Financial Institution

Zaheer Swati 1

Unit 2

MONEY
2.1 Money
Money is an asset that is generally accepted as payment for goods and services or repayment of debt
Money is a component of wealth that is held in a readily- spendable form
Money is made up of
Coin and currency
Checking account balances
Other assets that can be turned into cash or demand deposits without risk or cost


2.2 Types of Money
There are two types of money, Commodity Money and Fiat Money

2.2.1 Commodity Money
The first means of payment were things with intrinsic value like silk or salt
Successful commodity monies had the following characteristics
o They were usable in some form by most people
o They could be made into standardized quantities
o They were durable
o They had high value relative to their weight and size so that they were easily transportable; and
o They were divisible into small units so that they were easy to trade
o For most of human history, gold has been the most common commodity money

2.2.2 Fiat Money
Today we use paper money that is fiat money, meaning that its value comes fromgovernment order
These notes are accepted as payment for goods or in settlement of debts because it is legal tender (coins or
banknotes that must be accepted if offered in payment of a debt)
A note costs about 0.04% its worth to produce

2.3 Characteristics of Money
2.3.1 A means of payment
The primary use of money is as a means of payment
Money is accepted in economic exchanges
Barter is an alternative to using money but it doesnt work very well
Money finalizes payments so that buyers and sellers have no further claimon each other

2.3.2 A Unit of Account
We measure value using rupees and paisas
Money is the unit of account that we use to quote prices and record debts
Money can be referred to as a standard of value
Using money makes comparisons of value easy

Financial Institution


Zaheer Swati 2

Unit 2

2.3.3 A Store of Value
For money to function as a means of payment it has to be a store of value too because it must retain its worth
fromday to day

2.3.4 Liquidity
Liquidity is a measure of the ease an asset can be turned into a means of payment, namely money
An asset is liquid if it can be easily converted into money and illiquid if it is costly to convert
Cash is perfectly liquid
Stocks and bonds are somewhat less liquid
Land is least liquid.

2.4 Other means of Payment
Following are some other means of payment

2.4.1 Cheques
Cheques are another way of paying for things, but
They are not legal tender
They are not even money.
Cheques are instructions to the bank to take funds fromyour account and transfer those funds to the person or
firmwhose name is written in the Pay to the Order of line

2.4.1.1 Bearer Cheque
o When the words "or bearer" appearing on the face of the cheque are not cancelled, the cheque is called a bearer
cheque
o The bearer cheque is payable to the person specified therein or to any other else who presents it to the bank for
payment
o However, such cheques are risky; this is because if such cheques are lost, the finder of the cheque can collect
payment fromthe bank

2.4.1.2 Order Cheque
When the word "bearer" appearing on the face of a cheque is cancelled and when in its place the word "or order"
is written on the face of the cheque, the cheque is called an order cheque
Such a cheque is payable to the person specified therein as the payee, or to any one else to whom it is endorsed
(transferred).

2.4.1.3 Uncrossed / Open Cheque
When a cheque is not crossed, it is known as an "Open Cheque" or an "Uncrossed Cheque". The payment of
such a cheque can be obtained at the counter of the bank. An open cheque may be a bearer cheque or an order
one



Financial Institution


Zaheer Swati 3

Unit 2

2.4.1.4 Crossed Cheque
Crossing of cheque means drawing two parallel lines on the face of the cheque with or without additional words
like "& CO." or "Account Payee" or "Not Negotiable"
A crossed cheque cannot be encashed at the cash counter of a bank but it can only be credited to the payee's
account.

2.4.1.5 Anti-Dated Cheque
If a cheque bears a date earlier than the date on which it is presented to the bank, it is called as "anti-dated
cheque". Such a cheque is valid upto six months fromthe date of the cheque

2.4.1.6 Post-Dated Cheque
If a cheque bears a date which is yet to come (future date) then it is known as post-dated cheque. A post dated cheque
cannot be honored earlier than the date on the cheque.

2.4.1.7 Stale Cheque
If a cheque is presented for payment after six months from the date of the cheque it is called stale cheque. A stale cheque
is not honored by the bank.

2.4.2 Debit Cards
The money in your account is used for payments
Works like a cheque and there is usually a fee for the transaction

2.4.3 Credit card
It is a promise by a bank to lend the cardholder money with which to make purchases
When the card is used to buy merchandise the seller receives payment immediately
The money that is used for payment does not belong to the buyer
Rather, the bank makes the payment, creating a loan that the buyer must repay
So, they do not represent money; rather, they represent access to someone elses money

2.4.4 Electronic Funds Transfer
Move funds directly fromone account to another
Banks use these transfers to handle transactions among themselves
Individuals may be familiar with such transfers through direct deposit of their paycheques and the payment of
their utility bills, etc

2.4.5 Stored-value card
Retail businesses are experimenting with new forms of electronic payment
Prepaid cellular cards, Internet scratch cards, calling cards etc



Financial Institution


Zaheer Swati 4

Unit 2

2.5 Measuring Money
Different Definitions of money based upon degree of liquidity
Changes in the amount of money in the economy are related to changes in interest rates, economic growth, and
most important, inflation
In reality, we draw line at different places and compute several measures of money called the monetary
aggregates

2.5.1 M1
M1 is the narrowest definition of money and includes only include coins and notes in circulation and other
money equivalents that are easily convertible into cash.
Currency in the hands of the public
Travelers Cheques
Demand deposits and Other chequeable deposits

2.5.2 M2
M2 includes everything that is in M1 plus assets that cannot be used directly as a means of payment and are
difficult to turn into currency quickly,
Small time deposits,
Saving deposits
Money market mutual fund shares held by individuals
M2 is the most commonly quoted monetary aggregate since its movements are most closely related to interest
rate and economic growth

Monetary Statistics (Million
Rupees)

Currency
Other Currency Banks' Reserve Scheduled Narrow Scheduled Resident Broad
Deposit in till of Deposits Money Banks' Money Banks' Foreign Money
in with Scheduled with (M0) Demand (M1) Time Currency M2
Period Circulation SBP Banks SBP (1+2+3+4) Deposits (1+2+6) Deposits Deposits (7+8)
1 2 3 4 5 6 7 8 9 10
1991 136,967 3,114 7,339 22,427 169,847 125,060 265,141 126,016 9,487 400,644
1992 151,819 3,322 8,962 43,773 207,876 147,767 302,908 159,657 43,004 505,569
1993 166,864 4,449 11,301 41,243 223,857 156,509 327,822 206,294 61,274 595,390
1994 184,708 5,506 13,738 54,404 258,356 168,554 358,768 252,497 92,134 703,399
1995 215,579 5,055 16,363 45,855 282,852 202,505 423,139 296,521 105,073 824,733
1996 234,110 6,791 19,328 49,852 310,081 207,108 448,009 344,713 145,958 938,680
1997 244,141 7,135 17,821 77,949 347,046 192,275 443,551 386,801 222,882 1,053,234
1998 272,922 6,412 18,769 71,375 369,478 200,997 480,331 447,432 278,556 1,206,319
1999 287,716 6,212 18,870 85,185 397,983 349,115 643,043 516,586 120,917 1,280,546
2000 355,677 7,959 19,468 114,703 497,807 375,397 739,033 549,124 112,475 1,400,632
2001 375,465 11,292 19,178 127,266 533,201 374,675 761,432 610,458 154,154 1,526,044
2002 433,816 13,847 26,414 110,522 584,599 429,175 876,838 727,076 157,456 1,761,370
2003 494,577 3,499 30,415 140,990 669,481 608,170 1,106,246 846,321 126,138 2,078,705
2004 578,116 2,116 36,432 156,204 772,868 791,413 1,371,645 969,217 145,694 2,486,556
2005 665,911 3,355 43,462 196,302 909,030 954,880 1,624,146 1,161,202 180,295 2,965,643
2006 740,390 4,931 48,439 215,701 1,009,461 1,095,260 1,840,581 1,380,418 195,501 3,416,500
2007 834,524 5,595 740,390 255,331 1,835,840 2,416,604 3,256,723 335,823 200,484 3,793,030

Source: Hand Book of Statistics on Pakistan Economy 2005 &
State Bank of Pakistan Annual Report 2006-2007 www.sbp.org.pk

Financial Institution


Zaheer Swati 5

Unit 2
Currency in Circulation
(Million Rupees)
Period
Subsidiary
One
Rupee
Five
Rupee
Total
Held by Held by Currency Currency
Banking Issue in till of in
Coins Bills Department Department Scheduled Circulation
Coins
and
above
and
above (1+2+3) of SBP of SBP Banks (4-5-6-7)
1 2 3 4 5 6 7 8
1991 559 2,186 142,171 144,916 167 443 7,339 136,967
1992 591 2,187 158,655 161,433 150 502 8,962 151,819
1993 627 2,587 175,719 178,933 424 344 11,301 166,864
1994 654 2,827 195,809 199,290 170 454 13,958 184,708
1995 672 2,604 229,313 232,589 234 413 16,363 215,579
1996 684 2,604 250,620 253,908 165 305 19,328 234,110
1997 697 2,528 259,364 262,589 219 408 17,821 244,141
1998 701 2,564 289,998 293,263 154 1,418 18,769 272,922
1999 702 2,514 305,326 308,542 120 1,835 18,870 287,717
2000 700 2,558 373,739 376,997 100 1,751 19,468 355,678
2001 708 2,726 393,114 396,548 178 1,727 19,178 375,465
2002 665 3,055 458,375 462,095 127 1,738 26,414 433,816
2003 662 4,004 522,891 527,557 214 2,351 30,415 494,577
2004 664 4,941 611,904 617,509 161 2,799 36,432 578,117
2005 667 6,093 705,720 712,480 146 2,961 43,462 665,911
2006 667 6,931 784,236 791,834 139 2,865 48,439 740,391
2007 667 7,441 893,293 901,401 136 3,012 58,072 840,181

Source: Hand Book of Statistics on Pakistan Economy 2005 &
State Bank of Pakistan Annual Report 2006-2007 www.sbp.org.pk