Money and

Banking
By Yasir Ali Soomro
History
 Inthe olden days people did not use
money, for exchanging goods and
services, Instead there existed a
procedure known as BARTER SYSTEM.
 This was traditional method which
prevailed in the Asian and particularly
South Asian countries. Merchants from
Various parts of world used to meet at
Melaba.
Money
 Many Economist have sought to give the
arguably ideal definition of money.
Among them we see…
 Prof Walker: “Any thing which performs
the functions of money is money”.
 Prof. Sayers: “ Anything which is widely
accepted for the transaction of loans is
money”
Functions of Money
 Generally Money has four main Functions
1. Medium Of Exchange
2. Standard of Value
3. Store of Value
4. Standard of Deferred Payment
 Other functions of Money
1. Unit of Account
2. Most Liquid Asset
3. As credit Instruments
4. Base for Government Payments
Kinds of Money
 MetallicMoney
 Paper Money
 Credit Money
Metallic Money
 Metallic Money can be Divided into two
classes:
 Standard Metallic Money
 Token Money
 Standards of Metallic Money
 Monometallism: It means there is only one
particular Kind of Money circulating in the
country.
 Bimetallism: There exist currency of two metals
which are convertible to each other
Paper Money
 Thiskind of money refers to notes or bills
issued by the state or central bank.
 Paper money can be divided into Three
groups
1. Inconvertible Paper money
2. Convertible Paper Money
3. Representative Paper Money
Credit Money
 Cheques
 Bearer Cheque
 Cross Cheque
 Order Cheque
 Travelers Cheque
 Bank Draft
 Credit Card
 Securities
Value Of MONEY
 QUANTITY THEORY OF MONEY:
This theory was presented by Prof. Taussiq
and Calculation formula was presented by
Prof. Fisher.
This law States
“Other things remaining constant, if quantity
of money is doubled prices would double ,
thus, value of money would go down by
Half and vice versa.
QUANTITY THEORY OF MONEY
 PROF Fisher explains the theory with help of
“equation of exchange”.
PT= MV + M’V’
P= General Price level
T= Real National income
M= Quantity of paper and metallic money
M’= Quantity of Credit money
V= Velocity of circulation of Paper and metallic
Money
V’= Velocity of circulation of Credit Money.
Equation of Exchange
 Meaning of The Equation:
PT= total demand for money in the
country
MV+ M’V’= Total supply of money

From the previous equation we are able to

derive another equation:

P= MV+M’V’
T
Example
 Data:
M=200
V=2
M’ =400
V’= 4
T= 100
Calculate General Price Level( P) ?
 Supposing quantity of Money is Doubled
and credit money is doubled now
calculate

 Thus Value of Money= 1

p
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The Spendable Money Supply:

M-1
M-1 counts only the most liquid, or
spendable, forms of money. It includes:
 Currency
 Checks
 Demand Deposits
M-1 Plus the Convertible Money
Supply: M-2
M-2 includes everything in M-1 plus items
that cannot be spent directly but are easily
converted to spendable forms. Major
components of M-2:
 M-1
 Time Deposits
 Money Market Mutual Funds
 Savings Deposits

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Financial Institutions
 Savingsand loan
 Commercial banks are associations (S&Ls)
companies that accept deposits and
accept deposits that make loans
they use to make loans  MutualSavings
and earn profits Banks and Credit
 Diversification and Unions
Mergers
 Commercial Interest  Non-deposit
Rates Institutions
 Pension Funds
 Insurance Companies
 Finance Companies
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 Securities Dealers
 Savings and Loan Associations (S & Ls)
 FinancialInstitution accepting deposits and making
loans primarily for home mortgages

Mutual Savings Banks

 Financial institution whose depositors are
owners sharing its profits
Credit Union
 Non-profit, co-operative financial
institution owned and run by its
members, usually employees of a 17

particular organization
None-deposit Institutions
 PensionFund:
None-deposit pool of funds managed to
provide retirement income for its
members

 InsuranceCompany:
None-deposit institution that invests funds
collected as premiums charged for
insurance coverage
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None-deposit Institutions
 FinanceCompany:
None-deposit institution that specializes in
making loans to business and consumers

 Securities
Investment Dealer (Broker):
None-deposit institution that buys and sells
stock and bonds both for investors and for
their own accounts
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 Financial System of Pakistan

 45 Commercial banks 16 Investment Banks

 04 Housing Finance Companies
 04 Discount Houses
 02 Venture Capital Companies
 32 Leasing Companies
 46 Modarbas
 39 Mutual Funds
 07 Listed Brokerage Houses
 37 Insurance Companies
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 Functions of Commercial Banks

 Accepting of Deposits
 Making Loans and Advances
 Agency services to customers
 Collection of cheques
 Payment of Utility bills
 Agency services
 Purchase or sale of securities
 Foreign exchange business
 Export promotion cell

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STATE BANK OF
PAKISTAN

“The State Bank” is

the Central bank of
Pakistan, which acts
as the government’s
bank, serves member
commercial banks,
and controls the
nation’s money
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supply.
 The Structure of the State Bank

 TheBoard of Governors
 The bank’s board of governors consists
of seven members appointed by the
president.
 Member Banks
 All chartered commercial banks are
members of the state bank of Pakistan.

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The Functions of the SBP

 The Government’s Bank

 The state bank produces the nation’s paper
currency and lends money to the government.
 The Bankers’ Bank
 The state bank makes loans to individual banks.
 The state bank provides storage for commercial
banks.
 The state bank clears checks.
 Controlling the Money Supply
 The state bank is responsible for the conduct of
monetary policy.
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The Functions of the SBP

 Overseeing the Banking Community
 Controlling the Money Supply
Currency in Circulation (up-to Sept 2009)
Amount in Billion
Denomination No. in Millions (Rs.)
Rs 5 261.85 1.309
Rs 10 261.832 2.618
Rs 20 73.206 1.464
Rs 50 56.533 2.827
Rs 100 51.202 5.12
Rs 500 13.25 6.625
Rs1000 17.231 17.231
Rs5000 2.564 12.822
TOTAL 737.668 50.016 26
 27

The Tools of the SBP

 Reserve requirement is the
percentage of its deposits that a
bank must hold in cash or on
deposit with State bank.

Discount rate is the interest rate at

which member banks can borrow
money from the State Bank
Reserve.
The Tools of the SBP
 Open-market operations refer
to the state bank’s sale and
purchase
of securities in the open market

 Selective credit controls is the state

bank’s Reserve authority to set both
margin requirements for consumer
stock purchases and credit rules for
other consumer purchases 28
What is the World Bank?

U. N. agency that
provides a limited
scope of financial
services

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 World Bank Lending to Pakistan
Lending by Volume in
Lending by Volume in Millions
Number of Projects - Pakistan
of US Dollars - Pakistan

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 World Bank Lending By Region
Fiscal 2007
South Asia
Africa
23%
24%

Middle East and

North Africa
4%
East Asia and
Pacific
16%
Latin America and
Europe and Central
the Caribbean
Asia
18% 15%

Total Lending: $24.7 billion 31

 World Bank Lending by Theme
Fiscal 2007

Urban
Development
11% Environmental &
Trade & Economic
Natural
Integration Management
Resources
Social Protection 6% 1%
8%
& Risk Management Financial &
7% Private Sector
Development
Social 17%
Development,
Gender & Inclusion Human
5% Rural Development
Public Sector 17%
Development Governance
13% Rule of Law
14%
2%

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Total Lending: $24.7 billion

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10 Largest Borrowers (2007)

Commitments
Borrower $ millions % of total
India 3,751 15.2
Argentina 1,749 7.1
China 1,641 6.6
Indonesia 1,159 4.7
Turkey 1,158 4.7
Colombia 1,102 4.5
Pakistan 985 4.0
Nigeria 750 3.0
Vietnam 712 2.9
Africa Regional Projects 707 2.9
Total 13,714 55.5
 What is the
International
Monetary
Fund (IMF)?
U.N. agency consisting of about
150 nations that have combined
resources to promote stable
exchange rates, provide
temporary short-term loans and
serve other purposes

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