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Understanding Money and Banking

Chapter Outline
What Is Money? The Financial System The Reserve System The Changing Money and Banking System International Banking and Finance

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

What is Money?
Characteristics of Functions of Money Money
Portability Divisibility Durability Stability Medium of Exchange Store of Value Unit of Account

The Spendable Money Supply: M-1

M-1 counts only the most liquid, or spendable, forms of money. It includes:

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

Financial Institutions
Commercial banks are companies that accept deposits that they use to make loans and earn profits Diversification and Mergers Commercial Interest Rates Prime Rate Savings and loan associations (S&Ls) accept deposits and make loans Mutual Savings Banks and Credit Unions Nondeposit Institutions
Pension Funds Insurance Companies Finance Companies Securities Dealers

Financial System of Pakistan

45 Commercial banks
04 Discount Houses

16 Investment Banks

04 Housing Finance Companies 02 Venture Capital Companies 32 Leasing Companies 46 Modarbas 39 Mutual Funds

07 Listed Brokerage Houses

37 Insurance Companies

Functions of Commercial Banks

Accepting of Deposits Making Loans and Advances Agency services to customers
Collection of cheques

Purchase or sale of securities

Foreign exchange business

Export promotion cell


The State Bank is the Central bank of Pakistan, which acts as the governments bank, serves member commercial banks, and controls the nations money supply.


The Structure of the State Bank

The Board of Governors
The banks 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.


The Functions of the SBP

The Governments Bank
The state bank produces the nations 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.

The Functions of the SBP

Overseeing the Banking Community Controlling the Money Supply


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 banks sale and purchase of securities in the open market

Selective credit controls is the state banks Reserve authority to set both margin requirements for consumer stock purchases and credit rules for other consumer purchases

What is the World Bank?

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


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