Prepared by : Sir Asif Nawaz Insitute For Commerce Karachi

B.COM PART-2 Karachi Board

Notes of Money Banking and Finance

What is Bank and discuss various kinds of bank?

History of bank

Money is very important and necessary to satisfy human wants. Man has been needy in every era due to which the collection and supply (receipts and payments) of money has been an essential part of human life. Different commodities have been used as money in different ages, like, stones, metals, animals, different eatables and minerals. The concept of money, its sources and uses have been passing through from the revolutionary stages along with the evolution of human culture. Even a good number of people directly started dealing in money e.g. merchants, gold smiths, and money lenders etc. the concept of loan, interest, written documents i.e. cheque a bill of exchange came into time light only because of them Origin of the word “BANK” Opinion differs regarding the origin of the word “BANK”. According to some authorities, the word “BANK’ is derived from the Italian word “BANCO”, “BANCUS”. Which mean

that “a bench upon which Italian money changers used to sit with their cons to transact business”.

The German experts says about the word “BANK” is originally derived form the word “BACK” which means a join stock firm or fund. This word was Italianized into “Banco” when Germans were

masters of great part of Italy. Generally it is said that “A financial institution which deals in money

and credit. It borrows and lends money and credit. It borrows money and lends money and in this way acts as financial intermediary between the lender and borrower”

We can simply say that

“The banker is a man who lends you an umbrella when it rains, and takes it away when the weather is


Simple definition:

“Banks are Financial Departmental stores”

Experts Views:

Prof Kinley views:

“A bank is an institution which receives deposits and advances loans”

According to H.L.Hart

“A banker is one who, in, the ordinary course of his business, honours cheques drawn upon him by persons from or for whom he receives money or current account”.

According to Prof. Crowther

“A bank collects money form those who have it spare or who are saving it out of their incomes. It lends money to those who require it.”

Comprehensive Definition

According to Banking companies’ ordinance 19

“Banker means a person transacting the business of accepting for purpose of lending or investing of money from the public, repayable on demand or otherwise with draw able by cheque, draft, and order or otherwise.

Kinds of Banks:-

(a) On the basis of Functions

(b) On the basis of Ownership

(c) On the basis of Registration

(d) On the basis of Domicile

Functional Classification:-

(i) Commercial Banks:-

The most popular kind of banks is the commercial bank receives surplus money from the public and lends to others who needs funds. The bank collects cheques, Bill of exchange etc for customers .Its transfers money from one place to another. The purpose of a commercial bank is to earn profit. The main commercial banks of Pakistan are National Bank, Habib Bank, Allied Bank, United Bank,

MCB etc. These banks play a vital role in economic development.

Central Bank:-

Central bank is the most important bank of any country. Almost all countries of the world now have central bank. The central bank is the leader of all other banks. It does not compete for profit. It has a right to note issue. It controls the operations of other banks for monetary and economic stability in country. The central bank represents the Govt in International conferences.

Industrial Banks:-

The industrial bank is very important for the development of any country. To provide medium and long-term finance to industry is the distinguishing Features of these banks. Industrial banks generally provide finance for fixed capital requirement. They provide finance for expansion, modernization and establishment Bank (IDBP) was set up in 1961. The other institution engaged in providing financial assistance to industries are PICIC, NDFC, SME, etc.

Agricultural Banks:-

Pakistan is an agricultural country and most of our exports consist of Agro-based products. So well organized agriculture sector is necessary for the development of a country. Agricultural banks provide loan for this purpose. ADBP, Agriculture credit advisory committee and rural credit banks are the

few examples of “Agriculture Banks in Pakistan”.

Saving Bank:-

The banks are established for encouraging and collecting savings of people. Saving banks are not banks in the real sense of term. They only provide saving facility. These banks usually invest their funds in Govt securities. The well-Known Post Office savings Banks is an institution of this type. Commercial banks are also providing the service of saving banks in Pakistan.

Investment Banks:-

The bank is opened to buy and sell shares and other securities. It also provides loans for purchase of shares and debenture etc. It keeps new companies by under writing the share, bonds & other securities.

At the end of June, 1992 Seventeen investment Banks, both Pakistani and foreign were functioning in Pakistan.

Merchant Bank:-

The bank provides services like acceptance of bills of exchange, corporate finance, Leasing, hire-purchase and insurance broking. It is a whole sale bank and accepts large sums for fixed term from individual, companies and financial institutions. Baring, lazards are examples of Merchant Bank.

Consortium Banks:-

A Consortium bank is owned by other banks. The bank is formed to meet the financial requirements of

large companies for long period of time. The bank receives the funds from the parent Bank. It can also arrange syndicate loans. International energy Bank, British Middle East Bank, Orion Bank are the examples of consortium Banks.

Labour Bank:-

The Bank is opened by trade union of labourers. The purpose of this bank is to manage worker funds like pension funds, Provident fund etc in a better way. The Labourers also keep their saving in it. The bank provides loans to the concerns which are under the control of trade union. E.g. Union Bank, Saving Bank of Chicago, State Bank of Kansas city.

School Bank:-

The banks provide banking facilities to the students in schools. The boxes or bags are supplied to the students who keep their saving in boxes. Accounts are opened in the name of students. The bank officers go to the school after regular interval and collect the amount of their saving. In U.S.A Beloit saving Bank started working school bank in 1882.

Mortage Bank :-

These banks provide loans to people against moveable and immovable property. HBFC is doing the working of Mortage Bank.

Cooperative Bank:-

These banks are set up to provide credit facilities to farmers and small producers. The bank is opened by

persons of similar occupations living in same areas for providing banking facilities. In Pakistan the Co- Operative bank registered under the Co-Operative societies Act 1925 and can be registered with registrar of Co-Operative societies at provincial headquarters.

On the Basis Of Ownership:-

Public sector Bank:-

Such banks are owned by government and works under the direct control of the government. The chief executive of such banks is appointed by federal government. NBP are examples of public sector banks, First woman Bank.

Private Sector Bank:-

These banks are under the direct ownership of the private organization of Co- Operative Societies. The banks are controlled by the individuals or Pvt Organization, MCB, ABL and KASB Bank is the examples.

On The Basis Of Registration:-

Scheduled Bank:-

These are the banks which are registered in the list of central bank. They are bound to follow the instruction and policies of central bank.

Non Scheduled Banks:-

These are the banks which are not registered in list and policies, Instruction of central Bank.

On The Basis Of Domicile:-

Domestic Bank:-

The banks which are registered and incorporated with in the country are called domestic bank. These banks provide financial assistance domestically. In Pakistan the banks regulated under Pakistan Banking companies’ ordinance 1962 are domestic banks. E.g. N.B, H.B.L, Askari Bank are examples of Domestic banks.

Foreign Bank:-

The bank which have their origin and head offices in foreign country are called foreign bank. Foreign banks are the branches of the banks incorporated abroad. The standard chartered Bank Ltd, National and Grind lays Bank Ltd, Al-Falah Bank Ltd are examples of foreign banks.

Define Commercial bank. Discuss the functions of commercial bank?

A commercial bank is public limited company it is set up under companies’ ordinance 1984. The operations of commercial banks are controlled under banking companies’ ordinance 1962. Foreign

exchange ACT 1947 and state bank of Pakistan ACT 1956. The bank receives deposits from general public. Different accounts are opened to collect money. The bank keeps some money to honour cheques of customers. A large part of such money is provided to people as loans. The bank is important for government, businessman and general public. Commercial bank plays very important role in economic

development of the country it is often called the HEART of financial system of an economy.

Simple definition:

“Banks are Financial Departmental stores”

Experts Views:

Prof Kinley views:

“A bank is an institution which receives deposits and advances loans”

According to H.L.Hart

“A banker is one who, in, the ordinary course of his business, honours cheques drawn upon him by persons from or for whom he receives money or current account”.

According to Prof. Crowther

“A bank collects money form those who have it spare or who are saving it out of their incomes. It lends money to those who require it.”

Comprehensive Definition

According to Banking companies’ ordinance 1962 “Banker means a person transacting the business of accepting for purpose of lending or investing of money from the public, repayable on demand or otherwise with draw able by cheque, draft, and order or otherwise.

Functions of commercial banks

Primary Functions

  1. Accepting deposits

Bank accept deposits form those who have extra money out of their income in their hands, but they can’t use it in a profitable way so banks give them opportunity to deposit their money and enjoy profit.

  1. Current Account In this account the depositor can deposit and withdraw money at any time. Normally traders, businessmen, are interested to open this account bank pays no interest on this accounts. A cheque book is given to the account holder to with draw his money.
  2. Profit & Loss sharing OR saving account :This account is suitable for those people who have small

level of savings. In this account a nominal interest is paid to customer cheque book is given to account


  1. Fixed OR term deposits account: In this account a specified amount is deposited in the

bank for particular period of time. The longer the duration the higher would be the interest. In this

account, a receipt is given to customer, called fixed deposit receipt (FDR).

  1. Advance loans

The bank gives loans in order to earn profit. In this way it accepts deposits at low rate of interest and advances loan at high rate of interest. The difference becomes profits of the bank. Advances are given in the following types.

  1. Over Draft: This is a shot period financing facility. In this facility the bank sanctions that the customer can withdraw his money over and above the balance lying in the bank. This facility is provided to current account holders.
  2. Discounting Bills of Exchange: Its mean, making payment before the maturity of the bill the payment made the bank before the date of maturity is the loan to the bill holder.
  3. Cash credit: In this loan facility the bank sanctions a particular amount. The facility is provided against security.
  4. Time loans: Short term loan in which the time period is less than one year.
  5. Medium term loan for period of 1 to 3 or 5 years
  6. Long term loan for period of more than 5 years and the entire loan are given against proper security.

Secondary functions

  1. Transfer of money

The banks transfer money form place to place by means of draft collection of cheques telephonic transfer and direct debt. The banks purchase bills of exchange to help their customer for collection of money.

  1. Issue of credit money

The banks issue various types of near money the cheques bank draft credit car, are main instrument which is valid as medium of exchange to settle their obligations.

  1. Investment of funds:

The banks can invest funds in stocks shares and bounds. As per law commercial banks at least 25% of

their deposits in securities.

  1. Financing foreign trade

The bank performs duty of financing foreign trade. The respites and payment on accounts of exports and imports is possible through bank.

  1. Foreign exchange dealing

The bank deal in foreign exchange they buy and sell currencies of other countries. The commercial banks are dealer of foreign exchange market.

  1. Status report

The commercial bank act as referee for supply of information about its customer, relating to financial position of party concerned.

Agency Functions

  1. Collection of cheque

A commercial bank acts as agent to the customer to collect and make payment on the cheques. The cheques may be local or out station.

  1. Collection of income

Banks collect pension, dividend, rent and interest of their customers. A credit voucher is sent to customer for information.

  1. Payment of expenses

The bank makes payment of insurance premium trade subscription, school fee and similar other expenses.

  1. Act as trustee

The bank can act as trust to mange trust property as per will of property owner. The order of court is obtained to act as trustee. (Takes care affairs of its client)

  1. Tax return

The bank act as agents of customers, those are bound to pay tax to government.

  1. Hajj application

The bank collects Hajj application from general public on behalf of government.

  1. Safe custody

The bank accepts valuables and other papers for safe keeping. A nominal fee is charged from customer.

  1. Zakat deduction

The bank automatically deduct Zakat on first Ramzan every year from his customer accounts

Utility functions

  1. Letter of credit

Commercial banks issue letter of credit in order to provide financial assistance to the customers dealing in foreign trade.

  1. Information

The banks collect and supply trade information to businessman the issue bulletins that provide update

information abut companies working abroad.

  1. Govt loans

The banks participate in debt management for government. The bank can buy bonds, and others

securities offered by central bank.

  1. Lockers facility

Banks provide lockers facility to general public gold ornaments, documents and their valuables can be placed in lockers.

  1. Share application

Bank accepts applications for subscription of shares on Behalf Company the price of shares is collected with application money.

  1. Accepting bills of exchange

Banks accept bills of exchange on behalf of customers to meet their financial needs.


“Commercial banks play a vital role in promotion economic development by mobilizing the financial resources of the country. As well as through commercial banks provided multiple services to their

customers for the purpose of increasing their business and becoming reliable entity for their customers”

What is central Bank? Explain the function of state Bank of Pakistan in detail?

Introduction & history of central bank:

Money and credit play a very important role in modern society. We can derive maximum benefit from money and credit if their supply can be kept with in reasonable limits. Otherwise they will give rise to many social evils. Money supply takes place through commercial banks and other financial institutions .They primarily to serve their own interest.

The central banking system was originated in different countries during the last century. But it was in a very crude form during that time. The modern system of central banking particularly developed in the 1st half of the present century (i.e. the 20th century). The need of the present century banking system was strongly felt during the financial crisis caused by First World War (1914_1918).

After the war there was complete confusion in currency and exchange markets. There were large

with drawls of money from banks. The bank reserves fell below the needed level. There was no institution which could supervise the working of banks and also serve as a fiscal agent. In order to solve the monetary problems of the countries and set them on healthy footing, a conference was held at Brussels in 1920. It was decided in that conference that to control the supply of money and credit in the economy and maintain stable business conditions, each country must establish its own central bank.

Central bank is the most important bank of a country. Its important has increased manifold during past 50 years. It is the symbol of financial sovereignty and stability of the country. It is head of banking and monetary system. The principles on which a central bank operates are different from those of commercial bank. It does not work for profit. It acts in the public interest and earning profit is only a secondary consideration.

Evolution & Growth

The Riksbank of Sweden was set up in 1656 and declared as central bank in 1668 and is considered to be the old of the central banks. The Bank of England was established in 1694. The Bank of France was set up in 1800. The national bank of Denmark was opened in 1818 and National bank of Belgium in 1850. The Reich’s Bank of Germany was made in 1875. In U.S.A Federal Reserve System was set up in 1914. The Reserve Bank of India was formal in 1935 and the State Bank of Pakistan was established on July 1, 1948.

Organization of Central Bank

The organization of central bank differs from country to country. So it is difficult to speak of single types as a standard. There are central banks which are owned and managed by the private shareholders, such as the federal reserve system of the U.S.A. There are other central banks, The Bank of England, The Bank of France which are fully owned and managed by the government. Again there may be central banks which are jointly owned and managed by the government and Pvt Shareholders. UP to Dec 1973, the State bank of Pakistan was a government and private shareholders bank. Under The Bank ationalization Ordinance 1974, The State Bank of Pakistan has become purely government owned institution. Today no central Bank is completely free the government influence.

Definition of central bank

Simple defection

“A Central bank is a bank, which controls credit”

Expert views

According to Dr De. Kock:-

“The guiding principle of a central bank is that it should act only in the public interest for the welfare of the country as a whole and without regard to profits as a primary consideration"

In words of Prof. Hawtry,s:-

“A central bank is that which is lender of last resort”

Comprehensive definition

According to R.P.Kent:-

“An institution which is charged with the responsibility of managing the expansion and contraction of the volume of money in the interest of general public welfare”

Objective of Central Bank

Following are the principles/objectives of central bank:-

1-Safeguarding Financial Stability:-

The main objective of the central bank is to protect and safeguard economical and financial stability. It is

established in order to design and implement policies to avoid depression and unwanted fluctuations in


2-Working In Public Interest:-

Central bank works in the best interest of the economy and public. It does not give advances, not it allows any interest on deposits. It performs its function without any consideration of profit.

3-Supervision Of Banking System:-

Central bank object is to have supervision and effective control over commercial banks structure, central bank set guidelines for commercial bank, and parameters in which commercial banks are allowed to perform their operation.

4-Control Of Credit & Money Supply:-

Central bank object is to exercise effective control over credit and currency supply in the economy. It has a sole monopoly over note issue and it constantly keeps an eye on the supply of currency in the economy. It also watches the credit creation of commercial bank.

5-Accommodation Commercial Banks:-

It saves commercial banks from bank runs and panics. It case commercial banks find any difficulty in meeting their liabilities; the central bank comes to their help.

6-Ensuring Economic Development:-

The objects of central bank are by direct finances towards important sectors of the economy and ensure that credit requirements of such sectors are full filed.

Function of central bank

A central bank usually performs the following function:-

Monopoly of Note Issue:

In early periods of banking development, all banks used to issue their own notes. This caused confusion, frequent trouble, over issued, causing high inflation and economic crisis.At present through out the world, central banks have the sole right of issuing currency notes. In Pakistan

“State Bank of Pakistan” issues the currency notes of worth five to Rs 5000, (5, 10, 20, 50, 100, 500, and

1000). The main propose of giving the monopoly right of note issue area as under:-

1- Uniformity in the system of note issue.

2-The central bank can exercise better control over money supply.

3- It increases public confidence.

There are two principles of note issue:

1-Banking principles

2-Currency principles

Banker to the Government

Central bank is the banker to the Government. It means that central bank provides

some important services for Government as:

  1. Control of gold and other reserves of Government.
  2. Keeps the Government account.
  • Principle advisor of Govt (Regarding annual budget, taxation system, international trade and
  1. foreign exchange reserves etc).
  2. To formulate of lending facility (For various projects).
  3. Agent to Govt (Attending national and international conference on behalf of Govt).

Banker’s Banks

The control bank acts as banker to

commercial bank as:

  1. It holds cash reserves and deposits of commercial banks.
  2. Discounting of bill of exchange of commercial banks.
  • Enabling the commercial banks to create credit.
  1. Clearing house facility (i.e. the settlements of mutual claims of commercial banks).
  2. Lender of last resort (Granting of loans to commercial banks in the days of financial crises).
  3. Establishment of new banks (Prior permission necessary).
  • The advance policy (Keeping in mind the influence of rate of interest).
  • Every commercial bank sends a monthly statement of its assets and liabilities to central
  1. bank.

Lender of last Resort

Central bank is the lender of last resort to the commercial banks. It means that whenever the scheduled commercial banks are short of funds and are unable to get help from anywhere, it is the central bank which provides them loans and brings them out of trouble. A commercial bank gets loans from other banks in normal routine. But when they do not get such help, they approach the central bank.

Clearing House

Central bank also performs the functions of a clearing house. Since central bank holds the cash reserves of other bank, it easily helps to settle their mutual obligation. Payments by one bank to another are settled through central bank. Daily, in every bank, people deposit cheques which are to be drawn from other banks. In this way every bank has to receive amounts on behalf of its customers and has to make payments on behalf of them. But the banks do not get cash from each other. They settle their accounts with the help of central bank. Every bank has account at central bank, so funds can be transferred from the account of one bank to other bank.

Controller of credit

The central bank also regulates and controls the supply of money in the country. In order to manage the supply of money it implements monetary policy. The important tools of monetary policy are bank rate open market operation and varying reserve requirement.

Maintenance of exchange rate & foreign exchanges

The whole business of foreign exchange control and financing of international trade is done be the central bank. And give the suggestion to the govt. in case of balance of payment. As well as it control the forging exchange rate because a stable rate is promote the forging trade Role in economic development Through polices of central bank of any country is directly influence the rate of economic development. It establishes financial institutions with the help of it countries takes suitable measure to promote economic development.


The central bank can supervise activities of bank management. The bank has powers to look after working of commercial banks. If commercial banks are not follows the policy of central bank then the central bank imposed fine on banks.

Other functions

  1. Representation in international financial institution (World Bank, IMF)
  2. Industrial and agricultural bank
  3. Publication of annual report
  4. Establishment of training institutes


Central bank play very important role in the economy, the policies of the central bank beneficial for the

country as well as commercial banks, with the help of it rate of inflation becoming increase after it economic development started.



The central bank is formed under an act of parliament or ordinance

  1. Ownership

The share capital of the central bank is owned by the government or people

  1. Management

The management and employees are appointed by the government

  1. Number of bank

There is only one central bank for every country.

  1. Branches

The central bank has only inside branches. It has no foreign branches

  1. Aim

The aim of central bank is to maintain monetary and economic stability therefore profit is not

the aim of the central bank

  1. Issue of money

The central bank can issue currency money like Rs. 5, 10,50,100, 500, 1000, 5000

  1. Account holder

The government and commercial banks is the accounts holder of the central bank.

  1. Adviser

The central bank advises the government on financial matters. accounts holder of commercial bank The commercial banks advise their customers for investment of business consultancy

  1. Nature ofaccounts

The central bank opens the government accounts under various head of accounts

  1. Money market

Central bank is leader of money market

  1. Credit

Controller The bank controls the volume of credit through various methods.

  1. Exchange

Control It is the controller of foreign exchange.

  1. Wind up

The central bank can not be closed up even if working at loss.

  1. Foreign

Payment It makes the foreign payment on behalf of the government.

  1. Transfer

It transfer money from one place to

another for the government and banks

  1. Loans

If arranges loans for the government and provides loans to commercial banks as lender of last resort.

  1. Discounting

Bills It discount the bills of the commercial banks

  1. Monetary

Stability It is responsible for the money tray stability of a country.

  1. Right to issue

Notes The central bank has the sole right to issue currency notes

  1. Relations with

International financial institutions It holds relations with international financial intuitions such as IMF, World




The commercial bank is formed under the companies law.

Tthe share capital of the commercial bank is owned by the public.

 The management and employees are appointed by the board of directors.

 There are many commercial banks in every country.

The commercial banks have inside and as well as outside branches. The basic aim of commercial bank is to earn profit.

The commercial bank can issue cheque, credit card and visa card. The individual, partnership, limited companies are the

The commercial banks open current, saving, PLS, fixed deposit accounts.

 The commercial bank is the member of money market.

 The commercial bank creates credit according to money available.

It is the authorized dealer in foreign exchange under the supervision of central bank.

The commercial bank can be closed up if the management decides due to loss.

It makes the foreign payment for customers due to import of goods and services.

It transfers the money from place to place for the people.

It provides loans, cash credit and overdraft to the customers.

It discount the bills of the customers .

They assist the central bank for achieving monetary stability.

The commercial bank can not issue currency notes.

The commercial bank does not have direct relation with international financial institutions

Ddefines the term banker and customer. What is the relationship between them? And discuss the reason for termination of relationship.

Banker Definition

  1. crowther

“A banker is a dealer in debt of his own and other peoples”


“A banker is a dealer in capital or more properly a dealer in money. He is an intermediate party between the borrower and the lender. He borrows from one party and lends to another”

Customer Definition

By dr. hart

“A customer is one who has an account with the banker or for whom a banker habitually underrates to act as such”

By Justice Lindley

“Customer is a person who has some sort of account either deposit or current account or some similar relation with a banker”

  1. The customer must be.....
  2. He should not be a minor
  3. He should be person of sound mind
  4. He should not have been debarred from entering into any contract under the law


General Relationship

Debtor and creditor: “The basic relationship is that of debtor and creditor. If a customer deposits money in the bank he is the creditor and the bank is debtor. If the customer has an overdraft balance then he is the debtor and bank is the creditor”

Special Relationship

Principal and agent: The customer is the principal when deposits cheque, drafts, dividends for collection with bank. The bank is an agent when he sells or purchases securities and installment of loans etc.

Bailer and Bailee: When a customer hands over his valuable to the bank for safe custody then the customer becomes the bailer and the bank is the bailee. And charges small amount for services rendered.

Pledger and Pledgee: When the customer pledges moveable properly with the banker as security for loans, he becomes pledger and banker as pledge. This relationship also knows as pawner and Pawnee. The pledged good should be returned after the debt is repaid by customer.

Mortgagor and mortgagee: When the loan is taken against immovable property the customer is called mortgager and the banker is mortgagee.

Banker is a trustee and Executor: The banker receives valuable and documents of the customer and keeps them in safe custody. The banker also executes the standing instructions of its customers so banker becomes as trustee and executor.

Consultant :Bank usually undertakes financial consultancy for their client. In such a situation the bank becomes a consultant. When a bank advises his client on anyimportant financial matter, bank becomes advisor and client becomes advisee.

Guarantor and principal debtor : Guarantor is the person who gives the guarantee. Principal debtor is the person for whom the guarantee is given. Today’s banking business giving of guarantee is an ordinary job of a bank when a bank gives guarantee, it becomes guarantor and client becomes principal debtors.

Financer and Financee: When the banker provide loan to his customer he become financer and customer becomes financee.

Indemnifier and indemnity holder: Indemnity is a contract when one party promises to save the other party form the loss caused to him by the conduct of the promisor himself or by the conduct of any other person the person who promises to make good the loss is called indemnifier and promise is called indemnity holder. So the bank makes a contract of indemnity with the client, bank becomes indemnifier and client becomes indemnity holder.

Reference and referee: When a bank informs the state bank or any other authority about the financial status of a client, bank is called referee and client becomes reference Termination of the relationship The relationship between customer and bank is terminated in following conditions

 Termination by customer

  1. The rate of interest is not acceptable to him
  2. Bank does not give him facility as offered by other
  3. Not satisfied with the services
  4. His confidence in the bank is shakened
  5. Due to change of customer death
  6. He change his place of residence

Termination by banker

  1. If the customer does not obey the banking
  2. Intimation of death of customer
  3. Due to insanity of customer
  4. Due to insolvency of the customer
  5. Due to court order
  6. Character is not satisfactory


Ddefines banker and customer. Discuss the Right and Duties of Banker and Customer in detail.

Banker Definition

  1. crowther

“A banker is a dealer in debt of his own and other peoples”


“A banker is a dealer in capital or more properly a dealer in money. He is an intermediate party between the borrower and the lender. He borrows from one party and lends to another”

Customer Definition

By dr. hart

“A customer is one who has an account with the banker or for whom a banker habitually underrates to

act as such”

By Justice Lindley

“Customer is a person who has some sort of account either deposit or current account or some

similar relation with a banker”

The customer must be.....

  1. He should not be a minor
  2. He should be person of sound mind
  3. He should not have been debarred from entering into any contract under the law

Right and duties of customers

Rights of customers

  1. Right to encash a cheque : It is the right of the customer that his cheque is to be encashed. He should be given the amount as per the balance.
  2. Right to receive documents: It is the right of the customer to receive the pass book, cheque book, and statement of account from the bank.
  3. Right to sue against wrongful dishonor: A customer has the right to sue a bank if the

bank dishonors the cheque with out and positive reason.

  1. Secrecy: It is the right of customer that bank can be kept his account secret and not disclosed to any one.
  2. Right to interest : It is the right of customer to receive the interestand bank, is bound to pay, and depends upon the nature of account.

Duties of customer

  1. Obey banking hours

A customer must present his cheque for encashment (payment) and collection with in banking hours and days.

  1. Safe custody of cheque book

It is the duty of the customer to keep his cheque book safe. So that it may not be go into the hands of unauthorized person.

  1. Presentation of cheque before expiry

It is the duty of the customer that he should present the cheque with in six month of its issue date. Otherwise no claim would be for payment.

  1. Case of forged cheque

It is the duty of the customer that he must inform the bank believing that his signature is being forged on a cheque so that no payment should be made.

Right and duties of banker

Right of banker

  1. Right of interest and charges:

The banker has the right to charge interest on loans. It also charges commission as for services provided. The services include collection of cheque, bills of exchange and dividends etc.

  1. Right of lien

The bank has a lien on the goods and securities of the customer until he repays his dues. The bank can sell such items after giving proper notice.

  1. Charge compound interest

The banker has right to charge compound interest on over drafts calculated o daily balance. There is agreement between banker and customer about rate and time period.

  1. Adjustment of balances: The banker has right to adjust debit balance against credit balance.

Duties of banker

  1. The honour the customer’s cheque:

It is the duty of the banker to honour cheque issued by the customers. The cheque must be drawn properly and presented during working hours.

  1. Secrecy of customers account

The bank should maintain the secrecy of the customer account if it is disclosed the customer may suffer loss.

  1. Purchase and sale of securities

It is the duty of the bank to obey the instructions regarding the purchasing and selling of securities

  1. Opening of letter of credit (L/C)

It is one the duties of the bank to issue letter of credit for its customers in the international trade.


Discuss role of central bank as controller of credit?

What do you mean by monetary policy discuss its objectives and methods of monetary policy explain

Explain the different methods of credit control?


The central bank is responsible for regulation and control of monetary system. Because its first priority to increasing in public interest, for this central bank developed policies for control the supply and credit money in the market, such policy called Monetary policy.


Simple definition

Monetary policy refers to the measures which the central bank of a country takes in controlling the money and credit supply in a country, with a view to achieving certain specific economic objectives Expert views

According to S.A. Meenai

Monetary policy is the regulation of the cost and availability of money and credit in the economy

According to H.W.Arudt

Monetary policy is that branch of economic policy, which is concerned, with regulation of the supply, the cost and the direction of credit

According to H.G. Jhonson

It is a policy of central bank in control the supply of moneywith the aim of achieving macro economic stability .

Objective of monetary policy

Control on inflation and deflation

Central bank generates economic stability by controlling inflation and deflation in a country, through monetary policy

Economic growth

A good policy of credit control ensures economic growth. The decisions regarding sanction of credit to deferent sectors of the economy greatly affect the rate of economic growth. Increase in investment

Money Banking & Finance Notes

State bank give the instructions to commercial banks provides loan to productive sectors, with the help of it industry promote and as well as employment also increased

Increase in exports

With the help of monetary policy the commercial bank issued loan to exporters of the countries. And due to this facility country get foreign currency, and economic growth automatically enhanced

Price stability

The economic growth depends on stable price level. For this central bank fixing the credit limit for the commercial bank, then supply of money is controlled. Due to this effect industries control the price level till it become stable

Stable in money market

The central bank must keep stable money market. The demand and supply of credit must be adjusted in the best of interest of the country.

Method of monetary policy

  1. Quantitative control
  2. Qualitative control
  1. Quantitative control
  2. Bank reserve rate policy

Bank reserve rate means the rate that is deposited by commercial bank to central bank

  1. In case of inflation

 When there is inflation on the country, then central bank for the purpose of control over the inflation increase the Reserve rate of commercial bank, then supply of money control automatically as well as inflation becoming control.

  1. In case of deflation

In case of deflation central bank decreased the reserve rate due to this supply of money increased and price is also increased and at the end deflation decreased

  1. Open market operation

Its mean sale and purchase of Govt. securities in the open market by the state bank of Pakistan. If the inflation condition exit then central bank sells the govt securities to general public and in case of deflation central bank purchase the govt securities from open market.

  1. Credit limits

The central bank controls the credit supply with the help of fixing the credit. After it supplies of money control as well as inflation also controlled.

  1. Discount rate policy

Discount means when the central bank discounting the bills of exchange of banks. In case of inflation central bank increase the discount rate and vice versa

  1. Qualitative control
  2. Consumer credit control: The central bank can increase or decrease number of installments payable under installment sale agreement. Sometimes the grant o credit for consumer goods on installment basis is completely banned by central bank.
  3. marginal requirements: Margin means the difference between the amount of loans and value of security. The minimum margin requirement on securities may be relaxed o encourage the borrowing and can be imposed to discourage the borrowing.
  4. Direct action:

When commercial bank fails to follow credit policy of central bank, direct action may be taken against defaulter bank. By following action Doest not provide the facility of clearing house Increase the reserve ratio of case Reuse to discount the bills of exchange Declares the scheduled banks as non-schedule bank and takes the facility back.

4- Moral persuasions

The central bank can use this method of moral persuasion as leader of commercial bank. It regularly advises and guides commercial banks to follows a particular policy for loans.

Limitations of monetary policy

  1. Co-operation of banks

It is very difficult for central bank to control to credit, if commercial banks do not extend their full co-operation.

  1. Conflicting objectives

The greatest difficulty in controlling credit is the simultaneous, achievement of conflicting objectives of price stability, economic stability etc.

  1. Conventional techniques

In under developed countries like Pakistan the conventional techniques of credit control namely bank rate policy open market and reserve ratio are not all powerful.

  1. Existence of non-monetized sector

In underdeveloped counties there exists a large non- monetized and rural subsistence sector. Thus a bi sector of community is quiet unaffected by the monetary policy

  1. Deficit financing

A large scale of deficit financing by govt may make the central bank powerless in controlling the credit which cause inflationary pressure in he country.


As we study in above question about policies. But all these policies are affective when these are implemented by the Govt. of Pakistan. Inflation stage required 5 to 10 years to convert in equilibrium position. That is not possible during the daily changing in presented and other member of Govt. so these policies only for the reading not for implementing.


 How do the commercial banks create credit? Indicate the limitations on the power of a bank tocreate credit?

 “Loans are children to deposit and deposits are children of loans” Explain.


Credit: -

The term credit is an evolution of a Latin word “credo” which means “I entrust and i put my faith in.

The word credit has been described by GIDE in the following ways.

“An exchange which is complete after the expiry of certain period of time after payment”.

In simple words credit means a Loan.

Credit Creation: -

The creation of credit or deposit is one of the most important functions of commercial banks. Like other corporations banks aim at earning profits. Credit creation is the multiple expansions of banks demand deposits. When a bank advances a loan, it does not pay the amount in cash, but it opens a current account in his name and allows him to withdraw the sum by cheque. In this way the banks create deposit or credit. It is an open secret that banks advance a major portion of their deposits to the borrowers and keep smaller part of them for payment to the customers on demand.


Simple definition

“The tendency on the part of commercial banks to expend their demand deposits as a multiple of their excess cash reserves is known as creation of credit”

Expert views

According to Prof Crowther:-

“The important work of bank is to provide easy people. Banks are considered as manufacturer of credit.

It means they are not only the dealer of money but in actual meaning they are creator of credit.”

A single bank can not create credit. It is the banking system as a whole which can make loans more then their excess cash reserves.

Assumption of credit creation process:-

The process of credit creation is based on certain assumptions which are as under:-

  1. There are many banks say A, B and C etc in the banking
  2. Each bank has to keep 20% of its deposits as required reserves. In other words 20% is the reserve rate fixed by law.
  3. Business conditions remain normal in the country.
  4. Central bank does not adopt any credit policy.
  5. The loan amount drawn by the customer of one bank is deposited in full in the second bank and that of the second bank into the third bank and so on.

Process of credit creation

The bank creates credit in four ways-

  1. Discount Bills of Exchange.
  2. Purchase of Assets.

By over drafting bank creates credit. Secondly, bank purchase the securities and paid them with its own cheque. The holder of these cheques deposits them in the bank. They create deposits which is nothing other than creation of credit. It is recognized that the process of credit creation can’t proceed with out involvement of the whole banking system.

According to Samvelson,

“The banking system as whole can do what each small bank can not do. It can extend its loans and investment many times. The new reserves of cash created for it’s even though small bank is lending out only a fraction of its deposits


The credit creation process can be explained as:


The bank receives RS 5000 as fresh deposits from a customer. The bank keeps some cash to honors cheques of customers. The amount so kept is known as cash receives. Suppose cash receives ratio is 20% the bank can be lend 80% of deposit to the needy people.

The position of first category bank after credit creation is as follow:-

Balance sheet of 1st bank








Cash 20 %

Loan 80%











The loan of RS 4000 may be deposited by the customer with this or other bank. The receiving bank can lend 80% of it by keeping 20% as cash reserve. It can be stated in the balance sheet of second bank.

Balance sheet of 2nd bank








Cash 20 %

Loan 80%










The deposits creation position of the third bank is stated below.

Balance sheet of 3rd bank








Cash 20 %

Loan 80%










The process is not yet complete. It will continue further. The whole process can be settled in a summary form as follow.

Expansion of bank deposits



Cash reserve



































The fresh deposit of RS 5000 is used to create credit of RS 25000; if the reserve ratio is 10% then created credit will be RS 50000. The amount can be calculated by following formula.

Deposits * 100/ Cash reserve %

We have discussed the credit creation process through loans. Deposits can also be created by overdraft, discounting of bills and purchase of assets.

Limitation on the power of Bank to create


Following are the limitation of credit creation:-

Amount of Cash:-

The credit creation power of bank depends upon the primary deposits with the bank. The larger cash, the larger amount of credit that can be created by bank.

Proper Security:-

An Important factor that limits the power of bank to create credit is the availability of securities because the bank advance loans to its customers on the basis of securities or a share, or a bank, or a building or some other types of a .

Banking Habits of the People:-

If people have more banking habits banks will create more credit and vice versa.

Legal Reserve Ratio:-

The ability to create credit also depends upon the cash reserves ratio imposed my central bank. The higher this ratio the lower is the power to create credit.

Shortage of Borrowers:-

If there is shortage of borrowers due to business. Slump or due to any reason, the ability of banks to create credit will also be decreased.

Clearance Facility:-

If banks enjoy clearing house facility by the central bank then they can create more credit and vice versa.

Behaviour Of Other Banks:-

The power of credit creation is further limited by the behaviour of other banks. If some of the bank do not advance loans to the extent required of the banking system, the chain of credit expansion will be broken.

Policy of The Central Bank:-

The central banks policy regarding the expansion and contraction of credit also restricts the credit creation by the commercial banks.

Cash In Circulation:-

If the loan issued by the bank may not be deposited in the bank. The cash may remain in circulation can not be used by banks for credit creation.

Economic Climate:-

Bank can not continue to create credit limitlessly. Their power to create credit depends upon the economic climate in the country.

Summing Up:-

We can say that creation of credit is an important function of commercial banks. However the power of credit creation by the bank is not unlimited.


 Define letter of credit? What are various parties involved in letter of credit? What is procedure to open a letter of credit?


In different countries goods are import and exports by their businessman, for import and export the reliable source for payment for importer is Letter of Credit. L.C is issued by the buyer bank in the favor of seller bank,


by frank Henious

“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”

By Pritchard

A letter of credit is a commitment on the part of the buyer’s to pay or accept draft, drawn upon it, provided such drafts, do not exceed specified amount.

Parties in letter of credit

Buyer/ Importer/opener

The person who wants to purchase goods and commodities from foreign as well as at whose request letter of credit is opened is called importer.

Importer bank/ Buyer bank

The bank, which opens the letter of credit at the buyer request is called buyer bank


The person who wants to sell the goods to foreign country as well as to whose favor letter of credit is open

Exporter bank/ seller bank

The bank which makes the payment to the exporter after receiving the letter of credit is called seller bank.

Requirements of opening letter of credit

Sales contract

First of all there must be a contract between buyer/importer and seller/exporter of sales and purchase, and they agreed all term and conditions as well as mode of payment

Import License

The banker demands the applicant about import License, and indent of goods to be imported. After checking such document allow importer to file on application on printed form.

Application form

Its means the agreement for irrevocable letter of credit, i.e. filled up by the banker and signed by the Importer. As well as it contain all term and conditions of the sale agreement.

Completion and scrutiny of the form

Letter of credit is filled by the banker as per information provided by the applicant (buyer) the banker complete and scrutinizes the documents.

Opening letter of credit

When all the information is completed then banker opened letter of credit on the behalf of importer.

Information to exporter bank

The issuing bank informs the seller bank about the issuance the letter of credit. And after it 3 copies are made by the issuer bank. One copy retain by the buyer bank, other 2 send to seller bank, out of which one copy send to seller by the seller bank.

Information to the seller

The seller bank inform to seller about receiving letter of credit form buyer bank, then seller send the good to buyer according to term and condition and shipping documents to seller bank. After checking documents the seller bank sends it to buyer bank.

Margin on letter of credit

Central bank of Pakistan decides the percentage of amount to be paid to the issuing bank, by the importer. Such chargeable amount is called margin.

Payment to the Exporter

The buyer bank, on receipt of shipping documents, make payment to seller bank, and seller bank make payment to seller.

Types of letter of credit

Irrevocable letter of credit

A letter of credit which cannot be cancelled is called irrevocable L.C. such type of L.C provided fully protection to exporter.

Revocable letter of credit

A letter of credit which can be cancelled by the importer bank at any time without any obligations. After this such L.C is not acceptable by the exporter.

Confirmed letter of credit

In which the exporter bank gives guarantee to make payment to the exporter even if the importers bank fails to make the payment. And on the other hand importer bank also give the guarantee to importer. So the seller gets double protection of payment.

Unconfirmed letter of credit

A letter of credit in which the exporter bank does not gives and guarantee to exporter about payment. The bank give payment if the importer the provided the payment to exporter bank.

Documentary letter of credit

In which the payment is made after receiving following documents

  1. Invoice
  2. Packing list
  3. Insurance policy
  4. Bill of lading

Clean letter of credit

A letter of credit in which there is no condition of document attached for the payment.

Fixed letter of credit

It is a letter of credit in which the credit is available for a fixed total amount payable in one or more than one draft.

Revolving letter of credit

In which the amount of credit can be revolved or renewed on the fulfillment of credit conditions. And all the term and conditions can be renewed by the commitment of both parties.

 What is barter system? Discuss the problems of barter economy. Explain the evaluation of money, and how money removes the problems of barter system.


A system of direct exchange of one commodity or service for another without the use of money is called barter. One has to exchange the product which one has in excess with those who have other surplus product with themselves.


By R.H.Parker

Barter is the direct exchange of goods and services with out the use of money as either a means of payment or a unit of account.

By Sloan

Direct exchange of commodity or services for another without use of money

By G.Thomas

Barter is a form of trading in which goods are exchanges directly for other goods without the use of money as an intermediary.

Inconveniences of Barter system

  1. Lack of double coincidence of wants

The basic problem in barter system is double coincidence of wants. It means that there must be double satisfaction of wants. Both parties in barter. For instance, goods can be exchange effectively if a person is able to spare what the other person wants and at the same time needs what the other can spare.

  1. Lack of common measure

In barter system, there is no common measurement for exchangeable goods. For instance, if a person have cow and other have goat, and 1st want to exchange cow after receiving two goats, and other is not agree from 1st because there is no common measurement of goods.

  1. Lack of sub-division

As there are some commodities which cannot be sub divided. Like a person have a horse and other want to 20 Kg Rice. So in this situation which part of horse should be given in exchange for 20 Kg. of Rice?

  1. Lack of store value

In barter system there is no facility of store value. Because there were some goods that have no storage facility. Like vegetables, fruits, etc

  1. Lack of capital formation

The formation of capital goods is necessary for further production of goods and services. Barter is the enemy of capital formation. The basis of capital formation is saving. In the absence of capital formation the economic progress become zero.

  1. Difficulties in tax collection

In barter tax collected by revenue department in the form commodities. The goods collected form tax payer will not be stored for a longer period. They will lose their value with the passage of time.

  1. Difficulties in transfer of wealth

There is great difficulty in transferring wealth from one place to another under barter. More ever immovable property can not be transferred.

  1. No budgeting

Under barter it was not possible to budget expense and incomes. People were unable to forecasting the worth of their mechanism and merchandise. They therefore can not make any estimate of their future incomes and revenues.

  1. No investment no saving

Under barter there is no concept of investment and saving. Because we can not express our income in any monetary unit.

  1. Difficulty in future payment

In barter there is no concept of credit. And have no facility of future payment, because lack of monetary unit.

Removal of inconvenient of barter

  1. Money as a medium of exchange

The goods and services are now purchased and sold with the help of money. The difficulty of double coincidence of want has been removed.

  1. Money as a common measure of value

Money is used as a common measure of value, by which we can measure and compare the values of different goods and services.

  1. Money as a standard of future payment

A modern economy, goods and services are sold and bought on the promise to pay in future. So it acts as the standard of future payment.

  1. Money as store value

Under barter system goods animals and commodities cannot be stored for a longer period. Now a day’s wealth is stored in the form of money.

  1. Money is an instrument of making loans.

People save money and deposit to businessmen and industrialists so savings are transferred to investment.

  1. Liquidity to wealth

Money imports liquidity to various forms of wealth such as land, machinery, stocks, and stores etc, these forms of wealth can easily be converted into money.

  1. Establishment of financial institutions

The introduction of money has made it possible to establish financial institutions like the central bank, commercial bank etc which deal in currency and near money assets such as bills of exchange, bonds, shares, etc

  1. Tax collection

The collection of tax was practically impossible in barter economy money solved this problem. Due to the introduction of money, the tax system is working quite successfully.

  1. Development of banking system

Money is an integral part of baking system. Without money the concept of banking system seems t be meaningless. The barter system gives no idea of banking.

  1. Money and problem of sub-division

The problem of sub-division was also solved by the use of money. Now with the help of money we can purchase each and every kind of goods.


No doubt money have remove the all the problem of barter system but still in developing countries like Pakistan, china use the barter system.

 What is paper money? Describe its different forms? Also discuss the advantage and disadvantage of paper money?


Paper money means the currency notes issued by central bank of country. In the present age paper money has got a significant place in place of metallic money. Paper money is convenient to carry and easy to handle and store. It is the most advance form of money. It fulfils nearly all the characteristics of ideal money. It is believed that different attempts are make or introduce paper money i.e. In China during 9th century, Iran 13th century and finally paper money was originated by gold smith of England in early 17th century. Now in all developed and underdeveloped countries of world, Inconvertible paper money is used as medium of exchange and standard of value.


Prof. Hanson

 “Paper money means the paper instruments such as bank notes, cheque, bills and other forms which act as a currency”.


“Paper money is document representing money such as bank notes, promissory notes, bills of exchange etc”.


“Paper money means documents with a value started on them but having no value in them”.


Paper money is classified into following kinds:-

  1. Representative paper money.
  2. Convertible paper money.
  3. Inconvertible paper money.
  4. Fiat paper money


Representative paper money is one which is fully state is in a position to convert all the notes into gold, If they are presented for conversion at the same time. The govt keeps reserves for the confidence of people. In USA before 1934 the notes were issued on this principle. The example of this is American gold and silver certificates.


It is such a form of money which can be converted into gold and metallic reserves, but not all the notes issued by the state are fully backed by Govt. No need to keep 100% gold reserves as compare to representative paper money.


Inconvertible paper money cannot be exchange or converted into gold. The gold or silver reserves are not kept by the monitory authority. The money is issued on the written promise of the government. This paper money can cause over issue of notes.


Fait money is the form of inconvertible money having little or no value in it. Fait means the order of government. Fait money is accepted by the people for purchase or exchange of goods, due to government order. Paper money is fait money.

Whenever government cancels any notes, the holder will lose the whole value.



Paper money is normally much easy to issue. The cost of currency as compared to its face value is very low. The central bank has not to keep gold or silver for issuing of the paper notes.


Paper currency is unlimited legal tender money. I.e. any amount of debt can be paid in it. It can be used to discharge all kinds of business obligations and liabilities. No one refuse to accept in settlement of any debt.


The paper money has less weight then metallic money. It is easy to handle then metallic money.


Paper money due to its elasticity is very useful for the government. It can be increased or decreased according to business requirement.


The paper money is convenient to carry and transfer. It can be easily kept in pocket or wallet.


The design of paper currency is very intricate and special type of ink and paper is used hence it is difficult to copy it.


Paper currency is always numbered. Each one has a distinct number. So in case of robbery, bank fraud, the involved person can be traced out when. They use the embezzled money.


The paper money is easily recognizable. There is no botheration of testing the genuineness of the money material.


Paper currency is easily convertible into other. Credit instruments such as draft, promissory note and bills etc.


The paper money can be used in emergency like war and floods. The government can meet the expenses by printing notes in short period.


Paper currency indirectly leads to the saving in the metallic reserves of the country. Due to the issuance of paper currency there is no need to issue coins in greater value.


Paper money has the quality that it has value in small quantity or bulk.


The paper money stays uniform. The apparent loss of colour or tearing of paper does not affect the value. It is uniform in colour, size, design, weight etc.


It is easier and less expensive to make payment in thousand of rupees through paper money.


Paper money is of great advantage to banks. They can keep cash reserves in this form.


The present state of international trade also owes great to paper currency. Different type of paper money can be conveniently interred changed and used in different parts of world. This has increased the liquidity of world’s economy.


Our market forces of demand and supply works because of price mechanism. Paper money has greatly help in making price mechanism workable and effective.


As the supply of paper money can be regulated by central bank so, monetary management becomes easy. The volume of circulation of money central bank.

Disadvantages of paper money

Limited acceptance

Demerit of paper money is that it has a limited acceptance. Its acceptance is limited with in the boundaries of home cont ray. It is not legal tender money in other countries. Danger of inflation The biggest demerit is that paper money is over issued then it brings inflation in the country which is harmful for purchasing power.

Lack of durability

Normally paper money has a short life than metallic money. There are chances of damages to paper. Fire may burn it. Paper money loses its good appearance and shape. Small denominations Paper money is not suitable for small monetary denominations such as 1, 2, 5, 10, 25, and 50 paisa. In this case metallic money gets preference over paper money.

Balance of payment

When paper money over issued in the market then it cause the inflation, and in which prices will be higher on the other hand value of money decrease and balance of payment becoming unfavorable day to day with the affect of inflation.

Less stability

There is less stability in the value of the paper money as compared to metallic money. Some time it is over issued and people lose confidence in the value of money and they prefer to keep their savings in terms of gold and silver.

Loss due to fire and water

Although the paper money is not affected by and apparent wear and tear or loss of colour yet it can be damaged due to fire or water.


Paper money is useful only when it is efficiently managed. If the monetary authority is not vigilant and does not issue the paper currency as required, it often leads to inflation deflation.


Paper money has given rise to wide scale price fluctuation in different countries of world. The fluctuations in exchange rate market also produce serious effects on the general price level in theeconomy. Weak paper money fails to enjoy. The confidence of the people and cause price instability.


From above discussion we concluded that paper money has also some defects. It is better than metals and it is also helpful for removing the economic problems. It is a source of blessing for mankind. However when it is not properly managed it becomes source of perils & confidence.

Define money and explain the different function of money?


By R.P Kent

“Money is anything which is commonly used and generally accepted as a medium of exchange or as a standard of value”

By Marshall

“All those things which are, at any time and place, generally current without doubt or special enquiry as a means of purchasing commodities and services and of defraying of expenses”

By Geoffrey Crowhter

“Anything that is generally acceptable as a means of exchange (i.e. as means of settling debts) and at the same time acts as a measure and as a store of value”

Functions of money

Primary functions

Medium of exchange

Now a day’s money is used as a medium of exchange. With the help of money we purchase goods and commodities according to our demand at any time. And money also used for the payment of goods and services. We can simply say money act as medium of exchange between purchaser and seller.

A standard of value

Money used as standard value; we can measure the units in terms of money. Only specific goods can not measured like love, care, and respect etc, other wise every thing is measured in term of money. Price can be settled of good and services with the help of money

A store of value

To store the perishable commodities for a long period of time is very difficult. Now a day’s money has removed this problem. We can easily store for a long period of time.

A standard of deferred payment

Money provides the facility of future payment, but in barter there is no facility of credit. Because there is no standard value for payment of credit. But money has removed this problem and we can pay future payments. As well as credit transactions also possible with money.

Secondary functions

Facilities productions

With the help of Money we can ensure the availability of factor of productions. If a person wants to start a business then with through money all factor of productions (land, labor, and organizations etc)

available easily.

Easy consumptions

In barter system the main problem of consumption goods according to demand of peoples, because it require double coincidence of wants. Money removed this problem, and every can easily purchase commodities according to his demand,

Promotes savings and investment

It is easy to save and invest in terms of money. The establishment of big projects absorbing huge investment can be possible only due to the dynamic role of money.

Enhance trade activates

Money promote trade activates by serving as a medium of exchanging making exchange of goods easy. Facilitates distributions of rewards With the help of money we easily distribute the rewards. Its helps us in finding the correct value of goods produced and the contribution of each factor of production to the production process. It thus becomes a base for the disturbing for rewards among the contributing factors.

Enhance capital function

Injecting more and more funds in the form of money can increase capital formation required for the development of an economy.

Ensure fair distribution of income

Money ensures fair distribution of income through progressive taxation system, which can only be implemented in money economy.

Easy borrowing and lending

Borrowing and lending activities have become easy which easy which otherwise were difficult in barter economy. Banks create credit on the basis of money deposits they receive

Contingent functions

Distribution of national income

Money helps us in the fair distribution of national income among factors of production.

Credit creation & contraction

The process of credit creation and contraction by commercial banks depends upon cash reserve, which they maintain from moneydeposits of the accounts holders.

Equalizer of marginal utilities and productivities

Money enables consumers to get maximum satisfaction through the law of equi-marginal utilities. Similarly the producer can get maximum profit by equalizing the marginal productivities of different factors of productions.

A liquid asset

Because of having the quality of general acceptability, the households and businessmen keep it with themselves to meet the current domestic and business requirements.

 Further, it is easy to hold it and the holder faces no problem of its depreciation as in caseof goods. So it serves as a liquid asset.

A Guarantor of solvency

A trader always keeps sufficient ready cash to meet the obligations. If a trader or a company fails to meet the obligation, when fall due, it is said to be insolvent irrespective of its asset and liabilities statement. Similarly, banks keep cash reserves to pay their depositors usually at a moment notice. Therefore, we can say that it serves as a guarantor of solvency.


In barter economy there were so many problems of exchange and transaction according to consumer wants, because their was no any standard value of measurement. But money has removed all the problems and as well as facilities the consumers. Businessmen can exchange goods and services according to their customers demand. After this when consumer is satisfied on the behalf of supplier then economic growth is starting day to days.

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