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2. money and banking


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2. money and banking

  1. 1. CHAPTER 18 Understanding Money and Banking
  2. 2. Chapter Outline <ul><li>What Is Money? </li></ul><ul><li>The Financial System </li></ul><ul><li>The Reserve System </li></ul><ul><li>The Changing Money and Banking System </li></ul><ul><li>International Banking and Finance </li></ul>
  3. 3. What is Money? Any object that is portable, divisible, durable and stable and that serves as a medium of exchange, a store of value and a unit of account
  4. 4. What is Money? <ul><li>Characteristics of Money </li></ul><ul><ul><li>Portability </li></ul></ul><ul><ul><li>Divisibility </li></ul></ul><ul><ul><li>Durability </li></ul></ul><ul><ul><li>Stability </li></ul></ul><ul><li>Functions of Money </li></ul><ul><ul><li>Medium of Exchange </li></ul></ul><ul><ul><li>Store of Value </li></ul></ul><ul><ul><li>Unit of Account </li></ul></ul>
  5. 5. The Spendable Money Supply: M-1 <ul><li>M-1 counts only the most liquid, or spendable , forms of money. It includes: </li></ul><ul><ul><li>Currency </li></ul></ul><ul><ul><li>Checks </li></ul></ul><ul><ul><li>Demand Deposits </li></ul></ul>
  6. 6. M-1 Plus the Convertible Money Supply: M-2 <ul><li>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: </li></ul><ul><ul><li>M-1 </li></ul></ul><ul><ul><li>Time Deposits </li></ul></ul><ul><ul><li>Money Market Mutual Funds </li></ul></ul><ul><ul><li>Savings Deposits </li></ul></ul>
  7. 7. Financial Institutions <ul><li>Commercial banks are companies that accept deposits that they use to make loans and earn profits </li></ul><ul><ul><li>Diversification and Mergers </li></ul></ul><ul><ul><li>Commercial Interest Rates </li></ul></ul><ul><ul><ul><li>Prime Rate </li></ul></ul></ul><ul><li>Savings and loan associations ( S&Ls ) accept deposits and make loans </li></ul><ul><li>Mutual Savings Banks and Credit Unions </li></ul><ul><li>Nondeposit Institutions </li></ul><ul><ul><li>Pension Funds </li></ul></ul><ul><ul><li>Insurance Companies </li></ul></ul><ul><ul><li>Finance Companies </li></ul></ul><ul><ul><li>Securities Dealers </li></ul></ul>
  8. 8. Financial System of Pakistan <ul><li>45 Commercial banks 16 Investment Banks </li></ul><ul><li>04 Housing Finance Companies </li></ul><ul><li>04 Discount Houses </li></ul><ul><li>02 Venture Capital Companies </li></ul><ul><li>32 Leasing Companies </li></ul><ul><li>46 Modarbas </li></ul><ul><li>39 Mutual Funds </li></ul><ul><li>07 Listed Brokerage Houses </li></ul><ul><li>37 Insurance Companies </li></ul>
  9. 9. Functions of Commercial Banks <ul><li>Accepting of Deposits </li></ul><ul><li>Making Loans and Advances </li></ul><ul><li>Agency services to customers </li></ul><ul><ul><li>Collection of cheques </li></ul></ul><ul><li>Purchase or sale of securities </li></ul><ul><ul><li>Foreign exchange business </li></ul></ul><ul><li>Export promotion cell </li></ul>
  10. 10. 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 supply.
  11. 11. The Structure of the State Bank <ul><li>The Board of Governors </li></ul><ul><ul><li>The bank’s board of governors consists of seven members appointed by the president. </li></ul></ul><ul><li>Member Banks </li></ul><ul><ul><li>All chartered commercial banks are members of the state bank of Pakistan. </li></ul></ul>
  12. 12. The Functions of the SBP <ul><li>The Government’s Bank </li></ul><ul><ul><li>The state bank produces the nation’s paper currency and lends money to the government. </li></ul></ul><ul><li>The Bankers’ Bank </li></ul><ul><ul><li>The state bank makes loans to individual banks. </li></ul></ul><ul><ul><li>The state bank provides storage for commercial banks. </li></ul></ul><ul><ul><li>The state bank clears checks. </li></ul></ul><ul><li>Controlling the Money Supply </li></ul><ul><ul><li>The state bank is responsible for the conduct of monetary policy . </li></ul></ul>
  13. 13. The Functions of the SBP <ul><li>Overseeing the Banking Community </li></ul><ul><li>Controlling the Money Supply </li></ul>
  14. 14. The Tools of the SBP <ul><li>Reserve requirement is the percentage of its deposits that a bank must hold in cash or on deposit with State bank. </li></ul><ul><li>Discount rate is the interest rate at which member banks can borrow money from the State Bank Reserve. </li></ul>
  15. 15. The Tools of the SBP <ul><li>Open-market operations refer to the state bank’s sale and purchase of securities in the open market </li></ul><ul><li>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 </li></ul>
  16. 16. What is the World Bank? U. N. agency that provides a limited scope of financial services
  17. 17. 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