to maintain the conditions of employment in the
country but also to create more opportunities of employment in less developed countries.
10. Control on inflation and deflation

Central bank generates economic stability by controlling inflation and deflation in the country.
11. Promotion of economic development

This means the steady growth in the National Product and Per Capita Income. It requires best
utilization of productive resources. Thus with this objective the crecit control policy aims at
mobilization of monetary resources and ensuring their fuller and productive use.
12. Increase in Production

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.
Methods of Credit Control
Quantitative Methods
This method is used to control the total quantity of money supply and bank credit. They are
selective in nature. This method can be divided into following five sub-methods.
1. Interest Rate Policy
It means the rate of interest at which the commercial banks grant loans against first class securities
according to the instructions of central bank. In case of inflation, the bank interest rate is raised
which discourages borrowings, as a result credit contracts. On the other hand if there is deflation,
the bank interest rate is lowered which encourages the borrowings as a result credit expands.
2. Open Market Operation

It means purchase and sale of securities by central bank in open market. If there is more quantity of
money, the central bank sells securities in open market. Buyers make cash payments through
commercial banks, so as a result, credit contracts. On the other hand, if central bank wants to
increase the quantity of money in a country, then it buys securities and makes payment in cash, as a
result credit expands.
3. Change in Reserve Ratio

Every member bank is required to keep a certain amount of its total deposits as cash reserve with
central bank. If there is more quantity of money in the country, the ratio is raised which reduces the
credit base of banks and credit contracts. On the other hand, if there is less quantity of money then
the ratio is reduced which increases the credit base of banks and credit expands.
61
4. Credit Rationing
The central bank puts limits for the grant of credit. The credit is rationed for each bank during
financial crises. If the central bank adopts expansionary monetary policy the rationing limit of loans
increases. On the other hand if the central bank adopts the contractionary monetary policy the
rationing limit of loans decreases.
5. Bank / Discount Rate Policy

The policy refers to the varying of the rate at which the central bank re-discounts the first class bills
of exchange of scheduled banks of advances loans to them against approved securities. In case of
inflation, the central bank increases the bank rate and vice versa. Now in Pakistan open market
operation and bank (discount) rate policy are mostly used by SBP to control the credit in the country.
Qualitative Methods
These methods are used to restrict bank advances for certain specific purposes. There are general in
nature. The detail of these methods is as under:
1. Moral persuation
Sometimes the central bank advises the commercial banks to avoid malpractices and makes them to
adopt right ways. So that country could achieve its objects easily. Generally, following instructions
are given to commercial bank in this regard.
i) Avoid economic activities against the interest of country.
ii) Issuance of loans only for investment and productive purposes.
2. Publicity
Central bank keeps the nation well informed about economic conditions through newspapers, radio
and television etc which enables the people to understand the economic condition of the country.
Publicity throws a light on the following points:
i) Policies of business concerns, their production and production targets.
ii) Deposits of capital, quantity of loans, interest rate of banks and level of inflation or deflation.
3. Direct Action
When the central ban realizes the fact that its policies regarding credit control are not being
implemented then he takes following direct actions:
i) Does not provide the facility of clearing house.
ii) Declares the scheduled banks as non scheduled banks and takes the facilities back.
iii) Increases the ratio of Cash Reserve which limits the advancing ability of banks.
iv) Refuses to re-discount the bills of exchange of scheduled banks.
4. Change in Margin
Margin means the difference between the amount of loan and the value of security. The minimum
margin requirement on securities may be relaxed to encourage the borrowings and can be imposed to
discourage the borrowings.
5. Restriction on advances
In severe economic problems, the central bank may impose restriction on commercial banks to grant
loans. The central bank tries its level best to avoid this tool of credit control policy.
6. Selective Control
In this method the credit controlled by increasing or decreasing the buying power of consumers. If
there is inflation, the grant of credit for consumption goods may be banned and in case of deflation a
lenient policy about the consumer credit is adopted and supply of money expands. Central bank
usually restricts consumer’s credit, so that more funds are available to the industry, agriculture and
other sectors.
62
Limitations / Difficulties in Controlling Credit

1. Non-cooperation
Different commercial banks do not cooperate with the central bank due to which central bank cannot
achieve its objects.
2. Non-Schedule Banks
Non-scheduled banks are out of control of the central bank and they are not bound to follow the
policies of the central bank.
3. Self Created credit instruments
Only bank do not create credit instruments rather various businessmen also create their personal
credit instruments to settle business dealings and these people are not under the control of central
bank.
4. Other Conditions
At the time of getting loan, the borrowers not only keep in view interest rate but also consider other
conditions. If other conditions are suitable then they get loan on high rate of interest.
5. Object of Loan
Business community takes loan not only for productive purposes but also for non-productive
purposes. The non-productive use of loans does not create stability in economic condition of the
country.
6. No Control on objects
Central bank cannot control the objects of spending amount of loan. It means credit can be utilized
on different unwanted and non-productive purposes. For example, there is a possibility that loans
may be utilized for speculative motive, which is not a progressive element for the economy in any
case.
7. Political conditions
If there is political instability, the business community transfers its capital to the foreign countries
which effects badly on the circulation of credit in the country.
8. Foreign banks
The central bank of any country cannot impose its rules and regulations strictly on foreign banks,
because these banks work according to the conditions of international banking.
9. Unorganized capital market
The success of monetary policy depends upon the availability of organized capital market. If the
capital market of any country is not organized then the central bank has to face difficulties in
controlling the credit.
10. Other Financial Institution
In addition to commercial banks other financial institutions like insurance companies and financial
corporation play a pivotal role in import and export. The balance of payment disturbs in case of low
rate of import and export which hampers the economy of the country.
63
FINANCE
PORTION
64
Q. 28 What is business finance? Briefly discuss the different importance and types of
business finance?
Business Finance
“Business finance is defined as that business activity which is concerned with
acquisition and conservation of capital funds in meeting the financial needs and overall
objectives of business finance”.
IMPORTANCE OF FINANCE
1. Purchase of asset
The purchase and maintenance of assets like land, building, plant and machinery is possible with
finance.
2. Purchase of material
Factories depend on raw material. Manufacturers can buy raw material to make goods.
3. Purchase of goods
Wholesalers and retailers purchase finished goods from producers with finance.
4. Payment of expenses
The claims of inside and outside business are paid with finance.
5. Business expansion
The increase in the size of business is possible due to availability of finance only.
6. Change in business
The businessmen can change the nature of their business with the help of finance.
7. Purchase of technology & professional services
With the help of finance technology and professional services can be purchased from world markets
easily.
8. Tax payment
Taxes are paid in terms of money and money is finance.
TYPES & SOURCES OF FINANCE

1. Short - Term Finance
The borrowing of funds for the period of one year or less is known as short term finance. The short
term finance is available at low rate of interest, for seasonal requirements.
Sources
(i) Public Sources

Short term finance can be raised through following public sources.
1. Commercial Banks & Foreign exchange banks
Commercial banks receive the savings of public as deposits and lend them to the businessmen for
short period. Foreign banks make loans to large scale foreign business in accordance with
nationality which can be converted into local currency.
2. Federal Government Agencies
Many Central Government Agencies provide loans to private business. Generally, these agencies are
authorized to make loans to business during emergency period. i.e. S.B.F.C.
(ii) Personal Sources

Short term finance can be raised through following personal sources.
1. Friends and Relatives
A number of persons obtain loan from friends or relatives in the time of need.
2. Indigenous Bankers
This type of sources includes small money lenders i.e. Sahukar, Mahajan and Zamindar.
65
3. Finance Companies & Cooperate Societies

Finance companies are the specialized financial institutions whose primary reason for existence is to
lend money for short period. Cooperative societies render valuable services in providing loans to
rural businessmen against the security of land.
(iii) Business Sources

1. Trade Creditors
Trade creditors include whole sellers, retailers and manufacturers who supply goods on credit basis.
2. Customers
Sometimes customers provide short term funds by making advance payment of goods before their
delivery.
3. Commercial Paper House
These financial agencies are formed to buy promissory notes of the small business concerns and they
can be sold in the open market.
2. Medium - Term Finance
In medium term finance borrowing is made for one to 10 years. Some other banking experts say that
the period is one to 5 years. It is needed for purchasing new machinery, to introduce new product,
for repair, improvement, alteration and addition to plant.
Sources
1. Life Insurance Companies
Insurance companies have stable income of premium, so they grant medium term finance.
2. Partial Payment Method
Some manufacturers sell their goods on cash and installment basis. Some portion of the price is paid
and the balance is partially paid or on Installment basis.
3. Other Resources
In some businesses directors, partners and officers may also provide loans.
4 Finical Institutions
The financial institutes of a country grant medium term finance to the businessmen e.g. PICIC,
IDBP.
5. TFC & PTC
Term Finance Certificates are issued by the company to lending institutions. The mark up price is
paid in installment. Participatory term certificates are issued by a company for meeting its medium
term needs.
3. Long – Term Finance
Long term finance is generally required for more than 10 years. Following are the main features of
long term finance for purchasing permanent capital assets such as land, building, plant and
machinery, for starting a big business. High rate of interest is charged.
Sources
1. Underwriters
They take the responsibility to dispose out securities of companies and receive commission.
2. Bonds
Under this scheme, large size businesses issue secured and unsecured bonds.
3. Investment Trust
These trusts are specialized in the field of investment. They sell their own shares in the open market
and then collected amount is utilized to purchase securities of their companies.
66
4. Incorporate Savings
A company does not distribute its whole profit among the shareholders. They transfer some portion
of the profit to reserve fund every year.
5. New Partners
By inviting new partners in a firm, the volume of capital can be increased.
6. Debentures
The debentures are long term loans against the assets of company. The interest and time period for
their redemption is also fixed.
7. Mortgage
These loans are secured against immovable property like land and building etc.
9. Musharika Investment
The capital requirements of a business are also met by Musharika certificates.
10. Modaraba Certificates Long term loans are also obtained on Modaraba certificates which may
be for specific or multiple purposes.
67
Q. 29 What do you mean by Debt Financing? Explain its merit and demerits?
Debt Financing
“Borrowed funds for the business needs are called debt financing. These sources of loan
are obtained for short term, intermediate and long period on interest basis. The
repayment of these loans is made on installment basis if it is for more than one year.”
MERITS
1. Checking of Invoice and Goods
If purchases are made on credit it is the more easy to check the invoice and goods before paying the
bill than paying cash on delivery.
2. Low Interest
The interest charged on debts is lower than the rate of return paid to shareholders in form of
dividend.
3. Tax Savings
As the interest on borrowed funds is an expense and is deductible from income which results in low
profit. So, the owners have to pay fewer taxes.
4. Urgent Current Expenses
The business concern can take over draft and short term loans from commercial banks.
5. Large Scale Business
For large scale business huge capital is required, we can take help of borrowed money.
6. Expansion of Business
The business can be expanded with the use of borrowed funds.
7. No interference of Creditors
The creditors does not interfere the affairs of the business and the owners are independent.
8. Flexible Financing Policy
Debt financing enables the management to frame a flexible financing policy.
9. Winding up
When business is closed the owners have to refund of capital after the creditors have been paid. So
the whole loss goes to owners as per accounts.
10. Quick and High Return
Debt financing makes finance policy flexible. The reason is that a firm will get debt finance when
the season starts and repays it as soon as the season is over.
DEMERITS
1. Discouragement of Investment
In the period of depression when firm would be given a low return as compare to interest on
borrowed funds, the new investors will not contribute their funds in business sector.
2. Payment of Principal Amount
The main drawback of the use of creditor fund is the risk to the owners investment from the inability
to meet the creditor claims in respect of principal amount when due.
3. Regular Maturity
Short term credit must be paid at maturity. In case of delay or default the business can suffer but this
situation may not arise in owners finance due to absence of maturity
68
4. Depression
The funds supplied by creditors are not available in the times of depression, because they are not
ready to take risk.
5. Risk of Heavy Losses
The business depending upon borrowed money possesses less potential to face any loss.
6. Higher Rate of Interest
Interest charged by the lenders is high than other types of payments. Credit financing may be costly
due to various economic and business factors.
7. Chance of Sue
The interest due on the borrowed funds and the principal amount must be paid on maturity date. If it
is not paid then creditors can legally force the firm for repayment.
8. Restlessness
Sometimes the firm used its profit in the business to clear the borrowed funds, it then creates
restlessness among partners or owners.
9. Low Returns
The rate of interest is paid to the creditors out of the profit which reduce the income. As a result the
return to the owners remains low.
CONCLUSION
Debt Financing have some merits and demerits, on the basis of them we conclude that with the help
of debt finance a firm can raise funds in emergencies, meet seasonal needs and can expand sales
during depression. If the interest on borrowed capital and principal is not paid at maturity date then
the creditors may sue the business which put it in a very awkward position in the eyes of
competitors.
69
Q. 30 What do you mean by Equity Financing? Explain its merit and demerits?
Equity Financing
“The finance provided by the owners is called equity financing.
The profit retained in the business is also a part of equity financing. The owners contribute for
meeting the working capital as well as fixed capital needs of the business.
SOURCES OF EQUITY FINANCING
1. Preference shares
The public companies can raise funds through sales of preference shares. The investors can get
fixed rate of dividend on these shares.
2. Ordinary shares
The shares are sold to general public. The funds are available on permanent basis. The rate of profit
is not fixed. Assets are free from any charges.
3. Deferred shares
Deferred shares are issued to directors. They received dividend after payments to ordinary
shareholders. The interest of directors remains in business due to sale of such shares.
4. Reserves
The reserves are created out of profits for meeting unforeseen expenses. The management is
allowed to use such reserves for benefit of business.
5. Accumulated profits
The accumulated profits are available for use in business. The management can decide the utility of
such profits.
6. Sale of idle assts
The management can sell idle assets. The available funds are used in business to meet financial
needs. The cost of borrowing can be saved.
MERITS
1. High rate of profit

The capital provides high rate of profit. There is no loan so there is no interest. In the absence of
interest the rate of profit is high. It is beneficial for owners.
2. Minimum losses
There is minimum loss to the owners during depression. The interest on loan increases losses. In
case of equity finance there is no interest so losses remain low.
3. Borrowing is possible
The owners provide capital without security. The assets are free from any burden. In case of need
assets can be use as security for borrowing money.
4. Permanent nature of capital
The capital remain with management during business life. There sis no repayment problem at any
stage. The nature of capital is permanent so it is not refunded.
5. Management becomes alert
The owners finance makes the management alert. In case of low profit they are responsible when
there is loss the management is accountable.
6. No need of sinking funds
70
The owner’s funds are available for indefinite period. There is no need to set up sinking funds for
refund of capital. The owner’s funds increase financial position.
7. Liquidation of company
The assets are free from any burden. There is no claim of creditors on the assets. The owners can
get back amount of capital invested in business.
8. No financial worries
It is benefit of equity finance that there are no financial worries of borrowing when supply of loan
funds is short and interest rate are high
DEMERITS
1. Business expansion becomes impossible

The owners like risk free investment. Therefore business expansion becomes impossible. The
economies of large scale are not possible due to small size of business.
2. High rate of taxes
The rate of profit is high as interest is not charged to profit and loss account. When profit is high the
rate of taxes are high. The government earns more income.
3. Business life is at stake
The capital provides high rate of profit. There is no loan so there is no interest. In the absence of
interest the rate of profit is high. It is beneficial for owners.
4. No innovation
The owners invest their funds is safe areas. They work on the basis of their experience. They do not
start new and risky business. There is no innovation so there is little profit.
5. Idle funds
There may be need of seasonal funds. The needs are met with equity finance. The funds remain idle
for many months. The result is that profit rate goes down.
6. High cost of capital
The cost of capital is higher as compared to borrowed funds. The owners invest money to earn
reasonable rate of profit. The expected rate of profit is started at high level.
71
Q.31 What are the Islamic Modes of Financing?
ISLAMIC MODES OF FINANCING
1. Loans financing by lending

1. Qarze - Hasna
Under the Qarz-e-Hasna Scheme, interest free loans are granted by the nationalized banks to the
students who are less than 35 years of age and do not have sufficient means to continue their
education studies. Qarz-e-Hasna is available for post intermediate studies in engineering, medicine,
agriculture, electronics, economics and commerce etc. For repayment of the loan, a grace period of 2
years is granted after completion of studies.
2. Interest Free Loans with Service Charges
It is a new concept of lending and is based on Ijtehad. The banks are permitted to lend funds free of
interest. They are to recover only the actual service charges from the users of funds. This mode of
financing is being used by the banks for financing of exports.
2. Trade Related Modes of Financing

1. Hire Purchase
In a hire purchase bank purchases the specified goods at the request of the customer and hires them
to the clients on the payment of periodical installments. The installments are worked out covers a fair
return as well as the actual cost of the goods on full payments.
2. Development Charges
It is a very useful mode of trade financing. The bank made advances to the customers for the
development of land and property. It then takes a share in the value added to the property. This share
in the value added to the developed property is named as development charges.
3. Leasing
Leasing also called Ijra is a medium or long term financing. In this trade mode of financing, the
lessee Mustegir acquires the rights for the use of an asset from the lessor Ajir for a fixed agreed
period of time, on the payment of a fixed amount which may be on yearly, half yearly or on monthly
basis. The title of the property remains with the lesser.
4. 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 late payment basis.
5. Mark Down
It is a purchase of moveable or immovable property by the bank with Buy Back Agreement.
According to this trade mode of financing, the customer sells the moveable or immovable property
to the bank with a promise to buy back the same from the bank on a future date.
ISLAMIC INVESTMENT MODES OF FINANCING

1. Investment in Musharika
It is an agreement between the Bank and its client to participate in a business as temporary partners
by providing agreed amount of funds for sharing profits or losses during a specified period of time.
2. Modaraba
Modaraba means the business in which the subscriber participates with the money and the manager
Modaraba with the knowledge and skill. The chief features of Modoraba are:
72
• Modaraba must be registered under Modarba Floatation and control ordinance, 1980
• Profit is shared in agreed ratio. Modaraba certificates are transferable
• Modaraba may be for "Specific purpose” or for "Multiple purpose "
• It may be perpetual or for a specified period.
3. Participation Term Certificates
Participation term certificates are an instrument of finance issued by company for meeting its
medium and long term capital needs. The salient features of PTC are:
• PTC is an instrument of medium and long term financing which has been developed to
replace debenture financing and instrument is transferable.
• Profits are shared in agreed ratio while losses are shared in the ratio of banks and company’s
investments.
• Only JSC Joint Stock Companies can raise funds for by issuing PTC.
4. Investment on the Basis of Equity Participation
• Equity participation means sharing rises and rewards of ownership.
• Under this scheme, 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.
5. Investment on Rent Sharing Basis
• 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. Rent may be revised after every three months.
73
Short Question & Answer

1. State Bank Of Pakistan
State bank of Pakistan is an institution which performs the functions of expansion
and contraction of money and supply in Pakistan.
2. IMF
IMF stands for International monetary fund. It is an institution financial institution.
3. Islamic Development Bank
Islamic Development Bank was established in 1975 at Jeddah in the Islamic
Conference, where the ministers of the Islamic countries were gathered in 1973.
Head office of the bank is in Jeddah (Saudi Arabia)
4. Near Money
The money and assets which can be easily and quickly converted into money
without loss in value represents near money.
5. IBRD
IBRD stands for the international bank for reconstruction and development. It is an
international financial institution.
6. Index Number
An index number is measure of relative changes accruing in a series of value
compared with base year.
7. Leasing
Leasing is an agreement whereby a party, the lessor, transfers an asset and the right
to use it to another party, called the lessee in exchange for periodic lease payments.
8. Musharika
An arrangement of business or financing in which partners can participate their
money or effort or skill or a combination of these items, is called Musharika.
9. Stock Exchange
A stock exchange is an association of persons engaged in the buying & selling of
stock, bonds or shares for the public on commission and is governed by certain rules
& regulations.
10. Money Market
A place where near money is sold and purchased is known as money market.
Further, where the short-term loans are bought and sold in a market is called money
market.
11. Negotiable Instruments
A negotiable instrument means promissory note, bill of exchange or cheque payable
either to order or bearer.
12. E-Banking
The relationship between banking and the electronic information technology
products that can assist banking represents e-banking. In other words, the use of
information technology products by the bankers to promote their business.
13. Mark-Up Financing
A mode of financing in which banks purchases goods and then sell them to client at
some markup in price on deferred payment basis is called markup financing.
14. Cross Cheque
A cross cheque has tow transverse parallel line on its face. The payment of cheque
can be claimed thorough another bank. The payee bank will collect amount if he is
actual payee.
15. Trade Cycle
The recurrent ups and downs in the level of economic activity that extends a period
74
of time is called trade cycle.

16. Fiat Paper Money
A type of paper money that gets its status as money from the power of state neither it
is convertible nor it is fully backed by gold or metallic reserves. It is money because
government says it as legal tender.
17. Mutual Funds
actual payee.
18. Clearing House
An institution that takes the responsibility of settlement indebtness between its
member sis called clearing house.
19. Spot Rate Of Exchange
A rate of exchange prevailing in the foreign exchange market at a specific time is
called, spot rate.
20. Post Dated Cheque
A cheque issued for future date is called post dated cheque.
21. Non-Scheduled Bank
The banks which are not registered in the list central bank until its charter and they
are not bound to provide banking service according to the policies and instructions
of central bank.
22. Real Interest Rate
A rate of return gets from their investment after deducting inflation rate and other
deductions.
23. Barter System
Barter system is the direct exchange of goods and services without the use of money
as either means of payment or a unit of account.
24. Promissory Note
An instrument in writing containing an unconditional order signet by the maker,
directing a certain person to pay certain sum of money only to or to order of a
certain person or to the bearer of instrument.
25. Bills Of Exchange
A bill of exchange is an instrument in writing containing unconditional order signed
by the maker, directing a certain person to pay certain sum of money only to or to
the order of a certain person or to the bearer of instrument.
26. Debt Financing
The borrowed funds for the business needs is called debt financing.
27. Principles Of Note Issue
A principle of note issue in which these is no need to keep 100% gold or silver
reserves against note issued. The note issued should have guaranteed of
convertibility into gold.
28. Cash Balance Theory Of Money
When the demand for money increases people will reduce their expenditures on gold
and silver in order to have larger cash holdings.
29. Client
actual payee.
75
‫پنجاب یونیورسٹی کے سابقہ پیپرز‬

PAST PAPER 2015 B. COM PART 1 MONEY BANKING AND FINANCE
Money Banking and Finance 2015 —— Paper: BC-307
Time Allowed: 3 Hours —— New Course Marks: 100
Note: Attempt any five questions. All questions carry equal marks.
Q1. Define money. Discuss the role and scope of money. (5,15)
Q2. Define paper money: Explain its advantages and disadvantages in detail. (5,8,7)
Q3. What is Index Number? How P – E Index Number is constructed? Explain its limitations also. (5,10,5)
Q4. Define ‘Commercial Bank’. What are its various functions?3 (5,15)
Q5. What do you understand a BANKER and a customer? Give rights and duties of both. (5,7,8)
Q6. “Gnarling loans and advances is one of the functions of Banks.” What are the various PRINCIPLES to be observed
by a banker while advancing loans. to the customer and why? Explain. (15,5)
Q7. What is business finance? Explain the various modes of Islamic. Finance in detail. (5,15)
Q8. Write a note of two of the following: (20)
(i) Letter of credit(ii) IMF
(iii) Pak-China Trade Corridor (iv) SBP
MONEY BANKING AND FINANCE PAST PAPERS 2014 B. COM
1
Money Banking and Finance 2014
Time Allowed: 3 Hours New Course Marks: 100
Note: Attempt any five questions. All questions carry equal marks.
Question # 1 Define money and discuss the qualities of good money.4
Question # 2 Explain the different forms or types of money.
Question # 3 Differentiate inflation and deflation after defining them.
Question # 4 Discuss in detail the functions of S.B.P.
Question # 5 How does central bank of a country control the credit or money supply? Discuss.
Question # 6 Discuss the merits and demerits of privatization of banks in Pakistan.
Question # 7 Define debt finance. Also explain its merits and demerits.
Question # 8 Write short notes on:
Types of bank ac2counts
Sources of business finance
PUNJAB UNIVERSITY SUPPLEMENTARY 2013

PAPER: BC-307 MONEY, BANKING AND FINANCE
Time allowed: 3 Hours Max. Marks: 100
Attempt any FIVE questions. All questions carry equal marks.
1. Define money and explain its functions in detail.
2. Define money and discuss the forms of money.
3. How the rate of exchange is determined under “Balance of payment” theory.
4. Discuss the functions of commercial bank in detail.
5. “Loans create deposits and deposits create loans.!”. explain.
6. Define and distinguish between the cheque and bills of exchange.
7. Discuss the sources of various types of business finance.
8. Write short notes on:
a. Traditional and Islamic Banks
b. Kinds of LC.
PUNJAB UNIVERSITY ANNUAL 2013

1. Discuss the merits and demerits of paper money.
2. Define trade cycle. Also discuss the causes and remedies of trade cycle.
3. Define banker and customer and also discuss the nature of types of their relationship.
4. Explain the functions of Central Bank in detail.
5. Define letter of credit (LC). And discuss various kinds of LC.
6. How do the commercial banks create credit. Explain the process and state limitations in this regards.
7. Define equity finance. Also discuss merits and demerits of equity finance.
76
a. Qualities of good money

b. Islamic and traditional banks

2. Discuss the inconveniences of Barter system and also explain how these inconveniences were removed with the
introduction of money.
3. Explain the merits and demerits of Paper Money.
4. Define Trade cycle and explain its phases.
5. Define monetary policy and discuss its various tools (Methods of Credit Control)
6. Differentiate between central and commercial banks.
7. Explain the causes, merits and demerits of nationalization of banks in Pakistan.
8. Discuss the merits and demerits of equity finance.
1. Kinds of banks exist in Pakistan
2. Feature and sources of short term-finance.

1. What do you know about the evolution of money? Also discuss the qualities of good money.(8+12)
2. Critically examine the quantity theory of money given by Fisher. (20)
3. Define trade cycle and explain its different phases.(4+16)
4. Discuss the credit creation process of commercial bank. Also state their limitations in this regard. (15+5)
5. Discuss in detail the functions of Central Bank. (20)
6. Define letter of credit (L.C.) and explain its kinds. (4+16)
7. Define credit instruments. What are the differences between bills of exchange, promissory note and cheque? (4+16)
a. I.M.F.
b. Importance of business Finance.

1. What are the different kinds of banks that exist in Pakistan?
2. Define Monetary Policy? What ate the objective and tools of Monetary Policy?
3. What at eh causes of Nationalization in Pakistan? What are its advantages and disadvantages?
4. Define Bank? What is the difference between commercial and central bank given examples?
5. Define foreign exchange? What are the different rates of foreign exchange? How the rate of foreign is determined
through demand of supply.
6. Define Money? Discuss the role and importance of money in economy.
7. Define Trade Cycle? What are the causes of fluctuation in trade cycle? Give remedies.
8. Give short notes:
a. Islamic modes of financing
b. Dishonoring of cheque.

1. What is the procedure to open a Bank Account? Discuss the various sources of funds for commercial banks?
2. Define letter of credit. Discuss its parties. What is procedure to open letter of credit?
3. Define Negotiable instrument. Why these are called negotiable? Differentiate between Bill of exchange, Promissory
note, and cheque.
4. Define Central bank. What are the functions of central bank? Also discuss objectives of central bank.
5. Define money. What are the functions of money?
6. Define paper money. What are the advantages disadvantages of paper money?
7. Discuss the various interest free modes of financing.
8. Write note on the following:
a. Capital market
b. Role of commercial bank in economic development.
77

Attempt any FIVE questions including Question No. 1 which is compulsory. All questions carry equal marks.
1. Briefly explain the following:
a. Devaluation
b. Forward Rates
c. Stagflation
d. Banking principle of note issue
e. Equity participation
f. Bear and bull
g. Principles of lending
h. Fiat money
i. Bill of exchange
j. Cheque
2. What do you mean by SBP? Discuss in detail functions of state bank of Pakistan.
3. What is Index Number? Discuss its use & limitations.
4. What were the objectives of Nationalization of Banking in Pakistan?
5. Explain the functions of commercial banks.
6. What is Capital Market? Differentiate between money & Capital Market.
7. Define money. Discuss functions of money.
8. what is business finance? Discuss sources of business finance.
9. How do commercial banks employ their funds?

Attempt any FIVE questions including Question No. 1 which is compulsory. All questions carry equal marks.
1. give short answers for the followings:
a. Define money.
b. What is bill of exchange?
c. Define inflation.
d. List down four advantages of barter system.
e. What are scheduled banks?
f. What is ATM?
g. Name any three types of bank accounts?
h. What is equity finance?
i. What is general relationship between banker and customer
j. What is business finance?
2. Define paper money? What are the advantages and disadvantages of paper money?
3. Define deflation. What are its causes and remedies?
4. Describe the characteristics and phases of trade cycle.
5. What is meant by foreign exchange? And discuss the factors causing changes in exchange rate?
6. Define bank. Discuss in detail the kinds of banks?
7. Define and explain the function of state bank of Pakistan?
8. What are the different types of business finance? Also examine the sources of different types of business finance?
9, Write note on the following:
a. Islamization of banking system in Pakistan.
b. Pakistan Industrial credit & investment corporation
78
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Money, Banking & Finance (2016-17 Edition) For B.

There is only one central bank for every country.

The aim of central bank is to maintain monetary and

14. Winding up‫کنباکاخمت‬ The commercial bank can be closed up if the

Q. 2 Define bank discuss in detail the different kinds of banks.

2. Exchange Banks ‫ایسیکنبناادارےاہجںولگفلتخموکلمںیکرکیسندبتلیرکواےتںیہ‬

Q. 4 What is the procedure for opening a bank account?‫ایرمکلشکنبںیمایاکرونارناآدیمےسیکاھکہت(ااکون)ولھکااتکسےہ‬

An individual ‫ االیک صخش‬, business

Procedure for opening a bank account‫کنبںیماھکہتولھکاےناکرطقیاکر‬

1. Account opening form‫ااکونوھکےنلاکافرم‬

6. Pay in slip‫ کنبںیمرمقعمجرکواےنےئلیکاامعتسلوہےنوایللس‬Every account is opened with money. Customer fills

7. Initial deposit‫مکازمکینتکرمقاھکہتولھکاےنےئلیکدراکروہیگ‬The initial deposit is an amount which is paid into the

Operating a bank account ‫کنبںیماھکہتالچےناکرطہقیاکر‬

Central Bank ‫رمکریکنب‬

PRINCIPLES OF CENTRAL BANKING

FUNCTIONS OF CENTRAL BANK

1. Banker to the Government

2. Sole Right of Note Issue

5. Controller of Foreign Exchange

7. Leader of Capital Market

8. Exchange Rate Stability

9. Representative of Foreign Trade

Credit Creation by banking system

Banks Primary Deposits Ratio of Reserve Cash Reserve Credit Creation

Formula of Credit Creation

Process of Credit Creation

Limitations of Credit Creation

5. Central Bank Policy

Bank Al Falah Limited Date: 01-08-2009

Pay Mirza Shaban Zafar or bearer

Rupees Ten Thousand rupees only . B

10. Closed account

13. Crossed cheque

14. Payee fails to provide identity

15. Worn-out cheque / Stale Cheque

Rs. 5,000/- Sialkot , 12 September, 2008

To, Muhammad Aslam

Rs. 10,000 Sialkot , 12 September, 2008

To Mirza Shaban Zafar

Bank Al Falah Limited Date: 01-08-2009

Pay Mirza Shaban Zafar or bearer

Rupees Ten Thousand rupees only . B

Reason Promissory Note Bills of Exchange Cheque

RELATIONSHIP BETWEEN BANKER & CUSTOMER

Q. 11 Discuss the privatization of banks in Pakistan. Explain its advantages and

Denationalization / Privatization of Bank

2. Promote healthy competition

3. Reduce burden of government

4. Funds for social sectors

5. Speed up rate of industrialization

6. Promote capital market

10. Earning foreign exchange

2. No branch in rural areas

CAUSES OF NATIONALIZATION OF BANKS

1. Fair distribution of wealth

4. Growth of the level of the employment

1. Unbalanced distribution of credit

Q. 14 Write a note on E-BANKING

The following steps are taken to withdraw money from an ATM: