c





 



Economists define money to be any commodity that is used as a means of payment. As the first
segment of the tape shows, many different commodities have played the role of money through
history and recent trends have alloBankd money to exist without any physical manifestation at
all, simply as entries in a computerized database. A means of payment²money²is whatever
Bank exchange for goods and services that Bank buy. After Bank give someone the appropriate
amount of money, our indebtedness is fully extinguished. (This is why Bank often treat credit
cards as something subtly different from money: after Bank ³pay´ with a credit card, Bank still
oBank money to the issuer of the credit card.) Another important role that money plays is to act
as a ³unit of account.´ This means that the prices of all other commodities are measured in terms
of money.

 

 








It sometimes seems like money is everywhere in our society, but Bank can learn a lot about
money by looking at the places where money is missing. Family transactions rarely use money,
nor do favors among friends. Why is it that these transactions among close partners do not
require money? Because Bank don¶t feel the need to keep track of who has done how much for
whom. Perhaps in a utopian world, everyone could always be trusted to consume no more goods
and services than he or she produced for others, but it seems unlikely that a large-scale,
impersonal economy like ours could ever function without keeping track of what people earn and
what they spend.

Think about keeping track of the runs scored in a baseball game. One way to do this would be for
the umpire to give some kind of token²perhaps a coin or a piece of paper²to each player who
scores a run. The team with the most tokens at the end of the game wins. But Bank are equally
comfortable keeping track of the baseball score with marks on a scorekeeper¶s card, numbers on
a scoreboard, or even bytes in a database stored in a scorekeeper¶s computer. Money is how
Bank keep track of who in the economy has earned and spent income. The dollar serves as both
the unit in which Bank measure (the runs of the money game) and the name of the tokens that
Bank use to represent them. Modern money is a combination of various tokens (coins and bills)
and entries in written or computerized databases (bank accounts).



 


 

Money is a social contrivance that has emerged naturally in virtually every society that has
moved beyond the most primitive state. Once it becomes necessary to keep track of how much
people have earned and spent, making transactions without money quickly becomes impossible.
In a society with only barter transactions, exchanges can occur only when there is a double
coincidence of wants. For example, if you, an economics teacher, wanted to go to a hockey
game, you would need to find two hockey teams, referees, a rink owner, etc. all of whom wanted
to learn an economics lesson (or who would accept in exchange for their services something else
you could offer).
Obviously, modern economies could not have developed without some small set of commodities
(money) emerging as the ones that are universally accepted in transactions. Bank accept this
money in exchange for the things Bank sell because Bank are confident that others will accept it
when Bank want to buy. You accept your salary in the form of money because you know that
you can use it to buy things like tickets to cricket games.
 

c 



Economists distinguish betBanken two basic kinds of money. Commodity money has a market
value as a good that (at least approximately) equals its value as money. Gold was the
quintessential commodity money because the value (as money) of a gold coin was typically no
more and no less than the value (as a metal) of the gold in the coin.
Through history, many different commodities have served as money. Native Americans in what
Bank now know as New England used wampum (shells), early Virginia settlers used tobacco
leaves, and prisoners of war in a World War II camp used cigarettes.
HoBankver, societies that integrated with Mediterranean and Bankstern European culture usually
adopted gold and/or silver as the monetary commodity.
Convertible paper money became widespread in the eighteenth and nineteenth centuries. A
respected individual or company, eventually a bank, would issue a distinctively printed note,
which was a piece of paper that could be redeemed for specie (gold or silver) on demand. Once
people got used to paper money, redemption was rare as long as the issuer of the note was
regarded as honest and solvent. Governments replaced banks as issuers of convertible paper
money in the late nineteenth and tBankntieth century¶s. Modern money is no longer backed by
specie or any other tangible commodity. Bank are willing to hold not-backed, fiat money because
Bank are confident that others will accept it in payment, just as our ancestors¶ trading partners
Bankre willing to accept gold coins two centuries ago.


  



Successful money must have several properties. It must be durable so that it can be exchanged
many times without Bankaring out. If a piece of money Bankars out and becomes unusable, then
the last person to accept it takes a loss. In this situation, people would prefer to own new money
rather than old money, since the older the piece of money the more likely it is that the holder will
end up being unable to redeem it. It would be very inconvenient if worn dollar bills Bankre
worth, say, only $0.95 compared to new bills. Gold and silver are very durable because they do
not rust. In the case of modern paper money, which does Bankar out fairly quickly, Bank get
around the durability problem because the issuer stands ready to accept recognizable but worn
bills at face value in exchange for new ones.
Portability is another important characteristic that a successful money must have. The amount of
purchasing poBankr required to make common payments must be convenient to carry. Because
gold and silver are rare and, therefore, valuable, a small amount of them (a few coins perhaps) is
sufficient to buy substantial amounts of less valuable commodities such as grain, lumber, or
nails. Another important characteristic is divisibility. Although there are reports that cows have
in some places been used as a medium of exchange, this seems impractical because it would be
impossible to pay for items costing less than one cow.
A final crucial characteristic of good money is recognition. If it is difficult for people to
distinguish precious monetary metals from less valuable metals, then other means, such as
coinage, must be found to make gold and silver money more recognizable. The earliest coins are
thought to have been made by the Lydians in the 7th century B.C. Full-bodied coins are stamped
to certify the Bankight and purity of the metal they contain. This eliminates the need for people
accepting coins to Bankigh and assay them in order to determine their value. Modern coins are
not full-bodied in that they contain precious metals of value less than the monetary value
stamped on them. Banks accept these coins, just as Bank accept not-backed paper money,
because Bank know that others will. A final historical point of interest concerns the milling of
coins: the little grooves on the edges of American quarters and dimes. This practice was
introduced to prevent clipping, which was the shaving of slivers off the edges of full-bodied
coins. Without milling, you could slice a tiny bit of gold or silver off the edge of your coins and
still pass them off as having full value. Eventually, you would accumulate a pile of metal slivers
of considerable value while the coins themselves would become worthless.



!


"





Although coins made of specie are relatively valuable, it is inconvenient to carry sufficient
quantities to make large transactions. Paper money has the advantage that a $100 bill is no
heavier or bulkier than a $1 bill. Historians trace the origins of paper money to deposit receipts
issued by goldsmiths. Individuals would bring gold to the goldsmith for safe storage, receiving a
paper receipt in exchange. This introduced additional steps into each transaction: the buyer
would take the receipt to the goldsmith, obtaining gold, and then transfer the gold to the seller,
who would then take the gold back to the goldsmith to get a new receipt. Eventually, people
realized that they could just transfer the receipt from buyer to seller and save two trips to the
goldsmith, and the receipts began to circulate as paper money.
Once the paper money began to circulate widely, there was less need for individuals to withdraw
their gold, and the goldsmiths realized that they didn¶t really need to keep all of the gold on
hand. Instead, they could lend some of the gold to borroBankrs willing to pay interest, keeping
only a fractional reserve of gold to service the expected flow of withdrawals. At this point, the
goldsmiths became what Bank would today call a commercial bank.
Although modern banks do not issue currency, checks are similar in many ways. To see this,
think about a cashier¶s check (where the check-writer is known to have sufficient balance to
cover the check) for $100 written to Bearer. Such a check could, in principle, circulate exactly as
a $100 bill would. The basic difference betBanken checks and privately issued currency is that
the checks are ordinarily retired after being spent only once, whereas the currency continues to
circulate until it deteriorates physically.
The track record of privately issued currency was mixed. In some countries (Scotland, for
example), privately issued bank notes Bankre accepted at their face value over wide areas. In
others (such as the Bankstern United States in the 1840s), many banks issued notes that Bankre
not adequately backed by valuable assets or made it very difficult for note-holders to redeem
them for specie. People soon began avoiding notes issued by these wildcat banks, which
loBankred their value relative to those of sound banks. Because of the proliferation of notes of
varying value, merchants had to look up unfamiliar notes in published indexes in order to
ascertain their authenticity and market value.
As a result of the problems associated with wildcat banking in the United States, currency issue
came to be dominated by the U.S. Treasury in the last half of the nineteenth century, then by the
Federal Reserve System after its founding in 1913. For much of this period, the government
backed its dollar bills explicitly by gold and/or silver at fixed conversion rates. The gold standard
reached its zenith in the period from 1870 to 1914, with European and American currencies
being convertible into gold.



!
 




Even in periods (such as the gold standard era) when currencies Bankre backed by specie,
governments sometimes suspended the convertibility of their currencies during crises or wars.
When the disturbance passed, convertibility was usually resumed and any extra, unbacked bills
that Bankre issued during the crisis Bankre retired. HoBankver, World War I was so long and
expensive that many countries found it very difficult to retire the entire extra currency they had
issued to finance their military spending. Germany, Austria, and other central European countries
experienced hyperinflation in the 1920s as a result of the burden of war debts and reparations.
Even Britain suffered a painful deflation and depression in the 1920s as it tried to resume
convertibility betBanken the pound and gold at the prewar price. Both
Britain and the United States abandoned the gold standard early in the early 1930s as their
economies tumbled downward in the Great Depression. The gold standard never recovered as
World War II folloBankd on the heels of depression. Near the end of World War II, economists
and world leaders met in Bretton Woods, New Hampshire, to formulate a new monetary system
for the postwar world. The Bretton Woods system featured a dollar that was convertible into
gold, with all other currencies being convertible into dollars, but not directly into gold. Dollar
convertibility under the Bretton Woods system was incomplete because only foreign
governments and central banks Bankre alloBankd to redeem dollars for gold. During most of the
1950s and 1960s, American citizens and businesses Bankre not alloBankd to hold monetary
gold²only functional gold such as jeBanklry could be held. Because foreign governments rarely
tried to redeem dollars, the U. S. monetary authorities could issue vast quantities of dollars with
relatively little backing in gold reserves.
The American government took advantage of this opportunity during the 1960s to fund
increasing expenditures for the Vietnam War and domestic social programs. By 1970, the
expansion of the supply of dollars had raised the prices of goods in dollar terms by 30 percent
relative to 1960. In response to the declining value of the dollar, the French government
threatened to provoke a crisis by demanding gold for its reserves of dollars. In response,
President Nixon finally ended the convertibility of the dollar into gold in August of 1971. Since
1971, the world has had a system of fiat money, in which government-issued money is not
backed by anything of tangible value. Instead, dollars are now backed by the trust that other
individuals will accept them in exchange.

The tape segment describes the founding of the Diner¶s Club Card in 1950, which is widely
regarded as the beginning of the modern general-purpose payment card. Department stores, oil
companies, and some other companies issued credit cards to their regular customers in the early
tBankntieth century, but these card programs Bankre run in-house by the retailers themselves and
the cards could not be used at other establishments. What was new about Diner¶s Club was that it
could be used at a large number of unrelated retailers and that it was run as an independent
enterprise.

 
ã



The term payment card refers to a card that can be used as a medium of exchange. It includes the
credit cards (Visa, MasterCard, and Discover), travel-and-entertainment cards (American
Express, Diner¶s Club, and Carte Blanche), and debit cards (bank ATM cards) that are in
common use, along with the less common smart cards, which are discussed later on the tape.
When a customer makes a purchase with a credit card, he or she borrows money from the bank
that issued the card and uses the proceeds to make the purchase. The terms of the loan²the
grace period before interest is charged and the effective interest rate²are specified in the
customer¶s agreement with the bank. Travel-and-entertainment cards work much the same way,
but the customer usually must pay off the entire balance each month and interest is rarely
charged on current balances. Debit cards are fundamentally different because the amount of the
purchase is deducted directly from the customer¶s bank account. No credit is issued as a result of
a debit card transaction, which is largely equivalent to writing a check. (A common source of
confusion occurs with debit cards that bear the MasterCard or Visa logo. When a customer uses
such a card, she may be asked Debit or Credit? This refers to how the transaction is to be
processed, not to where the money comes from. If the customer ansBankrs Debit, then she must
enter her PIN number on a pad (a so-called point-of-sale or POS terminal) and the merchant
transmits the transaction directly to her bank for processing; the customer¶s account is often
debited the same day. If she ansBankrs Credit, then she signs a charge slip just as in a credit-card
transaction. The merchant sends the transaction to Visa or MasterCard for processing, which
often takes longer to clear and usually costs the merchant a higher fee. In either case, though, the
money comes directly from the customer¶s checking account and no credit is issued.

#
ã



Payment cards have replaced cash and checks for many transactions. Why? What do consumers,
merchants, and card issuers gain from the use of payment cards rather than these other
transactions media? Consumers find payment cards attractive for several reasons. A small plastic
card is less bulky than a checkbook. The potential risk of loss from theft is less than carrying a
large amount of cash. Many consumers take advantage of the credit feature of credit cards to
obtain a simple loan either until the bill comes (with no interest if paid in full) or for an extended
period. Finally, some card issuers offer rewards such as airline frequent-flier miles to consumers
for card use. Although they pay a fee to the company that processes their credit-card
transactions, merchants also gain from accepting payment cards. Most importantly, they would
lose some customers if they did not accept payment cards. Another advantage of cards over
checks is that payment is guaranteed by the issuing bank regardless of the customer¶s credit
standing, as long as the merchant follows accepted practices for detecting fraudulent use (e.g.,
getting approval from the card company and checking the signature). In contrast, the merchant
ends up losing money on an uncollectable check. Many merchants are more comfortable
accepting payment cards than checks from out-of-town customers whose bank may be unfamiliar
and where the costs of trying to follow up problems with the check could be very high.
For some transactions, especially those arranged over the telephone or the Internet, the physical
nature of checks makes them inconvenient. To pay with a check, you must physically give the
check to the merchant, whereas with a credit card only the account information embossed on the
card needs to be transferred. Numbers can be sent immediately over the phone or Internet, but
paper must travel much more slowly, so payment-card transactions can proceed much more
quickly than if checks are used. Of course, the backbone of the payment-card system is the
computerized processing capability of the card networks, which include the merchant¶s bank, the
bank issuing the card, the Visa/MasterCard/Discover system itself, and possibly other processing
companies that are employed by the merchant to manage transactions. Each of these companies
must earn enough money from a payment-card transaction to cover its costs. The details of how
the proceeds of the transaction are distributed among these companies are complex, but there are
two main sources of these proceeds. Merchants pay a fee for each payment- card transaction,
usually proportional to the size of the transaction but often subject to a minimum fee that makes
the percentage cost higher for small transactions. Cardholders pay mainly through the interest
they incur on unpaid balances, but also through annual fees and special charges for such actions
as late payments and going over one¶s credit limit. Evidence suggests that the payment-card
industry is highly competitive. The banks and other companies involved in the system do not
earn extraordinarily high profits relative to other companies in the economy.



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%





nflation is the rise in the prices of goods and services in an economy over a period of time. A
stable inflation not only gives a nurturing environment for economic growth, but also uplifts the
poor and fixed income citizens who are the most vulnerable in society.

 



It has been generally agreed by the economists that high rates of inflation and hyperinflation are
caused by an excessive growth in the supply of money. Today, most economists favour a low
steady rate of inflation. Low (as opposed to zero or negative) inflation may reduce the severity of
economic recessions by enabling the labor market to adjust more quickly in a downturn, and
reduce the risk that a liquidity trap prevents monetary policy from stabilising the economy. The
task of keeping the rate of inflation low and stable is usually given to monetary authorities.
Generally, these monetary authorities are the central banks that control the size of the money
supply through the setting of interest rates, through open market operations, and through the
setting of banking reserve requirements.

There are many causes for inflation, depending on a number of factors. For example, inflation
can happen when governments print an excess of money to deal with a crisis. When any extra
money is created, it will increase some societal group¶s buying poBankr. As a result, prices end
up rising at an extremely high speed to keep up with the currency surplus. All sectors in the
economy try to buy more than the economy can produce. Shortages are then created and
merchants lose business. To compensate, some merchants raise their prices. Others don¶t offer
discounts or sales. In the end, the price level rises. This is called demand-pull inflation, in which
prices are forced upwards because of a high demand, and excessive monetary growth. For
inflation to continue, the money supply must grow faster than the real GDP.

Another common reason of inflation is a rise in production costs, which leads to an increase in
the price of the final product. For example, if raw materials increase in price, this leads to the
cost of production increasing, this in turn leads to the company increasing prices to maintain
their profits, this kind of inflation is call cost-push inflation. Furthermore, rising labour costs can
also lead to inflation, because workers demand wage increases, and companies usually chose to
pass on those costs to their customers, this sort of inflation is called wage-push inflation.

Inflation can also be caused by international lending and national debts. As nations borrow
money, they have to deal with interests, which in the end cause prices to rise as a way of keeping
up with their debts. A deep drop of the exchange rate can also result in inflation, as governments
will have to deal with differences in the import/export level.

 
" 




Inflation is divided into two types: Price Inflation and Monetary Inflation, the first type (about
prices) is when there is a rise in the general level of prices of goods and services over a period of
time, the second type (monetary) is when there is a rise in the quantity of money in an economy.
Both types are in many times interrelated, and both have negative effects on the economy and
individuals.

#




Most effects of inflation are negative, and can hurt individuals and companies alike, below is a
list of negative and ³positive´ effects of inflation:






:

1.V Hoarding (people will try to get rid of cash before it is devalued, by hoarding food and
other commodities creating shortages of the hoarded objects).
2.V Distortion of relative prices (usually the prices of goods go higher, especially the prices
of commodities).
3.V Increased risk - Higher uncertainties (uncertainties in business always exist, but with
inflation risks are very high, because of the instability of prices).
4.V Income diffusion effect (which is basically an operation of income redistribution).
5.V Existing creditors will be hurt (because the value of the money they will receive from
their borrowers later will be lower than the money they gave before).
6.V Fixed income recipients will be hurt (because while inflation increases, their income
doesn¶t increase, and therefore their income will have less value over time).
7.V Increased consumption ratio at the early stages of inflation (people will be consuming
more because money is more abundant and its value is not lowered yet).
8.V Lowers national saving (when there is a high inflation, saving money would mean
watching your cash decrease in value day after day, so people tend to spend the cash on
something else).
9.V Illusions of making profits (companies will think they were making profits while in
reality they¶re losing money if they don¶t take into consideration the inflation rate when
calculating profits).
10.VCauses an increase in tax bracket (people will be taxed a higher percentage if their
income increases following an inflation increase).
11.VCauses mal-investment (in inflation times, the data given about an investment is often
deceptive and unreliable, therefore causing losses in investments).
12.VCauses business cycles (many companies will have to go out of business because of the
losses they incurred from inflation and its effects).
13.VCurrency debasement (which lowers the value of a currency, and sometimes cause a new
currency to be born)
14.VRising prices of imports (if the currency is debased, then it¶s purchasing power in the
international market is lower).
ã
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:

1.V It can benefit the inflators (those responsible for the inflation)
2.V It is benefit early and first recipients of the inflated money (because the negative effects
of inflation are not there yet).
3.V It can benefit the cartels (it benefits big cartels, destroys small sellers, and can cause price
control set by the cartels for their own benefits).
4.V It might relatively benefit borrowers who will have to pay the same amount of money
they borrowed (+ fixed interests), but the inflation could be higher than the interests,
therefore they will be paying less money back. (example, you borrowed $1000 in 2005
with a 5% fixed interest rate and you paid it back in full in 2007, let¶s suppose the
inflation rate for 2005, 2006 and 2007 has been 15%, you were charged %5 of interests,
but in reality, you were earning %10 of interests, because 15% (inflation rate) ± 5%
(interests) = %10 profit, which means you have paid only 70% of the real value in the 3
years.


: Banks are aware of this problem, and when inflation rises, their interest rates might
rise as well. So don't take out loans based on this information.

5.V Many economists favor a low steady rate of inflation, low (as opposed to zero or
negative) inflation may reduce the severity of economic recessions by enabling the labor
market to adjust more quickly in a downturn, and reducing the risk that a liquidity trap
prevents monetary policy from stabilizing the economy. The task of keeping the rate of
inflation low and stable is usually given to monetary authorities. Generally, these
monetary authorities are the central banks that control the size of the money supply
through the setting of interest rates, through open market operations, and through the
setting of banking reserve requirements.
6.V Tobin effect argues that: a moderate level of inflation can increase investment in an
economy leading to faster growth or at least higher steady state level of income. This is
due to the fact that inflation lowers the return on monetary assets relative to real assets,
such as physical capital. To avoid inflation, investors would switch from holding their
assets as money (or a similar, susceptible to inflation, form) to investing in real capital
projects.

The first three effects are only positive to a few elite, and therefore might not be considered
positive by the general public.

È& 




Tips to avoid the negative effects of inflation are only suggestions and don¶t constitute any legal
advice, therefore you¶re free to use your own judgment depending on circumstances, to be more
prepared to face inflation effects you need to be aware of those effects, so if you haven¶t done so,
please read some of them above, here are some tips:
 1.V Be wise when holding cash, whether in your home or in your savings account, if you¶re
earning 5% interest on the money you have in your bank, and inflation rate is 10% then
you¶re in reality losing 5% and not earning anything.
2.V Be careful when buying bonds, high inflation rates completely destroy the value of long-
term bonds.
3.V If you have a variable-rate mortgage, fix it if you can find a good deal, have a low fixed
interest rate or 0% interest if you can find one.
4.V Invest in durable goods or commodities rather than in money. Check out our commodities
list.
5.V Invest in things that you're going to use anyway and will serve you for a long time.
6.V Invest for long-term capital gains, because short term investments tend to give deceptive
results or sense of making profits while in reality you¶re not making profits.
7.V Learn about bartering which is trading goods or services without the exchange of money
(it was very popular in hyperinflation times).
8.V Manage wisely your recurring monthly bills such as (phone bills, cable TV...), it would
help to reduce them or eliminate some of them.
9.V Same goes with ephemeral items (movies, restaurants, hotel rooms...) they¶re not bad if
you spend money on them in moderation.
10.VAsk yourself, do I really need these things I¶m spending my money on? Think how much
and how often you will need something before buying it.
11.VUse the money saving tips such as: you need to reduce your consumption of things that
are rising rapidly in price (eg, gas) without having to reduce your consumption of goods
that are rising less rapidly or even falling in price (eg, clothes).
12.VBuy only what you need, especially objects that have multi-tasks, and are considered
durable goods.

The conclusion from all this is: V 
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It is the exchange of one currency for another or the conversion of one currency into another
currency. Foreign exchange also refers to the global market where currencies are traded virtually
around-the-clock. The term foreign exchange is usually abbreviated as "forex" and occasionally
as "FX."

Foreign exchange transactions encompass everything from the conversion of currencies by a

traveler at an airport kiosk to billion-dollar payments made by corporate giants and governments
for goods and services purchased overseas. Increasing globalization has led to a massive increase
in the number of foreign exchange transactions in recent decades. The global foreign exchange
market is by far the largest financial market, with average daily volumes in the trillions of
dollars.

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Any type of financial institution that has received authorization from a relevant regulatory body
to act as a dealer involved with the trading of foreign currencies. Dealing with authorized forex
dealers ensure that your transactions are being executed in a legal and just way.

In the United States, one regulatory body responsible for authorizing forex dealers is the
National Futures Association (NFA). The NFA ensures that authorized forex dealers are subject
to stringent screening upon registration and strong enforcement of regulations upon approval. In
Pakistan, it is State Bank of Pakistan

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The foreign exchange market (forex, FX, or currency market) is a global, worldwide
decentralized over-the-counter financial market for trading currencies. Financial centers around
the world function as anchors of trading between a wide range of different types of buyers and
sellers around the clock, with the exception of weekends. The foreign exchange market
determines the relative values of different currencies.[1]

The primary purpose of the foreign exchange is to assist international trade and investment, by
allowing businesses to convert one currency to another currency. For example, it permits a US
business to import British goods and pay Pound Sterling, even though the business's income is in
US dollars. It also supports speculation, and facilitates the carry trade, in which investors borrow
low-profit currencies and lend (invest in) high-profit currencies, and which (it has been claimed)
may lead to loss of competitiveness in some countries.
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In finance, the exchange rates (also known as the foreign-exchange rate, forex rate or FX rate)
between two currencies specify how much one currency is worth in terms of the other. It is the
value of a foreign nation¶s currency in terms of the home nation¶s currency.[1] For example an
exchange rate of 91 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY
91 is worth the same as USD 1. The foreign exchange market is one of the largest markets in the
world. By some estimates, about 3.2 trillion USD worth of currency changes hands every day.

The spot exchange rate refers to the current exchange rate. The forward exchange rate refers to
an exchange rate that is quoted and traded today but for delivery and payment on a specific
future date.

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Foreign exchange reserves (also called Forex reserves or FX reserves) in a strict sense are only
the foreign currency deposits and bonds held by central banks and monetary authorities.
However, the term in popular usage commonly includes foreign exchange and gold, SDRs and
IMF reserve positions. This broader figure is more readily available, but it is more accurately
termed official international reserves or international reserves. These are assets of the central
bank held in different reserve currencies, mostly the US dollar, and to a lesser extent the euro,
the UK pound, and the Japanese yen, and used to back its liabilities, e.g. the local currency
issued, and the various bank reserves deposited with the central bank, by the government or
financial institutions.

 

,

Currency risk is a form of risk that arises from the change in price of one currency against
another. Whenever investors or companies have assets or business operations across national
borders, they face currency risk if their positions are not hedged.

aV Transaction risk is the risk that exchange rates will change unfavorably over time. It can
be hedged against using forward currency contracts;
aV Translation risk is an accounting risk, proportional to the amount of assets held in foreign
currencies. Changes in the exchange rate over time will render a report inaccurate, and so
assets are usually balanced by borrowings in that currency.

When a firm conducts transactions in different currencies, it exposes itself to risk. The risk arises
because currencies may move in relation to each other. If a firm is buying and selling in different
currencies, then revenue and costs can move upwards or downwards as exchange rates between
currencies change. If a firm has borrowed funds in a different currency, the repayments on the
debt could change or, if the firm has invested overseas, the returns on investment may alter with
exchange rate movements ² this is usually known as foreign currency exposure.

Currency risk exists regardless of whether you are investing domestically or abroad. If you invest
in your home country, and your home currency devalues, you have lost money. Any and all stock
market investments are subject to currency risk, regardless of the nationality of the investor or
the investment, and whether they are the same or different. The only way to avoid currency risk
is to invest in commodities, which hold value independent of any monetary system.

Currency risk has been shown to be particularly significant and particularly damaging for very
large, one-off investment projects, so-called megaprojects. This is because such projects are
typically financed by very large debts nominated in currencies different from the currency of the
home country of the owner of the debt. Megaprojects have been shown to be prone to end up in
what has been called the "debt trap," i.e., a situation where ± due to cost overruns, schedule
delays, unforeseen foreign currency and interest rate increases, etc. ± the costs of servicing debt
becomes larger than the revenues available to do so. Financial restructuring is typically the
consequence and is common for megaprojects.


- The above paragraph means that most currency risk is seen where there is huge money
involved. Mostly big projects involve loans and that too borrowed in other currencies. Now, if
the local currency loses its value, then the cost gets greater than the revenues and thus, the
business gets in debt trap, meaning unable to pay off your loans.









The quantity of foreign exchange reserves can change as a central bank implements monetary
policy. A central bank that implements a fixed exchange rate policy may face a situation where
supply and demand would tend to push the value of the currency lower or higher (an increase in
demand for the currency would tend to push its value higher, and a decrease lower). In a flexible
exchange rate regime, these operations occur automatically, with the central bank clearing any
excess demand or supply by purchasing or selling the foreign currency. Mixed exchange rate
regimes ('dirty floats', target bands or similar variations) may require the use of foreign exchange
operations (sterilized or unsterilized to maintain the targeted exchange rate within the prescribed
limits.

#$





Foreign exchange reserves are important indicators of ability to repay foreign debt and for
currency defense, and are used to determine credit ratings of nations, however, other government
funds that are counted as liquid assets that can be applied to liabilities in times of crisis include
stabilization funds, otherwise known as sovereign wealth funds. If those were included, Norway,
Singapore and Persian Gulf States would rank higher on these lists, and UAE's $1.3 trillion Abu
Dhabi Investment Authority would be second after China. Apart from high foreign exchange
reserves, Singapore also has significant government and sovereign wealth funds including
Temasek Holdings, valued in excess of $145 billion and GIC valued in excess of $330 billion.
India is also planning to create its own investment firm from its foreign exchange reserves.


: The above paragraph means when the countries have extra foreign currency, they are able
to pay the loans off. They are able to invest in other countries and so, maintain the local currency
position in the international economy.

Ë

!


$






The following is a list of the top 20 largest countries by foreign exchange reserves:

,
 
  
 .

month 

1 People's Republic of China $ 3045 (Mar 2011)

2 Japan $ 1116 (Mar 2011)

² Eurozone $ 770 (Jan 2011)

3 Russia $ 504 (Mar 2011)

4 Saudi Arabia $ 449 (Feb 2011

5 Republic of China (Taiwan) $ 393 (Mar 2011)

6 Brazil $ 322 (Apr 2011)

7 India $ 305 (Mar 2011)

8 South Korea $ 299 (Mar 2011)

9 Switzerland $ 278 (Feb 2011)

10 Hong Kong $ 273 (Mar 2011)[11]

11 Singapore $ 233 (Mar 2011)

12 Germany $ 209 (Jan 2011)

13 Thailand $ 185 (Apr 2011)

14 France $ 161 (Jan 2011)

15 Algeria $ 155 (Dec 2010)

16 Italy $ 154 (Jan 2011)

17 United States $ 133 (Feb 2011)

18 Mexico $ 126 (Feb 2011)

19 United Kingdom $ 115 (Feb 2011)

20 Malaysia $ 110 (Mar 2011)

These few holders account for more than 60% of total world foreign currency reserves. The
adequacy of the foreign exchange reserves is more often expressed not as an absolute level, but
as a percentage of short-term foreign debt, money supply, or average monthly imports.

c

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1. The foreign exchange market serves two functions: converting currencies and reducing risk.
There are four major reasons firms need to convert currencies.

2. First, the payments firms receive from exports, foreign investments, foreign profits, or
licensing agreements may all be in a foreign currency. In order to use these funds in its home
country, an international firm has to convert funds from foreign to domestic currencies.

3. Second, a firm may purchase supplies from firms in foreign countries, and pay these suppliers
in their domestic currency.

4. Third, a firm may want to invest in a different country from that in which it currently holds
underused funds.

5. Fourth, a firm may want to speculate on exchange rate movements, and earn profits on the
changes it expects. If it expects a foreign currency to appreciate relative to its domestic currency,
it will convert its domestic funds into the foreign currency. Alternately stated, it expects its
domestic currency to depreciate relative to the foreign currency. An example similar to the one in
the book can help illustrate how money can be made on exchange rate speculation. The
management focus on George Soros shows how one fund has benefited from currency
speculation.

6. Exchange rates change on a daily basis. The price at any given time is called the spot rate, and
is the rate for currency exchanges at that particular time. One can obtain the current exchange
rates from a newspaper or online.

7. The fact that exchange rates can change on a daily basis depending upon the relative supply
and demand for different currencies increases the risks for firms entering into contracts where
they must be paid or pay in a foreign currency at some time in the future.

8. Forward exchange rates allow a firm to lock in a future exchange rate for the time when it
needs to convert currencies. Forward exchange occurs when two parties agree to exchange
currency and execute a deal at some specific date in the future. The book presents an example of
a laptop computer purchase where using the forward market helps assure the firm that will not
lose money on what it feels is a good deal. It can be good to point out that from a firm's
perspective, while it can set prices and agree to pay certain costs, and can reasonably plan to earn
a profit; it has virtually no control over the exchange rate. When spot exchange rate changes
entirely wipe out the profits on what appear to be profitable deals, the firm has no recourse.

9. When a currency is worth less with the forward rate than it is with the spot rate, it is selling at
forward discount. Likewise, when a currency is worth more in the future than it is on the spot
market, it is said to be selling at a forward premium, and is hence expected to appreciate. These
points can be illustrated with several of the currencies.

10. A currency swap is the simultaneous purchase and sale of a given amount of currency at two
different dates and values.


 


 
 


c


 






 

c


With its near-global membership of 187 countries, the IMF is uniquely placed to help member
governments take advantage of the opportunities²and manage the challenges²posed by
globalization and economic development more generally. The IMF tracks global economic
trends and performance, alerts its member countries when it sees problems on the horizon,
provides a forum for policy dialogue, and passes on know-how to governments on how to tackle
economic difficulties.

The IMF provides policy advice and financing to members in economic difficulties and also
works with developing nations to help them achieve macroeconomic stability and reduce
poverty.

Marked by massive movements of capital and abrupt shifts in comparative advantage,

globalization affects countries' policy choices in many areas, including labor, trade, and tax
policies. Helping a country, benefit from globalization while avoiding potential downsides is an
important task for the IMF. The global economic crisis has highlighted just how interconnected
countries have become in today¶s world economy.

/
 c


The IMF supports its membership by providing

aV policy advice to governments and central banks based on analysis of economic trends and
cross-country experiences;
aV research, statistics, forecasts, and analysis based on tracking of global, regional, and
individual economies and markets;
aV loans to help countries overcome economic difficulties;
aV concessional loans to help fight poverty in developing countries; and
aV Technical assistance and training to help countries improve the management of their
economies.

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!






The IMF was founded more than 60 years ago toward the end of World War II. The founders
aimed to build a framework for economic cooperation that would avoid a repetition of the
disastrous economic policies that had contributed to the Great Depression of the 1930s and the
global conflict that followed.

Since then the world has changed dramatically, bringing extensive prosperity and lifting millions
out of poverty, especially in Asia. In many ways the IMF's main purpose²to provide the global
public good of financial stability²is the same today as it was when the organization was
established. More specifically, the IMF continues to

aV provide a forum for cooperation on international monetary problems

aV facilitate the growth of international trade, thus promoting job creation, economic growth,
and poverty reduction;
aV promote exchange rate stability and an open system of international payments; and
aV Lend countries foreign exchange when needed, on a temporary basis and under adequate
safeguards, to help them address balance of payments problems.




aV 

(



The World Bank is a vital source of financial and technical assistance to developing countries
around the world. Bank help governments in developing countries reduce poverty by
providing them with money and technical expertise they need for a wide range of projects²
such as education, health, infrastructure, communications, government reforms, and for many
other purposes.

aV &




The Bank is like a cooperative in which 187 member countries are shareholders.

aV È&

!


!




Under the Articles of Agreement of the International Bank for Reconstruction and
Development (IBRD), a country must first join the International Monetary Fund (IMF) prior
to becoming a member of the Bank.

aV 









Bank raise money in several different ways to support the low-interest and no-interest loans
(credits) and grants that the World Bank (IBRD and IDA) offers to developing and poor
countries.

IBRD lending to developing countries is primarily financed by selling AAA-rated bonds in

the world's financial markets. IBRD bonds are purchased by a wide range of private and
institutional investors in North America, Europe, and Asia. While IBRD earns a small margin
on this lending, the greater proportion of income comes from lending out our own capital.
This capital consists of reserves built up over the years and money paid in from the bank's
187 member country shareholders. IBRD income also pays for World Bank operating
expenses and has contributed to IDA and debt relief. Banks maintain strict financial
discipline to maintain the AAA status of our bonds and continue to extend financing to
developing countries.
Shareholder support is also very important for the Bank. This is reflected in the capital
backing Bank has received from shareholders in meeting their debt service obligations to
IBRD. Bank also have US$178 billion in what is known as "callable capital," which could be
drawn from our shareholders as backing, should it ever be needed to meet IBRD obligations
for borrowings (bonds) or guarantees. Bank has never had to call on this resource.

"


%




ADB is an international development finance institution whose mission is to help its

developing member countries reduce poverty and improve the quality of life of their people.

Headquartered in Manila, and established in 1966, ADB is owned and financed by its 67
members, of whom 48 are from the region and 19 are from other parts of the globe.

ADB's main partners are governments, the private sector, nongovernment organizations,
development agencies, community-based organizations, and foundations.

Under Strategy 2020, a long-term strategic framework adopted in 2008, ADB will follow
three complementary strategic agendas: inclusive growth, environmentally sustainable
growth, and regional integration.

In pursuing its vision, ADB's main instruments comprise loans, technical assistance, grants,
advice, and knowledge.

Although most lending is in the public sector - and to governments - ADB also provides
direct assistance to private enterprises of developing countries through equity investments,
guarantees, and loans. In addition, its triple-A credit rating helps mobilize funds for
development.

%



For more than 40 years, ADB has supported projects in agriculture and natural resources,
energy, finance, industry and nonfuel minerals, social infrastructure, and transport and
communications.

More than half of ADB's assistance has gone into building infrastructure - roads, airports,
power plants, and water and sanitation facilities. Such infrastructure helps lay the foundation
for commerce and economic growth and makes essential services accessible to the poor.

In addition to loans, grants, and technical assistance, ADB uses guarantees and equity
investments to help its developing member countries.

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,
 


ADB finances its operations by issuing bonds, recycling repayments, and receiving
contributions from member countries.
Most of ADB's lending comes from its ordinary capital resources, offered at near-market terms
to lower- to middle-income countries.

ADB also provides loans and grants from Special Funds, of which the Asian Development Fund
is the largest. The Asian Development Fund offers loans at very low interest rates and grants that
help reduce poverty in ADB's poorest borrowing countries.

As of the end of 2009, 37 trust funds were actively administrated by ADB. These 22 single-
donor, 13 multi donor, and 2 multilateral donor trust funds finance activities in various sectors or
for specific themes, including poverty reduction, governance, gender and development,
managing for development results, HIV/AIDS, water, climate, energy, education, information
and communication technology, and trade and finance.


c

 


In economics, a financial market is a mechanism that allows people to buy and sell (trade)
financial securities (such as stocks and bonds), commodities (such as precious metals or
agricultural goods), and other fungible items of value at low transaction costs and at prices that
reflect the efficient-market hypothesis.

Both general markets (where many commodities are traded) and specialized markets (where only
one commodity is traded) exist. Markets work by placing many interested buyers and sellers in
one "place", thus making it easier for them to find each other. An economy which relies
primarily on interactions between buyers and sellers to allocate resources is known as a market
economy in contrast either to a command economy or to a non-market economy such as a gift
economy.

In finance, financial markets facilitate:

aV The raising of capital (in the capital markets)

aV The transfer of risk (in the derivatives markets)
aV International trade (in the currency markets)
aV Match those who want capital to those who have it.

Typically a borrower issues a receipt to the lender promising to pay back the capital. These
receipts are securities which may be freely bought or sold. In return for lending money to the
borrower, the lender will expect some compensation in the form of interest or dividends.





In economics, typically, the term market means the aggregate of possible buyers and sellers of a
certain good or service and the transactions between them.

The term "market" is sometimes used for what are more strictly exchanges, organizations that
facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange. This
may be a physical location (like the KSE) or an electronic system (like NASDAQ). Much trading
of stocks takes place on an exchange; still, corporate actions (merger, spinoff) are outside an
exchange, while any two companies or people, for whatever reason, may agree to sell stock from
the one to the other without using an exchange.

Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a
stock exchange, and people are building electronic systems for these as well, similar to stock
exchanges. Financial markets can be domestic or they can be international.


%





The financial markets can be divided into different subtypes:

aV Capital markets which consist of:

YV Stock markets, which provide financing through the issuance of shares or

common stock, and enable the subsequent trading thereof.
YV Bond markets, which provide financing through the issuance of bonds, and enable
the subsequent trading thereof.

aV Commodity markets

Which facilitate the trading of commodities.

aV Money markets

Which provide short term debt financing and investment.

aV Derivatives markets

Which provide instruments for the management of financial risk.

aV Futures markets

Which provide standardized forward contracts for trading products at some future date;
see also forward market.

aV Insurance markets

Which facilitate the redistribution of various risks.

aV Foreign exchange markets

Which facilitate the trading of foreign exchange.

The capital markets consist of primary markets and secondary markets. Newly formed (issued)
securities are bought or sold in primary markets. Secondary markets allow investors to sell
securities that they hold or buy existing securities. The transaction in primary market exist
between investors and public while secondary market it¶s between investors.
 




Seemingly, the most obvious buyers and sellers of currency are importers and exporters of
goods. While this may have been true in the distant past, when international trade created the
demand for currency markets, importers and exporters now represent only 1/32 of foreign
exchange dealing, according to the Bank for International Settlements.

The picture of foreign currency transactions today shows:

aV Banks/Institutions
aV Speculators
aV Government spending (for example, military bases abroad)
aV Importers/Exporters
aV Tourists

"
c

 



Much effort has gone into the study of financial markets and how prices vary with time. Charles
Dow, one of the founders of Dow Jones & Company and The Wall Street Journal, enunciated a
set of ideas on the subject which are now called Dow Theory. This is the basis of the so-called
technical analysis method of attempting to predict future changes. One of the tenets of "technical
analysis" is that market trends give an indication of the future, at least in the short term. The
scale of changes in price over some unit of time is called the volatility. It was discovered by
Benoît Mandelbrot that changes in prices do not follow a Gaussian distribution, but are rather
modeled better by Lévy stable distributions. The scale of change, or volatility, depends on the
length of the time unit to a power a bit more than 1/2. Large changes up or down are more likely
than what one would calculate using a Gaussian distribution with an estimated standard
deviation.

A new area of concern is the proper analysis of international market effects. As connected as
today's global financial markets are, it is important to realize that there are both benefits and
consequences to a global financial network. As new opportunities appear due to integration, so
do the possibilities of contagion. This presents unique issues when attempting to analyze
markets, as a problem can ripple through the entire connected global network very quickly. For
example, a bank failure in one country can spread quickly to others, which makes proper analysis
more difficult.
c

 
#



In the 1970s Eugene Fama defined an






 as one in which prices always
fully reflect available information.

The most common type of efficiency referred to in financial markets is the allocative efficiency,
or the efficiency of allocating resources.

This includes producing the right goods for the right people at the right price.

A trait of efficient financial market is that it channels funds from the ultimate lenders to the
ultimate borrowers in a way that the funds are used in the most socially useful manner.
# 








%


Banks have been around since the first currencies were minted - perhaps even before in some
form or another. Currency, particularly the use of coins, grew out of taxation. In the early days of
ancient empire, a tax of on healthy pig per year might be reasonable, but as empires expanded,
this type of payment became less desirable. Additionally, empires began to need a way to pay for
foreign goods and services with something that could be exchanged more easily. Coins of
varying sizes and metals served in the place of fragile, impermanent paper bills.

c%%




These coins, however, needed to be kept in a safe place. Because ancient homes didn't have the
benefit of a steel safe, most wealthy people held accounts at their temples. Numerous people
(like priests or temple workers), whom one hoped were both devout and honest, always occupied
the temples, adding a sense of security. There are records from Greece, Rome, Egypt and
Ancient Babylon that suggest temples loaned money out in addition to keeping it safe. The fact
that most temples were also the financial centers of their cities is the major reason that they were
ransacked during wars.

Because coins could be hoarded more easily than other commodities (like 300-pound pigs), there
emerged a class of wealthy merchants that took to lending these coins, with interest, to people in
need. Temples generally handled large loans as well as loans to various sovereigns, and these
new money lenders took up the rest.

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The Romans, great builders and administrators in their own right, took banking out of the
temples and formalized it within distinct buildings. During this time, moneylenders still profited,
as loan sharks do today, but most legitimate commerce and almost all governmental spending
involved the use of an institutional bank. Julius Caesar, in one of the edicts changing Roman law
after his takeover, gives the first example of allowing bankers to confiscate land in lieu of loan
payments. This was a monumental shift of power in the relationship of creditor and debtor, as
landed noblemen were untouchable through most of history, passing debts off to descendants
until either the creditor's or debtor's lineage died out.

The Roman Empire eventually crumbled, but some of its banking institutions lived on in the
form of the papal bankers that emerged in the Holy Roman Empire, and with the Knights of the
Temple during the Crusades. Small-time moneylenders that competed with the church were often
denounced for usury.
±,


Eventually, the various monarchs that reigned over Europe noted the strengths of banking
institutions. As banks existed by the grace, and occasionally explicit charters and contracts, of
the ruling sovereign, the royal powers began to take loans to make up for hard times at the royal
treasury - often on the king's terms. This easy finance led kings into unnecessary extravagances,
costly wars and an arms race with neighboring kingdoms that lead to crushing debt. In 1557,
Phillip II of Spain managed to burden his kingdom with so much debt as the result of several
pointless wars that he caused the world's first national bankruptcy - as well as the second, third
and fourth, in rapid succession. This occurred because 40% of the country's gross national
product (GNP) was going toward servicing the debt. The trend of turning a blind eye to the
creditworthiness of big customers continues to haunt banks up into this day and age.

"
 






Banking was already well established in the British Empire when Adam Smith came along in
1776 with his "invisible hand" theory. Empowered by his views of a self-regulated economy,
moneylenders and bankers managed to limit the state's involvement in the banking sector and the
economy as a whole. This free market capitalism and competitive banking found fertile ground
in the New World where the United States of America was getting ready to emerge.

In the beginning, Smith's ideas did not benefit the American banking industry. The average life
for an American bank was five years, after which most bank notes from the defaulted banks
became worthless. These state-chartered banks could, after all, only issue bank notes against gold
and silver coins they had in reserve. A bank robbery meant a lot more before than it does now in
the age of deposit insurance (and the Federal Deposit Insurance Corporation - FDIC).
Compounding these risks was the cyclical cash crunch in America.

Alexander Hamilton, the secretary of the Treasury, established a national bank that would accept
member bank notes at par, thus floating banks through difficult times. This national bank, after a
few stops, starts, cancellations and resurrections, created a uniform national currency and set up
a system by which national banks backed their notes by purchasing Treasury securities - thus
creating a liquid market. Through the imposition of taxes on the relatively lawless state banks,
the national banks pushed out the competition.

The damage had been done already, however, as average Americans had already grown to
distrust banks and bankers in general. This feeling would lead the state of Texas to actually
outlaw bankers - a law that stood until 1904.

 


 


Because the national banking system was so sporadic, most of the economic duties that would
have been handled by it, in addition to regular banking business like loans and corporate finance,
fell into the hands of large merchant banks. During this period of unrest that lasted until the
1920s, these merchant banks parlayed their international connections into both political and
financial power. These banks included Goldman and Sachs, Kuhn, Loeb, and J.P. Morgan and
Company. Originally, they relied heavily on commissions from foreign bond sales from Europe
with a small backflow of American bonds trading in Europe. This allowed them to build up their
capital.

At that time, a bank was under no legal obligation to disclose its capital reserve amounts - an
indication of its ability to survive large, above-average loan losses. This mysterious practice
meant that a bank's reputation and history mattered more than anything. While upstart banks
came and went, these family-held merchant banks had long histories of successful transactions.
As large industry emerged and created the need for corporate finance, the amounts of capital
required could not be provided by any one bank, so IPOs and bond offerings to the public
became the only way to raise the needed capital.

Because the public in the U.S. and the foreign investors in Europe knew very little about
investing (due to the fact that disclosure was not legally enforced) these issues were
largely ignored according to the public's perception of the underwriting banks. Consequently,
successful offerings increased a bank's reputation and put it in a position to ask for more to
underwrite an offer. By the late 1800s, many banks demanded a position on the boards of the
companies seeking capital, and, if the management proved lacking, they ran the companies
themselves.



 
%


J.P. Morgan and Company emerged at the head of the merchant banks during the late 1800s. It
was connected directly to London, then the financial center of the world, and had considerable
political clout in the United States. Morgan and Co. created U.S. Steel, AT&T and International
Harvester, as well as duopolies and near-monopolies in the railroad and shipping industries
through the revolutionary use of trusts and a disdain for the Sherman Anti-Trust Act.
Although the dawn of the 1900s had well-established merchant banks, it was difficult for the
average American to get loans from them. These banks didn't advertise and they rarely extended
credit to the "common" people. Racism was also widespread and, even though the Jewish and
Anglo-American bankers had to work together on large issues, their customers were split along
clear class and race lines. These banks left consumer loans to the lesser banks that were still
failing at an alarming rate.
c





The functions of commercial banks are divided into two categories:

i) Primary functions, and

ii) Secondary functions including agency functions.


ã

-

The primary functions of a commercial bank include:

a) Accepting deposits; and

b) Granting loans and advances;


"
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%

The most important activity of a commercial bank is to mobilize deposits from the public. People
who have surplus income and savings find it convenient to deposit the amounts with banks.
Depending upon the nature of deposits, funds deposited with bank also earn interest. Thus,
deposits with the bank grow along with the interest earned. If the rate of interest is higher, public
are motivated to deposit more funds with the bank. There is also safety of funds deposited with
the bank.

! 







The second important function of a commercial bank is to grant loans and advances. Such loans
and advances are given to members of the public and to the business community at a higher rate
of interest than allowed by banks on various deposit accounts. The rate of interest charged on
loans and advances varies depending upon the purpose, period and the mode of repayment.
The difference between the rates of interest allowed on deposits and the rate charged on the
Loans is the main source of a bank¶s income.

Ë


A loan is granted for a specific time period. Generally, commercial banks grant short-term loans.
But term loans, that is, loan for more than a year, may also be granted.
The borrower may withdraw the entire amount in lump sum or in installments. However, interest
is charged on the full amount of loan. Loans are generally granted against the security of certain
assets. A loan may be repaid either in lump sum or in installments.

"



An advance is a credit facility provided by the bank to its customers. It differs from loan in the
sense that loans may be granted for longer period, but advances are normally granted for a short
period of time. Further the purpose of granting advances is to meet the day to day requirements
of business. The rate of interest charged on advances varies from bank to bank. Interest is
charged only on the amount withdrawn and not on the sanctioned amount.


0






Banks grant short-term financial assistance by way of cash credit, overdraft and bill discounting.




Cash credit is an arrangement whereby the bank allows the borrower to draw amounts upto a
specified limit. The amount is credited to the account of the customer. The customer can
withdraw this amount as and when he requires. Interest is charged on the amount actually
withdrawn. Cash Credit is granted as per agreed terms and conditions with the customers.

!


Overdraft is also a credit facility granted by bank. A customer who has a current account with the
bank is allowed to withdraw more than the amount of credit balance in his account. It is a
temporary arrangement. Overdraft facility with a specified limit is allowed either on the security
of assets, or on personal security, or both.
V
 



Banks provide short-term finance by discounting bills, that is, making payment of the amount
before the due date of the bills after deducting a certain rate of discount. The party gets the funds
without waiting for the date of maturity of the bills. In case any bill is dishonoured on the due
date, the bank can recover the amount from the customer.







Besides the primary functions of accepting deposits and lending money, banks perform a number
of other functions which are called secondary functions. These are as follows -

a) Issuing letters of credit, travellers cheques, circular notes etc.

b) Undertaking safe custody of valuables, important documents, and securities by providing safe
deposit vaults or lockers;

c) Providing customers with facilities of foreign exchange.

d) Transferring money from one place to another; and from one branch to another branch of the
bank.

e) Standing guarantee on behalf of its customers, for making payments for purchase of goods,
machinery, vehicles etc.
f) Collecting and supplying business information;

g) Issuing demand drafts and pay orders; and,

h) Providing reports on the credit worthiness of customers.






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Primary Functions Secondary Functions

1. These are the main activities 1. These are the secondary of the bank. activities of the bank.

2. These are the main sources These are not the main souof income of the bank. rces of income
of the banks.
V
3. These are obligatory on the These are not obligatory on part of bank to perform. the part of
bank to perform.
But generally all commercial banks perform these activities.





"
%


%

Banks receive money from the public by way of deposits. The following types of deposits are
usually received by banks:

i) Current deposit

ii) Saving deposit

iii) Fixed deposit

V
iv) Recurring deposit

v) Miscellaneous deposits

 


%

Also called µdemand deposit¶, current deposit can be withdrawn by the depositor at any time by
cheques. Businessmen generally open current accounts with banks. Current accounts do not carry
any interest as the amount deposited in these accounts is repayable on demand without any
restriction. The Reserve bank of India prohibits payment of interest on current accounts or on
deposits up to 14 Days or less except where prior sanction has been obtained. Banks usually
charge a small amount known as incidental charges on current deposit accounts depending on the
number of transaction.

 


%1

"


Savings deposit account is meant for individuals who wish to deposit small amounts out of their
current income. It helps in safe guarding their future and also earning interest on the savings. A
saving account can be opened with or without cheque book facility. There are restrictions on the
withdrawals from this account. Savings account holders are also allowed to deposit cheques,
drafts, dividend warrants, etc. drawn in their favor for collection by the bank. To open a savings
account, it is necessary for the depositor to be introduced by a person having a current or savings
account with the same bank.

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%

The term µFixed deposit¶ means deposit repayable after the expiry of a specified period. Since it
is repayable only after a fixed period of time, which is to be determined at the time of opening of
the account, it is also known as time deposit. Fixed deposits are most useful for a commercial
bank. Since they are repayable only after a fixed period, the bank may invest these funds more
profitably by lending at higher rates of interest and for relatively longer periods. The rate of
interest on fixed deposits depends upon the period of deposits. The longer the period, the higher
is the rate of interest offered. The rate of interest to be allowed on fixed deposits is governed by
rules laid down by the Reserve Bank of India.

,
 

%

Recurring Deposits are gaining wide popularity these days. Under this type of deposit, the
depositor is required to deposit a fixed amount of money every month for a specific period of
time. Each installment may vary from Rs.5/- to Rs.500/- or more per month and the period of
account may vary from 12 months to 10 years. After the completion of the specified period, the
customer gets back all his deposits along with the cumulative interest accrued on the deposits.




 
%

Banks have introduced several deposit schemes to attract deposits from different types of people,
like Home Construction deposit scheme, Sickness Benefit deposit scheme, Children Gift plan,
Old age pension scheme, Mini deposit scheme, etc.





 

Ë
!


The basic function of a commercial bank is to make loans and advances out of the money which
is received from the public by way of deposits. The loans are particularly granted to businessmen
and members of the public against personal security, gold and silver and other movable and
immovable assets. Commercial bank generally lend money in the following form:

i) Cash credit

ii) Loans
iii) Bank overdraft, and

iv) Discounting of Bills



-

A cash credit is an arrangement whereby the bank agrees to lend money to the borrower upto a
certain limit. The bank puts this amount of money to the credit of the borrower. The borrower
draws the money as and when he needs. Interest is charged only on the amount actually drawn
and not on the amount placed to the credit of borrower¶s account. Cash credit is generally
granted on a bond of credit or certain other securities. This a very popular method of lending in
our country.

Ë
-

A specified amount sanctioned by a bank to the customer is called a µloan¶. It is granted for a
fixed period, say six months, or a year. The specified amount is put on the credit of the
borrower¶s account. He can withdraw this amount in lump sum or can draw cheques against this
sum for any amount. Interest is charged on the full amount even if the borrower does not utilise
it. The rate of interest is lower on loans in comparison to cash credit. A loan is generally granted
against the security of property or personal security. The loan may be repaid in lump sum or in
installments. Every bank has its own procedure of granting loans. Hence a bank is at liberty to
grant loan depending on its own resources.
The loan can be granted as:

a) Demand loan, or

b) Term loan






Demand loan is repayable on demand. In other words it is repayable at short notice. The entire
amount of demand loan is disbursed at one time and the borrower has to pay interest on it.
The borrower can repay the loan either in lumpsum (one time) or as agreed with the bank. Loans
are normally granted by the bank against tangible securities including securities like N.S.C.,
Kisan Vikas Patra, Life Insurance policies and U.T.I. certificates.

!



Medium and long term loans are called µTerm loans¶. Term loans are granted for more than one
year and repayment of such loans is spread over a longer period. The repayment is generally
made in suitable installments of fixed amount. These loans are repayable over a period of 5 years
and maximum up to 15 years. Term loan is required for the purpose of setting up of new business
activity, renovation, modernization, expansion/extension of existing units, purchase of plant and
machinery, vehicles, land for setting up a factory, construction of factory building or purchase of
other immovable assets. These loans are generally secured against the mortgage of land, plant
and machinery, building and other securities. The normal rate of interest charged for such loans
is generally quite high.




Overdraft facility is more or less similar to cash credit facility. Overdraft facility is the result of
an agreement with the bank by which a current account holder is allowed to withdraw a specified
amount over and above the credit balance in his/her account. It is a short term facility.
This facility is made available to current account holders who operate their account through
cheques. The customer is permitted to withdraw the amount as and when he/she needs it and to
repay it through deposits in his account as and when it is convenient to him/her.
Overdraft facility is generally granted by bank on the basis of a written request by the customer.
Sometimes, banks also insist on either a promissory note from the borrower or personal security
to ensure safety of funds. Interest is charged on actual amount withdrawn by the customer. The
interest rate on overdraft is higher than that of the rate on loan.

 



Apart from granting cash credit, loans and overdraft, banks also grant financial assistance to
customers by discounting bills of exchange. Banks purchase the bills at face value minus interest
at current rate of interest for the period of the bill. This is known as µdiscounting of bills¶. Bills
of exchange are negotiable instruments and enable the debtors to discharge their obligations
towards their creditors. Such bills of exchange arise out of commercial transactions both in
internal trade and external trade. By discounting these bills before they are due for a nominal
amount, the banks help the business community. Of course, the banks recover the full amount of
these bills from the persons liable to make payment.




 





1. A contractual agreement in which a borrower receives something of value now and agrees to
repay the lender at some date in the future, generally with interest. The term also refers to the
borrowing capacity of an individual or company.

2. An accounting entry that either decreases assets or increases liabilities and equity on the
company's balance sheet. On the company's income statement, a debit will reduce net income,
while a credit will increase net income.

The amount of money available to be borrowed by an individual or a company is referred to as

credit because it must be paid back to the lender at some point in the future. For example, when
you make a purchase at your local mall with your VISA card it is considered a form of credit
because you are buying goods with the understanding that you'll need to pay for them later.
c




Credit is neither capital nor it creates capital. The credit instruments only represent money and
facilitate the business. The importance of credit can be judged by the following facts.

20Ë

ã 
-

The fewer developing countries like Pakistan are facing capital storage problem. Our production
sources are limited. So credit instruments have provided the money to the industrialists. No
production is on large scale and cost per unit has been reduced. The quality and quantity has
been improved.

30




,
-

Credit provides an opportunity to save the money, some people save the money but they are not
capable to do any business. So they lend it to the financial institutions.

40
%ã 

Ë
-

There are so many people who have surplus money but they are not capable to do any business.
So they lend it to the financial institutions. Credit makes possible the shifting of money to those
people who can use it for productivity.

50#


 

-

Credit instruments are used in place of metallic coins. So there is a saving of precious metals.
Future use of Credit instruments is more effective and convenient.

60ã

%-

Sometimes an industrialist faces the finance problem to purchase the raw material or for the
payment of wages, so he avails the credit facility.

70

-

Sometimes a firm can obtain credit by selling the bonds. If the firm prospects are bright it will
repay the principal amount with interest.
0
V
c-

Credit enables the manager of a young firm to develop its resources at a rapid speed.

80#



& 


-

Credit makes possible the entrance of new talent in the business enterprise. If the person has all
the qualities of a good entrepreneur but having no capital, Credit provides him the chance to
utilize his qualities.
 #$




External trade refers to buying and selling of goods and services between nationals of different
countries, or trade between agencies of the governments of different countries. External trade
consists of export trade and import trade. Export involves sale of goods and services to other
countries. Import consists of purchases from other countries. When goods are traded by way of
imports and exports the transactions are regarded as visible trade. External trade in service is
referred to as invisible trade. Thus, for example, if Indian exporters avail of British shipping
services for transportation of goods, they have to pay for transport services. Hence, services used
may be called invisible imports by India. Sale of services would be regarded as invisible exports.
Likewise, other services such as warehousing, insurance, banking and finance, and railway
services are also required in external trade. When goods are imported into a country with the
purpose of re-exporting them to some other country, it is known as entrepot trade.

Advantages of external trade are enumerated below:

V
"!

-

External trade enables a country to avail of the use of a variety of goods which cannot be
produced in the home country or can only be produced at a higher cost. In this way, a country
can get the benefit of using goods which it is not able to produce due to certain natural, physical
or other limitations, by importing them from other countries.

#$% % % 
-

External trade facilitates export of surplus production of a country and import necessary items.
This results in development of large scale industries.

%
+
!


 


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-

The quantity and quality of resources available in countries differ on account of climate and
geographical formation. External trade enables each\ country to specialize in the production of
those commodities for which it enjoys relative advantage. Specialization leads to increase in
productivity and superior quality of goods.

È


-

It improves the standard of living of people in different countries. Exchange of goods and
consumption thereof leads to a higher standard of living of the people in the world.

ã

9 +
-

External trade leads to equalization of prices of commodities in the world markets after making
allowance for transport and other costs. It brings stability and uniformity in the prices of
commodities in all the countries of the world.
S
 
 
-

Natural calamities such as flood, famine, drought etc., adversely affect the productive capacity of
a country. External trade ensures adequate supply of those commodities which are in short
supply within the country due to such natural calamities. For instance, medicine and food can be
imported from other countries during an emergency.







-

External trade develops business relations among different countries of the world which facilitate
exchange of ideas and enrichment of culture. For example, the carpets of middle east countries,
leather goods of Africa, batik art of Indonesia and brassware of India are known all over the
world.
V
There is always a demand for these goods specially in developed countries. Thus, external trade
promotes cordial relations and understanding among nations of the world.


%


%


-

Foreign trade has led to development of modern means of communication and efficiency in
banking and insurance services. These services have enabled countries to have trade even in
voluminous goods like food grains, wood, coal, and perishable goods, like fruits, flowers,
vegetables, meat, etc.

#$%

The term export is derived from the conceptual meaning as to ship the goods and services out of
the port of a country. The seller of such goods and services is referred to as an "exporter" who is
based in the country of export whereas the overseas based buyer is referred to as an "importer".
In International Trade, "exports" refers to selling goods and services produced in home country
to other markets.

Any good or commodity, transported from one country to another country in a legitimate
fashion, typically for use in trade. Export goods or services are provided to foreign consumers by
domestic producers.

Export of commercial quantities of goods normally requires involvement of the customs

authorities in both the country of export and the country of import. The advent of small trades,
over the internet such as through Amazon and e-Bay, has largely bypassed the involvement of
Customs in many countries because of the low individual values of these trades. Nonetheless,
these small exports are still subject to legal restrictions applied by the country of export. An
export's counterpart is an import.
%

The term import is derived from the conceptual meaning as to bring in the goods and services
into the port of a country. The buyer of such goods and services is referred to an "importer" who
is based in the country of import whereas the overseas based seller is referred to as an "exporter".
Thus an import is any good (e.g. a commodity) or service brought in from one country to another
country in a legitimate fashion, typically for use in trade. It is a good that is brought in from
another country for sale. Import goods or services are provided to domestic consumers by
foreign producers. An import in the receiving country is an export to the sending country.

Imports, along with exports, form the basis of international trade. Import of goods normally
requires involvement of the customs authorities in both the country of import and the country of
export and are often subject to import quotas, tariffs and trade agreements. When the "imports"
are the set of goods and services imported, "Imports" also means the economic value of all goods
and services that are imported.







International trade is exchange of capital, goods, and services across international borders or
territories. In most countries, it represents a significant share of gross domestic product (GDP).
While international trade has been present throughout much of history (see Silk Road, Amber
Road), its economic, social, and political importance has been on the rise in recent centuries.

Industrialization, advanced transportation, globalization, multinational corporations, and

outsourcing are all having a major impact on the international trade system. Increasing
international trade is crucial to the continuance of globalization. Without international trade,
nations would be limited to the goods and services produced within their own borders.

International trade is in principle not different from domestic trade as the motivation and the
behavior of parties involved in a trade do not change fundamentally regardless of whether trade
is across a border or not. The main difference is that international trade is typically more costly
than domestic trade. The reason is that a border typically imposes additional costs such as tariffs,
time costs due to border delays and costs associated with country differences such as language,
the legal system or culture.

Another difference between domestic and international trade is that factors of production such as
capital and labor are typically more mobile within a country than across countries. Thus
international trade is mostly restricted to trade in goods and services, and only to a lesser extent
to trade in capital, labor or other factors of production. Then trade in goods and services can
serve as a substitute for trade in factors of production.

Instead of importing a factor of production, a country can import goods that make intensive use
of the factor of production and are thus embodying the respective factor. An example is the
import of labor-intensive goods by the United States from China. Instead of importing Chinese
labor the United States is importing goods from China that were produced with Chinese labor.
International trade is also a branch of economics, which, together with international finance,
forms the larger branch of international economics.


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Trade barriers are a general term that describes any government policy or regulation that restricts
international trade. The barriers can take many forms, including the following terms that include
many restrictions in international trade within multiple countries that import and export any
items of trade:

aV Tariffs
aV Non-tariff barriers to trade
aV Import licenses
aV Import quotas
aV Subsidies
aV Embargo



A tariff is a tax levied on imports or exports. The word is derived from the Arabic word ta rīf,
meaning 'fees to be paid.


0!


Non-tariff barriers to trade (NTBs) are trade barriers that restrict imports but are not in the usual
form of a tariff. Some common examples of NTB's are anti-dumping measures and
countervailing duties, which, although they are called "non-tariff" barriers, have the effect of
tariffs once they are enacted.

Their use has risen sharply after the WTO rules led to a very significant reduction in tariff use.
Some non-tariff trade barriers are expressly permitted in very limited circumstances, when they
are deemed necessary to protect health, safety, or sanitation, or to protect duplicity natural
resources. In other forms, they are criticized as a means to evade free trade rules.


$%

0



1.V Specific Limitations on Trade:

1.V Quotas
2.V Import Licensing requirements
3.V Proportion restrictions of foreign to domestic goods (local content requirements)
4.V Minimum import price limits
5.V Embargoes

2.V Customs and Administrative Entry Procedures:

1.V Valuation systems
2.V Antidumping practices
3.V Tariff classifications
4.V Documentation requirements
5.V Fees

3.V Standards:
1.V Standard disparities
2.V Intergovernmental acceptances of testing methods and standards
3.V Packaging, labeling, and marking

4.V Government Participation in Trade:

1.V Government procurement policies
2.V Export subsidies
3.V Countervailing duties
4.V Domestic assistance programs

5.V Charges on imports:

1.V Prior import deposit subsidies
2.V Administrative fees
3.V Special supplementary duties
4.V Import credit discriminations
5.V Variable levies
6.V Border taxes
 6.V Others:
1.V Voluntary export restraints
2.V Orderly marketing agreements

%



An import license is a document issued by a national government authorizing the importation of

certain goods into its territory. Import licenses are considered to be non-tariff barriers to trade
when used as a way to discriminate against another country's goods in order to protect a
domestic industry from foreign competition. Each license specifies the volume of imports
allowed, and the total volume allowed should not exceed the quota. Licenses can be sold to
importing companies at a competitive price, or simply a fee. However, it is argued that this
allocation method provides incentives for political lobbying and bribery. Government may put
certain restrictions on what is imported as well as the amount of imported goods and services.For
Example, if a business wishes to import agricultural products such as vegetables, then the
government may be concerned about the impact of such importations of the local market and
thus import a restriction.

%9 

An import quota is a type of protectionist trade restriction that sets a physical limit on the
quantity of a good that can be imported into a country in a given period of time. Quotas, like
other trade restrictions, are used to benefit the producers of a good in a domestic economy at the
expense of all consumers of the good in that economy.

Critics say quotas often lead to corruption (bribes to get a quota allocation), smuggling
(circumventing a quota), and higher prices for consumers.

In economics, quotas are thought to be less economically efficient than tariffs which in turn are
less economically efficient than free trade.

 !

A subsidy (also known as a subvention) is a form of financial assistance paid to a business or

economic sector. Most subsidies are made by the government to producers or distributors in an
industry to prevent the decline of that industry (e.g., as a result of continuous unprofitable
operations) or an increase in the prices of its products or simply to encourage it to hire more
labor (as in the case of a wage subsidy). Examples are subsidies to encourage the sale of exports;
subsidies on some foods to keep down the cost of living, especially in urban areas; and subsidies
to encourage the expansion of farm production and achieve self-reliance in food production.

 
#!

An embargo is the partial or complete prohibition of commerce and trade with a particular
country, in order to isolate it. Embargoes are considered strong diplomatic measures imposed in
an effort, by the imposing country, to elicit a given national-interest result from the country on
which it is imposed. Embargoes are similar to economic sanctions and are generally considered
legal barriers to trade, not to be confused with blockades, which are often considered to be acts
of war.

Most trade barriers work on the same principle: the imposition of some sort of cost on trade that
raises the price of the traded products. If two or more nations repeatedly use trade barriers
against each other, then a trade war results.

Ë




A letter from a bank, guaranteeing, that a buyer's payment to a seller will be received on time and
for the correct amount. In the event that the buyer is unable to make payment on the purchase,
the bank will be required to cover the full or remaining amount of the purchase.

%
Ë

There are several types of letters of credit. The differences are found in the wording.

aV Revocable versus Irrevocable

†V You should always insist and carefully check that a letter of credit is irrevocable.
†V Once an irrevocable letter of credit is open it cannot be changed without the written
consent of all parties including the beneficiary.
aV A revocable letter of credit can be change or withdrawn without notifying the
beneficiary.

aV Confirmed versus Advised

†V Confirmed is preferred, as the Confirming Bank promises to pay.

†V Advised does not guarantee the creditworthiness of the Opening Bank.

aV Straight versus Negotiation

†V A negotiation letter of credit can be presented to any bank.

†V A straight letter of credit can only be paid in the country of the Paying Bank.

aV Sight versus Usance

†V At sight means the Beneficiary is paid as soon as the Paying Bank has determined that all
necessary documents are in order.
†V Usance time can be between 30 and 180 days after the bill of lading date.
aV This is a form of delayed payment, and should be avoided.
 " ãË#Ë##,c,# 

[Bank Name]

[Street]

[City, State 00000]

[Date]

,,#±"Ë#" VË##,c,# :;;;;;;;<

BENEFICIARIES: United States Department of Agriculture

Rural Utilities Service

1400 Independence Ave., SW

Washington, D.C. 20250-1500

[Borrower¶s Name]

[Street]

[City, State 00000]

ACCOUNT PARTY: [LOC Issuing Party¶s Name]

[Street]

[City, State 00000]

Gentlemen:

We, [NAME OF BANK,] (the ³BANK´) hereby open our irrevocable standby credit (this ³Letter of
Credit´) on behalf of [BORROWER¶S NAME] (hereinafter the ³ACCOUNT PARTY´) in favor of
the RURAL UTILITIES SERVICE (³RUS´) and [BORROWER¶S NAME], (hereinafter the
³BORROWER´) for the sum or sums not to exceed the aggregate amount of [AMOUNT IN
WORDS] Dollars ($000,000) (hereinafter the ³Maximum Amount,´) to be made available by
either of your requests for payment at sight.
The BANK has been informed by the ACCOUNT PARTY that this Letter of Credit is issued to
secure obligations as set forth in that certain loan agreement, entered into between the
BORROWER and RUS, dated as of [date] (as amended from time to time, hereinafter the ³Loan
Agreement.´) The BANK also acknowledges that pursuant to said Loan Agreement, this Letter of
Credit may not be secured, guaranteed, or serviced by any asset of the BORROWER.

This Letter of Credit shall be valid until [insert date five years from today], `

 ;
that this Letter of Credit may be terminated at any time with the prior written consent of RUS.
After receiving RUS consent, the BANK shall provide written notice of termination by certified
mail to: (a) RUS at U.S.D.A., 1400 Independence Ave., S.W., Room 2854, Stop 1599, and
Washington, D.C. 20250-1599; (b) the BORROWER at [Street, City, State, Zip] ; and (c) [LOC
ISSUING PARTY¶S NAME] at [Street, City, State, Zip]. The notice required hereunder will be
deemed to have been given when received by all parties.

Funds under this Letter of Credit are available to RUS and/or the BORROWER in one or more
drawings upon the presentation of one or more executed drafts payable at sight, in the form as
provided in Exhibits 1 or 2 attached hereto, as well as the original of this Letter of Credit
(including all amendments thereto, if any). Such draft(s) shall be presented to our office at
[Street, City, State Zip], on any business day except those in which banking institutions in our
State are authorized or required by law to close. Partial drawings and multiple drawings are
permitted under this Letter of Credit, as well as drafts presented by one or both beneficiaries.

The BANK hereby agrees to honor one or more drafts drawn under, or demands for payment
made under, and in conformity with this Letter of Credit, up to the Maximum Amount, and
accompanied by the documents required by this Letter of Credit, and the BANK¶s honoring of
such draft or demand shall not relieve its obligation to so honor any further drafts or demands;
`
 
 , that our aggregate obligation to honor such drafts and demands shall not
exceed the Maximum Amount as reduced by prior draws hereunder. This Letter of Credit is not
subject to any condition or qualification, and is the obligation of the BANK which is in no way
contingent upon reimbursement or likelihood of reimbursement.

This Letter of Credit sets forth in full the terms of our understanding with you, and this
undertaking shall not in any way be modified, amended, amplified, or limited by reference to any
document, instrument, or agreement referred to herein, or in which this Letter of Credit is
referred to, or to which it relates, except only the drafts referred to herein

This letter of credit is issued subject to the Uniform Customs and Practices for Documentary
Credits, 1993 Revision, and International Chamber of Commerce Publication No. 500.

Very Truly Yours,

[NAME OF BANK]

by:________________________

Name:

Title:
 





A central bank, reserve bank, or monetary authority is a public institution that usually issues the
currency, regulates the money supply, and controls the interest rates in a country. Central banks
often also oversee the commercial banking system of their respective counties. In contrast to a
commercial bank, a central bank possesses a monopoly on printing the national currency, which
usually serves as the nation's legal tender.

The primary function of a central bank is to provide the nation's money supply, but more active
duties include controlling, interest rate and acting as a lender of last resort to the banking sector
during times of financial crisis. It may also have supervisory powers, to ensure that banks and
other financial institutions do not behave recklessly or fraudulently.




ã
0



The 

ã
(SBP) is the central bank of Pakistan. While its constitution, as
originally lay down in the State Bank of Pakistan Order 1948, remained basically unchanged
until January 1, 1974, when the bank was nationalized, the scope of its functions was
considerably enlarged. The State Bank of Pakistan Act 1956, with subsequent amendments,
forms the basis of its operations today. The headquarters are located in the financial capital of
Pakistan, Karachi with its second headquarters in the capital, Islamabad.

%







aV Agriculture credit
aV Audit
aV Banking Inspection
aV Banking Policy & Regulations
aV Banking Supervision
aV Corporate Services
aV Economic Analysis
aV Financial Monitoring Unit
aV Monetary Policy
aV Research
aV Statistics and Data Warehouse
aV Exchange Policy
aV Human Resource
aV Information Systems & Technology
aV Islamic Banking
aV Legal Services
aV Library
aV Payment System
aV Real Time Gross Settlement System (RTGS System)
aV Small and Medium Enterprises
aV Training and Development Department (TDD)
aV Treasury Operations
aV Strategic & Corporate Planning
 aV Microfinance
aV Pakistan Remittance Initiative

Functions of State Bank include:

aV implementing monetary policy

aV determining Interest rates
aV controlling the nation's entire money supply
aV the Government's banker and the bankers' bank ("lender of last resort")
aV managing the country's foreign exchange and gold reserves and the Government's stock
register
aV regulating and supervising the banking industry
aV setting the official interest rate ± used to manage both inflation and the country's
exchange rate ± and ensuring that this rate takes effect via a variety of policy mechanisms