1.
CHAPTER 18 Understanding Money and Banking

2.
Chapter Outline <ul><li>What Is Money? </li></ul><ul><li>The Financial System </li></ul><ul><li>The Reserve System </li></ul><ul><li>The Changing Money and Banking System </li></ul><ul><li>International Banking and Finance </li></ul>

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What is Money? Any object that is portable, divisible, durable and stable and that serves as a medium of exchange, a store of value and a unit of account

4.
What is Money? <ul><li>Characteristics of Money </li></ul><ul><ul><li>Portability </li></ul></ul><ul><ul><li>Divisibility </li></ul></ul><ul><ul><li>Durability </li></ul></ul><ul><ul><li>Stability </li></ul></ul><ul><li>Functions of Money </li></ul><ul><ul><li>Medium of Exchange </li></ul></ul><ul><ul><li>Store of Value </li></ul></ul><ul><ul><li>Unit of Account </li></ul></ul>

5.
The Spendable Money Supply: M-1 <ul><li>M-1 counts only the most liquid, or spendable , forms of money. It includes: </li></ul><ul><ul><li>Currency </li></ul></ul><ul><ul><li>Checks </li></ul></ul><ul><ul><li>Demand Deposits </li></ul></ul>

6.
M-1 Plus the Convertible Money Supply: M-2 <ul><li>M-2 includes everything in M-1 plus items that cannot be spent directly but are easily converted to spendable forms. Major components of M-2: </li></ul><ul><ul><li>M-1 </li></ul></ul><ul><ul><li>Time Deposits </li></ul></ul><ul><ul><li>Money Market Mutual Funds </li></ul></ul><ul><ul><li>Savings Deposits </li></ul></ul>

7.
Financial Institutions <ul><li>Commercial banks are companies that accept deposits that they use to make loans and earn profits </li></ul><ul><ul><li>Diversification and Mergers </li></ul></ul><ul><ul><li>Commercial Interest Rates </li></ul></ul><ul><ul><ul><li>Prime Rate </li></ul></ul></ul><ul><li>Savings and loan associations ( S&Ls ) accept deposits and make loans </li></ul><ul><li>Mutual Savings Banks and Credit Unions </li></ul><ul><li>Nondeposit Institutions </li></ul><ul><ul><li>Pension Funds </li></ul></ul><ul><ul><li>Insurance Companies </li></ul></ul><ul><ul><li>Finance Companies </li></ul></ul><ul><ul><li>Securities Dealers </li></ul></ul>

8.
Financial System of Pakistan <ul><li>45 Commercial banks 16 Investment Banks </li></ul><ul><li>04 Housing Finance Companies </li></ul><ul><li>04 Discount Houses </li></ul><ul><li>02 Venture Capital Companies </li></ul><ul><li>32 Leasing Companies </li></ul><ul><li>46 Modarbas </li></ul><ul><li>39 Mutual Funds </li></ul><ul><li>07 Listed Brokerage Houses </li></ul><ul><li>37 Insurance Companies </li></ul>

9.
Functions of Commercial Banks <ul><li>Accepting of Deposits </li></ul><ul><li>Making Loans and Advances </li></ul><ul><li>Agency services to customers </li></ul><ul><ul><li>Collection of cheques </li></ul></ul><ul><li>Purchase or sale of securities </li></ul><ul><ul><li>Foreign exchange business </li></ul></ul><ul><li>Export promotion cell </li></ul>

10.
STATE BANK OF PAKISTAN “ The State Bank” is the Central bank of Pakistan, which acts as the government’s bank, serves member commercial banks, and controls the nation’s money supply.

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The Structure of the State Bank <ul><li>The Board of Governors </li></ul><ul><ul><li>The bank’s board of governors consists of seven members appointed by the president. </li></ul></ul><ul><li>Member Banks </li></ul><ul><ul><li>All chartered commercial banks are members of the state bank of Pakistan. </li></ul></ul>

12.
The Functions of the SBP <ul><li>The Government’s Bank </li></ul><ul><ul><li>The state bank produces the nation’s paper currency and lends money to the government. </li></ul></ul><ul><li>The Bankers’ Bank </li></ul><ul><ul><li>The state bank makes loans to individual banks. </li></ul></ul><ul><ul><li>The state bank provides storage for commercial banks. </li></ul></ul><ul><ul><li>The state bank clears checks. </li></ul></ul><ul><li>Controlling the Money Supply </li></ul><ul><ul><li>The state bank is responsible for the conduct of monetary policy . </li></ul></ul>

13.
The Functions of the SBP <ul><li>Overseeing the Banking Community </li></ul><ul><li>Controlling the Money Supply </li></ul>

14.
The Tools of the SBP <ul><li>Reserve requirement is the percentage of its deposits that a bank must hold in cash or on deposit with State bank. </li></ul><ul><li>Discount rate is the interest rate at which member banks can borrow money from the State Bank Reserve. </li></ul>

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The Tools of the SBP <ul><li>Open-market operations refer to the state bank’s sale and purchase of securities in the open market </li></ul><ul><li>Selective credit controls is the state bank’s Reserve authority to set both margin requirements for consumer stock purchases and credit rules for other consumer purchases </li></ul>

16.
What is the World Bank? U. N. agency that provides a limited scope of financial services

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What is the International Monetary Fund (IMF)? U.N. agency consisting of about 150 nations that have combined resources to promote stable exchange rates, provide temporary short-term loans and serve other purposes