What is electronic banking and discuss the scope and advantages of Electronic banking

Electronic Banking :-
In simple words we can say that the delivery of banking services to the customers by using the electronic communication like internet is called electronic banking. Electronic banking is not only the ATM facility but it provides all other banking services like payments, purchase and sale without visiting physically to the banks.


Scope Of Electronic Banking :-
To day the customer demands the services of banks 24 hours where he lives even he is in the airplane.

Now in this modern age the entire banking structure has been changed due to widespread internet technology. Now all the business like commerce, trade, import, export, purchase and sale of goods is relying upon electronic banking. By using the advance electronic technology the banking services are fast and economical.

There is a saving time an saving of money in the use of E.banking. If any country wants to work in the world market, it will have to improve the banking services at international level because old traditional banking is not acceptable in the changing global economy.

The online banking facility has been provided by the large number of commercial banks. On other hand credit card facility is also available in the various commercial banks. Now every bank wants to attract the customers and for this purpose the offers the latest facilities so i seems that no any bank will survive in the market if he fails to provide up date facilities.


ADVANTAGES OF ELECTRONIC BANKING :-
Now it is also called on line or home banking electronic banking was stared with the use of proprietary software. Following are the important advantages of electronic banking :

1. Paper Work Reduced :-
The traditional procedure of banking is manual and paper based. Electronic banking is gradually replacing the paper transactions in the banks which has reduced the paper work.

2. Easy Transactions :-
Electronic banking has reduced the problems of the customers like writing cheques, filing taxes, and transforming of cash. Now in ATM facility there is no need of cheque book.

3. Security :-
Electronic banking provides the safe system of payment. Now transactions are made in the accounts through internet.

4. Saving Of Time :-
Electronic banking has saved the time and money of the customers and also the bank. Now burden of work on bank employees has been also reduced. were hired at higher wages, so operating cost was very high. Now by using electronic banking the number of employees has been reduced.

5.Reduction In Cost :-
In case of manual banking, large number of employees were hired at higher wages, so operating cost was very high. Now by using electronic banking the number of employees has been reduced.

6. Market Expanded :-
Due to electronic banking, national international market of various goods and services has been expanded. Now we can purchases and make payment in any place in the world.

7. Increase In Customers :-
As the banking industry is expanding due the modern facilities, it is attracting more and more customers. So number of customers are increasing day by day.

8. Branches Reduced :-
Now there is no need to open the branches on every place in the city because due to electronic banking facilities, there is no rush of customers in the banks. Because there is no need to visit the bank physically. So heavy cost of opening the new branches has been reduced and facilities are provided at low cost.

9. Checking Of Account :-
Every customer can check his balance of account sitting at home and makes the payments without traveling. It saves his time and expenses.

10. Utility Bills Payment :-
Bills, like telephone, gas, electricity and water can be easily paid to the concerned departments without going to the bank physically. Even he is sitting in any other country, he can make the payment.

11. Transferring Of Money :-
There is no need of writing the deposit slip cheques and drafts. By using the electronic banking money can be transferred easily.

12. Credit Cards :-
It is also very important facility for the customers that he can purchase the goods and ca make the payment by using the credit cards.

Define business finance or describe the sources of short term and long term finance or various types of business finance

BUSINESS FINANCE :-
According to George Terry "Finance consists of providing and utilizing the money, capital rights, credit and funds of any kind which are employed in the operation of an enterprise."

So business finance means investing borrowing and spending of money with proper manner so for the operation of a business.

Importance Of Business Finance :-
For any successful business finance has a primary importance. Finance is life blood for business. No business can run smoothly with out finance. There is a need of sufficient to achieve the desired results from the business activities.

Sources Of Business Finance :-
There are two sources of business funds :

1. Creditors.    2. Owners.

Creditors provide the funds temporarily while owner provide the funds permanently.
Following are the important sources of business finance :

A. SOURCES OF FINANCE :
1. Owners Financing or Equity Finance in Financing :-
If a firm needs the financial needs of a business from the funds supplied by the owners, it is called equity financing. When owner uses his own capital for current and fixed assets then he saves himself from the following problem.

a. He will not pay interest to any body because he has used his own capital.

b. He will not give the profit to any lender.

c. He will improve the quality of facing slumps.

d. For getting the loan he will not face any problem.

e. He will be able to control the business with full concentration.

2. Non Company Equity Financing :-
If sometime a proprietor is not able to meet his financial needs from his personal capital and he is also not ready to borrow then he can increase the equity capital by admitting any trust worthy sound party in his business.

3. Company Equity Financing :-
By selling the ordinary shares, a company may obtain the equity capital. Common stocks represent the ownership. The common stock holders have a right to receive profit declared by the company. They can also give vote and sell the shares in the market.

4. Financing Through Reserve Profit Ploughing Back Profit :-
To increase the owned capital of the firm a part of the profit is retained in the business. From this capital it can meet the financial needs easily. A firm can also use this part of profit for the extension of business or to face the depression.

5. Debt Financing :-
When we meet the financing needs by borrowing it is called debt financing. It is obtained if the owned capital of a firm is not sufficient to meet the business needs. Sometimes loan is obtained to save the business from dissolution and some times to meet the urgent expenses. Loan is obtained from creditors for short run for long run and for medium term.


TYPES OF BUSINESS FINANCE :-
Following are the important types of business finance :
1.    Short Term Finance.
2.    Medium Term Finance.
3.    Long Term Finance.

SHORT TERM FINANCE :-
This type of source is obtained for a period of one year or less than one year. It is required for the temporary needs of the business.

 
MEDIUM TERM FINANCE :-
The duration range of the intermediate term finance is from one year to ten years. Short term and medium term loan is provided by the following agencies.

1.    Commercial Banks :-
The commercial banks receive the savings of the people and lend it for short term to businessman. The bank advances the loan in the shape of cash or overdraft.

2.    Federal Government Agencies :-
Many agencies of the central bank provide loans to private business. Generally central bank authorizes them to advance loan in the emergency period.

3.    Re discounting Facility :-
Central bank provides re-discounting facilities on 1st Class bills. The cash can be raised when bank loan are not available on simple terms.

4.    Foreign Exchange :-
These banks advance loans to the large scale foreign business according to nationality.

5.    Friends and Relatives :-
A number of persons borrowing from friends and relatives for a short period. But this source is very limited.

6.    Private Money Lender :-
Private money landers like landlords and Sahukar also lends the money both their rate of interest is very high.

7.    Finance Companies :-
These are specialized finance companies and they also lend the money for short and medium terms.

8.    Cooperative Societies :-
These provide loans to rural areas for business on the security of land. These provide short term and medium term loans.

9.    Consumption Credit Agency :-
These companies provide the loans for consumption goods. Small businessman borrows the money for short and medium term from these agencies.

10.    Finance Facility By Agent :-
Sometimes managing agent also provide short term finance to the concerned business.

11.    Commercial Paper House :-
These financial agencies are from to buy the promissory note of the small business and then resale them to the investors in the open market.

12.    Partial Payment Method :-
Some producers sell their product on cash basis and others on installment basis. Some portion of the price is paid at the time of purchase and the balance is paid on installment basis. This method is also useful in providing short term finance.

 
LONG TERM FINANCE :-
This type of finance is required for a period more than ten years. The long term finance is use for the construction of building and machinery. Long term loan is provided by the following sources :

1.    Financial Institutions :-
There are various financial institutions which provide long term finance to the industry and business.

2.    Saving Of The Company :-
A long term finance is also act by the savings of the company. A company does not distribute its all profit among the share holders. They transfer some portion of the profit to reserve funds every year. So a company uses this saving for investment.

3.    Proprietors Own Resources :-
The proprietors may meet the long term financial requirement by the following sources :

i.    Joint stock company can issue the shares or debentures.

ii.    Sale traders and partner can dispose of their private assets. They can also use their profit.


4.    New Partners :-
By inviting new partners in a firm the volume of capital can be increased. The new comers will contribute their share of capital in business but they will not participate affairs of a business.

5.    Underwriters :-
In obtaining the long terms finance for a public limited company underwriters services can not be ignored. They undertake to dispose of the securities of the companies and receive commission for their services.

6.    Bonds :-
This is an important source of long term finance under this system large size business issue secured and unsecured bonds. These bonds may be disposed of directly or through agent.

Explain the process of interest free banking of Pakistan or Write a note on Islamisation banking In Pakistan

Pakistan is an ideological country and since 1947 it was the burning desire of the Pakistanis that they should lead their lives according to Quran and Sunnah. In Islam interest is prohibited. Islamic economic system is an interest-less system. So the present Govt. accepted the challenge and has taken steps to Islamize the economy. Following are main steps :

1. Introduction Of Islamic Banking :-
The process of Islamisation of our banking and financial system was introduced in july, 1979. The Govt. of Pakistan decided that only Islamic economic system can ensure the better standard of life to the public.

2. Amendments In Banking Law :-
To facilitate the introduction of interest free banking necessary changes were made in the banking laws in June, 1980. Different companies were allowed to start the business on the basis of interest free system.

3. Profit And Loss Sharing Deposits :-
All the commercial banks and bank of Uman starting accepting deposits of profit and loss sharing on 1st Jan 1981. At the same time the banks were asked to invest the PLS deposits in specified interest-less business. The field of business was gradually extended during the year 1981-1993.

4. Modaraba Ordinance 1980 :-
A Modaraba means the business in which some persons participate with their money and the managers with their skill and knowledge. The profits are distributed among both the parties. But the condition for the business is that it should be according the principles of Shariah. In order to encourage the business on the basis of profit participation a law was introduced which is called Modaraba ordinance 1980. The Govt. has also appointed a Registration of modaraba companies.

5. Musharika :-
It is an organization in which all partners contribute the capital. Profit is distributed among the partners according their agreement. Banks have been permitted for investment on the basis of sharing in the profit and loss.

6. Equity Participation :-
Banks are also allowed to purchase the shares of the listed joint stock companies.

7. Participation Term Certificate (PTC) :-
Participation term certificate is an instrument of finance issued by the company for meeting to its medium and long term capital needs. A company is authorized under the companies ordinance to issue PTC according the Govt. instructions.

8. Mark Up Method :-
Mark up means the purchase of goods by banks and their sale to the customers if the payment is on deferred basis. The financier arranges for the purchase of goods requested by the customer and sells these to him the basis of cost plus agreed profit margin (mark up). The payment can be made by customer over a specific period in lump sum or in installments.

9. Mark Down :-
It is a purchase of moveable or immoveable property by the banks from their customers with buy back agreement or otherwise.

10. Leasing :-
It is a long term financing in which the financier retains the ownership of the as set over a specified period of time on the payment  fixed amount. When the specified period is over then ownership of asset goes to lease.

11. Hire Purchase :-
On the basis of hire purchase banks are allowed to provide finance for the purchase of machinery to their clients in trade and industry. In a hire purchase deal the payment includes a portion of acquisition of ownership right and an element of rent.

12. Development Charges :-
The banks are also allowed to finance for the development of property.

13. Interest Free Loans To Farmers :-
Since July, the farmers, tenants and fisherman are receiving loans from the commercial bank. Cooperative banks and from the agriculture bank. The interest free loan has enabled the small farmers to use the modern inputs. The yield per acre is increasing due to this reason.

14. Qarze Hasna :-
The nationalized commercial banks provide interest free Qarze hasna to the deserving people in the country. These loans are payble as the borrower is able to repay. For example the commercial banks and banking council is providing loans to those students who want to get the higher and professional education inside and out side the country.

15. Investment Corporation (ICP) :-
The investment corporation has eliminated interest from the twelve mutual funds from July 1979. The ICP scheme was converted into profit and loss sharing on 1st Oct. 1980.

16. National Investment Trust (NIT) :-
The NIT was converted into interest free organization from July 1, 1979 to increase the process of Islamisation. After every three month NIT announces the rate of profit on every unit.

17. Small Business Finance Corporation (SBFC) :-
This corporation was also eliminated interest from its operation. The corporation had also provided financial assistance on Hire purchase system.

18. House Building Finance Corporation (HBFC) :-
The interest has been also eliminated from the operation of house building finance corporation from December, 1978.

19. Collection Of Zakat :-
Zakat is considered the backbone of Islamic economic system. So Zakat is also deducted by the commercial banks from the saving accounts of the public.

No doubt the Govt. of Pakistan is making sincere efforts to eliminate interest from economy. But still some doubt there in our minds such as the
1. National Saving Scheme which are still on interest basis.

2. The problem of international transactions which is on interest basis.

3. The loan against buy back agreement by the banks.

Any how, we can say that if our bankers, businessmen and governing  body cooperate and behave honestly, the Islamic banking system will succeed.

Discuss in brief the merits and demerits of equity and debt financing or What are two main sources of raising fund for a corporate enterprise

EQUITY FINANCIER OR OWNER'S FUNDS :-
Equity means the ownership to the resources of the business. It is an important source of obtaining funds. The real owners of the business and share holders of the corporation provide funds to the business from their own sources.

Following are the important sources of equity funds :
1. Funds provided by the owners.

2. Additional contribution made by the owners.

3. Earned profits reinvested by the business.

4. Contribution by venture capitalists.

5. Issue of stocks to general investing public.

 
ADVANTAGES OF EQUITY FINANCING :-
Following are the merits and demerits of equity fund :

1. Sound Base :-
Any business which is financed by the owners fund possesses a sound position.

2. Personal Interest :-
If fund is provided by the owners then they will work with full devotion. The business will flourish and rate of profit will be high.

3. No Interest :-
Interest charges will not be paid by the business concerns on owners fund.

4. Liquidation Of Business :-
The assets of the business will remain with owners if business is liquidated.

5. Return Of Funds :-
During the course of business owners have no fear for the rate repayment of the capital. The owners use their fund for a long time.

6. No Financial Problems :-
In case of equity financing the business concern has a freedom from the financial worries of borrowing.

7. Stable Position :-
In this case there is no burden of fixed interest charges. So business concern can face the crises of recession.

8. Borrowing Ability :-
A business which is financed by the owners fund will be very stable and it has ability to obtain the borrowed capital.


DISADVANTAGES OF EQUITY FINANCING :-

1.Payment Of Income Tax :-
In case of equity financing a firm pays more income tax as compared to credit financing. There is no deduction of interest cost.

2. Idle Funds :-
Some times funds obtained from owners funds remain UN-utilized which may cause more losses.

3. Inability To Make Payments :-
Increase of crises or slump a firm have sufficient to pay day to day expenditure which are essential to run the business.

4. Costly Source :-
Sometimes it has been also observed that equity financing is costly as compared to the credit financing.


DEBT FINANCING :-
When a firm obtains funds for business through borrowing it is called debt financing or credit financing. Today most of the business concerns are not able to finance the business by their own funds. They enter in to agreement with lenders or banks and obtain capital on interest for investment. This practice of borrowing is called debt financing.


ADVANTAGES OF DEBT FINANCING :-

1. Economies Of Large Scale :-
By borrowing the capital business can be expended on large scale. Due to this various types of economies can be availed by the firm.

2. Low Income Tax :-
When income tax is calculated, interest is deductible expense for income tax. So credit offers tax advantages.

3. Short Term Loans :-
Short term loan can be taken by the business concerns from the banks and other sources to meet the urgent expenses.

4. Earning Of Profit :-
The rate of interest is usually less as compared to the rate of return received from the invested capital. So in this way it earns the profit.

5. Control Of Business :-
The entire control of the business remains in hand of the borrowers. Creditors have no role in the business management.

6. Credit Is Flexible :-
The credit may be obtained when needed and it may be returned when it is no more required. There is flexibility in creditors funds nature.


DISADVANTAGES OF DEBT FINANCING :-
The use of creditors fund has the following disadvantages :

1. Interest Payment :-
Interest is regularly paid by the business whether firm is earning profit of loss.

2. Payment Of Credit :-
The principal amount will be paid at the due date without any regard to the financial condition of the firm.

3. Rate Of Interest In Crises :-
During the depression period rate of interest remains same but the rate of return on capital falls and business suffers a loss.

4. Maturity Of Loans :-
At the time of maturity of loans if sufficient funds are not available to meet the loans, the business can be closed.

Comprehensive note on Musharika and Modaraba

MUSHARIKA :-
The bank and customer join the temporary partnership and carry on the business. The bank and customer contribute the capital according the agreed ratio. Profit is also distributed according the agreed ratio. It is an important mode of Islamic financing. Following are the important features of Musharika.

1. Business Operation :-
All the business is operated by the customer. He is responsible for organizing the business. The bank only evaluates and monitors the business. The customer invests his capital and also uses his skill and knowledge.

2. Case Of Profit :-
In case of profit, bank shares the profit according the agreed ratio.

3. Case Of Loss :-
In case of loss in Musharika financing the bank will share the loss according to the ratio of fund invested in the business. The banks share of fund will be the actual amount financed by it.

4. Hire Purchase :-
Basically Musharika investment was introduced to cover the working capital of the business. Now banks are allowed to invest the money for the fixed capital.

5. Safety Of Capital :-
In Musharika financing bank obtains security from the party for the safety of his capital.

6. Insurance :-
The security which is obtained by the bank, it is also insured. The expenses of insurance are paid by the party.

7. Selection Of Party :-
Before financing the loan bank selects the parties keeping in view their previous reputation and profit record for 2 to 3 years. It is also checked that non of the director has been a defaulter of the bank.Under Musharika system the finance is approved by the bank head office.


MODARABA :-
Islamic economic system in interest less. People do the business on profit and loss sharing. In Modaraba business some persons participate with their money while other with their, efforts and skill. If profit earned it is distributed among the entrepreneur and financier according the agreed ratio.
      In case of loss financier shares the loss according the capital invested in the business.

Note :- If losses occur due to negligence of manager or breach of agreement then he will bear the losses. A modaraba (Manager) is a legal person. Modaraba companies ordinance was issued in 1980.

Registration :-
Modaraba company can be registered under the ordinance and it should fulfill the conditions mentioned in the ordinance. There are two kinds of modaraba company, one is multipurpose and other is specific purpose.


CONDITIONS FOR MODARABA COMPANIES :-
Following are the important conditions for Modaraba companies :

1. According To Islamic Shariah :-
The first and important condition for the Modaraba company is that its business should be operated according the law of shariah. It should be Halal.

2. Permission From Religious Board :-
One religious board is established which gives clearance that business is Halal. There are three members of the board. One is high court judge and two are religious scholars.

3. Prohibition Of Loan :-
Any director or the officer or their relatives can not take the loan from the Modaraba company. Even they can not get the loan against the security of the company.

4. Mobilization Of Resource :-
Modarba company generate its resources by selling its shares or Musharika certificates. Some Modaraba have the "Income Note" which are another mode of finance.

5. Modaraba Companies In Pakistan :-
There are large number of Modaraba and leasing companies which are working in Pakistan. But the turn.

What is the difference between musharika and modaraba

MODARABA :-
Modaraba is a business in which one person participates with his money and another person with his knowledge and skill. If there is a profit in business, it will be distributed according the agreed ratio on other hand if there is a loss it will become by the financier.

The person who participate in the business with skill is called Modaraba.


FEATURES OF MODARABA :-

1. It is an agreement, in which one party provides managerial skill and other party provides capital funds to carry on the business.

2. Profit is shared according the agreed ratio.

3. It may be "Multiple Purpose"  for special purpose.

4. This business must be governed by the "Modaraba companies Modaraba rules, 1981.

5. According to the modaraba rules at least 10% shares are compulsory for the party who provides managerial skill.

6. A company which is registered as a modaraba company can float a modaraba.

7. For the floating of modaraba. Company must obtain the permission from the registrar and controller.

8. A clearance certificate is also obtained from the Religious board that business is not against the Islamic Laws.

9. Each modaraba company has to appoint the charted accountant, as auditor who will certify the accounts and objectives of modaraba.


MUSHARIKA :-
It means an arrangement of business, in which all the parties contribute the funds. In this business profit is shared in pre agreed proportion by the parties according to their ratio of capital contributed.
       Banks have been permitted for investment on the basis of sharing in the profit and loss. So musharika is a temporary agreement between bank and a party for providing working capital with the conditions that the profit will be shared at the agreed ratio but loss will be shared in strict proportion of the actual fund invested. All the limited companies are eligible to participate in musharika. The entire management of the musharika business shall remain in the hands of the borrowing party. The bank will evaluate the performance of the business only.


FEATURES OF THE MUSHARIKA :-

1. Relationship :-
In case of Musharika the relationship between banks and other party is that of debtor and creditor according the ordinance 1980.

2. Profit And Loss Determination :-
In Musharika business profit is determined after taking in to consideration the various other factors besides the capital like political and economic conditions. Bank can not claim the profit on equal footing.

3. Bank Investment :-
In case of Musharika bank invests the capital. It does not lend the money to the other party.

4. Working Capital :-
In this case investment shall be used only for the financing requirements of working capital.

5. Security :-
To ensure safety of the capital the bank shall in its own right may obtain adequate security from the party. The securities shall be kept fully insured at the party cost.

6. Power Of Sanction :-
In case of first time the power for approving working capital finance under Musharika system shall rest with the head office only.

7. Case Of Loss :-
In case of loss bank also shares with other partner in proportion to their respective share in capital of the venture.

8. Payment Of Profit :-
An estimate of anticipated profit or projected rate of profit is provided by the other party to the bank when it enters into Musharika. It pays the share of profit to the bank made during a quarter in agreed proportion.

9. Right Of Bank :-
If customer fails to provide the accounts to the bank than bank has a right to debit the customer, his share of profit according the anticipated rate of profit.

Write a note on 1. Stock Exchange 2. IDBP 3. PICIC 4. NIT 5. ICP 6. EPF 7. NDFC 8. BEL 9. Insurance companies 10. Combined companies 11. HBFS 12. SBFC

In Pakistan capital market mainly consists upon the following institution :

1. STOCK EXCHANGE :-
It is a market for existing securities which are issued by the public authorities. Stock exchange provides a place to the buyers and sellers of the shares and securities. Stock exchange indicates about the good or bad health of the economy. If the share prices are rising it means country is running on the path of development and prosperity. If the share prices are falling, it is sign of downfall of the economy. At present there are two stock exchanges in Pakistan. The Karachi stock exchange was registered in 1949 and Lahore stock exchange in 1971.

2. PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION (PICIC) :-
The Pak industrial credit and investment corporation was established in 1957 with the help of Govt. of Pakistan and world bank. The private domestic investors hold 65% shares and the remain 35% has been taken by foreign investors from Japan, U.K, West Germany and France. A board consists upon the 20 members. Five members are foreign share holders. The Pakistan industrial credit and investment corporation provides the financial assistance to the new industries. Before advancing loan it examines the profitability and its importance to the economy. The objective of the Picic is to support the private industrial sector, in form of local and foreign currencies. It also provides technical skill to the industrialists. Corporation also arranges direct loans from abroad.

3. NATIONAL DEVELOPMENT FINANCE CORPORATION (NDFC) :-
Its main objective is to promote industrial expansion and economic growth in the country. It provides technical and financial assistance to the new and other projects. Railway, Airlines, Shipping, Ports, Steel Mills and Textile is financed by the NDFC.
Any one firm or individual can purchase the NDFC certificates. It provides large term and small term loans. NDFC offers higher rate schemes in the country with the maximum safety and security. NDFCs financial resources comprise of capital and reserves deposits in local and foreign currencies. World bank, Asian development bank and Islamic development bank also provide finance to this institution. The board of directors compromises of six directors including chairman, all are appointed by the Federal Government.

4. NATIONAL INVESTMENT TRUST (NIT) :-
The NIT was set up in 1963.. It is a joint stock company with paid up capital of 1.2 million. The NIT was converted into interest free organization in 1979. It was established to mobilize the savings to meet the growing needs in the country. It announces the rate of profit on the unit after every quarter. Now its branches are availabale in the big cities of the country. The national bank of Pakistan acts as a trustee of NIT. It also undertakes sales and purchase of units along with other commercial banks. Zakat is charged at the rate of 2.5% on the purchasing value of the NIT units.

5. INDUSTRIAL DEVELOPMENT BANK OF PAKISTAN (IDBP) :-
It is another important source which supply the funds for industrial development. It provides medium term and long term credit facilities. The loan are granted for the establishment of new industrial units and for the replacement needs of old units. The major objective of this bank is the spread the benefits of industrialization in all the classes of the people. It issues the loans on behalf of the Govt. and provides finance in the form of equity. It also encourages the establishment of industries in the less developed areas of the country. It pays due regard to the export oriented industries and those industries which are based on domestic raw materials.

6. INVESTMENT CORPORATION OF PAKISTAN (ICP) :-
It was set up in 1966. Its major objective was to develop the capital market in the country. It has to provided the sound base for investment in Pakistan. The authorized capital of the ICP is 200 million Rs. It has opened the branches in important cities to increase the share holders in the country. This corporation has also started the scheme of profit and loss sharing in 1980. The ICP mutual funds are operated on interest free return. It mobilizes the savings of public inside and outside the country.The fund amounting to Rs. 280 million has been fully subscribed. One board of directors supervises it which has eleven members including chairman. These are appointed by the federal Government.

7. EQUITY PARTICIPATION FUND (EPF) :-
It was established in 1970. Its major objective was to improve the growth of small and medium size of the private sector. It had to give priority to the less developed areas of the East and West Pakistan. After the Dacaa fall in 1973 it was reorganized. The authorized capital of the Fund is Rs. 200 million, which is contributed by the federal and provincial Govt. State bank and institutional investors. Any how its main objective is to provide equity support to the less developed areas to improve their economic condition.

8. BANKERS EQUITY LIMITED :-
It has started functioning in 1980. Its object is to improve the private sector investment and capital market. It also works on the basis of interest free loans upto 1984 it approved financial aid for 25 projects.

9. INSURANCE COMPANIES :-
In Pakistan there are three insurance companies which are playing very effective role for the capital market. State life insurance corporation was set up in 1972 and its position is the strongest then the other while Pakistan insurance corporation and national insurance corporation services also can not be ignored in this regard.

10. COMBINED COMPANIES :-
Pak Saudia company, Pak Kuwait and Pak Japan companies are also playing important role to improve the industrial and agricultural sector in the country. These are providing finance to the different sectors and improving the capital market in the country.

11. HOUSE BUILDING FINANCE CORPORATION (HBFC) :-
This institution was established in 1952 to advance the loans for the purchase of land and construction of houses. In December, 1978 the interest was eliminate from the operation of house building finance corporation. There is a board of eight directors which manages the affairs of the corporation. The house builder can get finance from the corporation once in life upto Rs. 1 lakh. Maximum repayment period is 15 years. No doubt this corporation is very useful in creating the new assets in the country. Besides the share capital of Rs. 12.5 million it borrows from state bank, debentures and Govt.

12. SMALL BUSINESS FINANCE CORPORATION (SBFC) :-
It was set up 1972. Its main aim is to provide financial aid to the small businessman, to increase the rate of production and employment in the country. Those people who have some technical know how but they are financially poor, they can get the finance from this corporation. Its head office is at Islamabad. Cottage and small scale industry is financed by this corporation. The corporation has also Islamized its corporation in 1980 by eliminating the interest.

Distinguish between money market and capital market and what are their problems in Pakistan and suggest measures

MONEY MARKET :-
In a sense we can say that money market is that market which provides loans for the short term. It mainly centers round the activities of the discount houses, commercial banks and the central bank of the country. In Pakistan there are many financial institution, like state bank, commercial banks, cooperative banks and saving banks which provide the short term loans. So money market in Pakistan mainly consists upon these institutions.

Capital Market :-
Capital market refers to a market where financial institutions mobilize the savings of the people and advance for long term to increase the new capital in the country. The financial institutions invest the funds in those sectors where the rate of profit is high and secured. The money market and capital market both are controlled by the central bank of the country.
In Pakistan capital market consists upon the following institutions :
1. The stock exchange.
2. NIT.
3. ICP
4. PICIC.
5. Insurance Companies.
6. NDFC.
7. Equity participation fund.


MAIN PROBLEMS OF MONEY MARKET AND CAPITAL MARKET IN PAKISTAN :-
No doubt with the passage of time are financial institution are developing. Our banking and non-banking institutions are mobilizing the savings of the people in urban and rural areas. These are also providing loans to trade inside and outside the country. Credit requirements of trade and industry are adequately met by these institutions. The state bank is also controlling these institutions very well. Inspite of all these achievements and efforts, there are many problems of capital and money market. Now we discuss them in brief.

1. Lack Of Corporation :-
There is a lack of coordination between the various financial institutions. They adopt different policies and due to this lending and borrowing becomes difficult. There is overlapping and delays in creating the needs of industrial and trade sector.

2. Bureaucratic Control :-
The economic policies are framed by the bureaucrats instead of technocrats, so they create many problems. Many financial institutions are controlled by the bureaucrats and they have no technical skill, so they lacks decision making.

3. Migration Of Skilled Persons :-
The professional and skilled persons in the financial institutions are leaving the country and getting employment in Middle East for higher wages. The large scale migration of skilled persons has created gap of talented persons in the financial institutions.

4. Lack Of Discipline :-
In the financial institutions unions are playing very effective role. So due to unionism there is in efficiency and indiscipline in the financial institutions.

5. Wasteful Expenditure :-
There is a wasteful expenditure almost in all the financial institutions and due to this rate of out put is low. A lot of money is wasted on advertisement and decoration.

6. Rural Areas Ignored :-
The branches of the financial institutions are not opened in the rural areas to collect the savings of the villages. So some new types of savings instruments should be introduced to attract the farmers.

7. Carelessness In Advancing Loans :-
In advancing loans financial institutions compete with each other to show better performance. Some times they lend the money to those people who can not repay. So before advancing loans they must be careful in checking the character and financed condition of the borrower. Before advancing they must be satisfied about the projects for which they are lending.

8. Political Pressure :-
Political leaders in Pakistan are also misusing the credit. Sometimes the financial institutions advance the loans on political grounds. So this practice is not suitable for the money market.
In Pakistan number of political leaders have been exempted from that loan which was advanced to them by the commercial banks, so these steps are not favourable for the nation and for the financial institutions.

9. Repayment Problem :-
The complaints about of default in loan re-payments both by the public and private sector is increasing day by day. The Govt. should take effective steps for the recovery of loan.

10. Poor Quality Of Man Power :-
Poor quality of manpower is employed in the financial institutions which causes low production. There should be an arrangement of training and higher studies. The talented people should be awarded.

11. Corruption :-
All the financial institutions bribery and Mal-practices are common. Govt. should make strict rules to eradicate corruption.

12. Public Is Not Bank Minded :-
In Pakistan literacy rate is very low and people are not bank minded, due to this rate of lending and borrowing is very low in the country.

13. Lack Of Information :-
People know nothing about the financial institution. Financial institutions should publish the publications about their performance, they may also use the press and media, for this purpose.

Due the above reasons money market and capital market is not well organized in Pakistan.

Write a note on agricultural development bank of Pakistan

AGRICULTURAL DEVELOPMENT BANK OF PAKISTAN
It was established in 1961. Its authorized capital is Rs. 4000 million and paid up capital is Rs. 3214 million on 30th June 2000. Its head office is in Islamabad.

OBJECTIVES OF ADBP :-
1. To supply the credit facility to the agriculture sector in the country.

2. To modernize the agriculture and cottage industry.

3. To provide the financial and technological service at the door step of the farmer.

4. To improve the condition of small farmer.

Branches :-
There are 346 branches and 49 regional offices in the country.

Loans And Schemes :-
The ADBP has introduced various types of schemes to attract the farmers. In 1979 it introduced supervised credit scheme. The credit needs of the farmers were assessed and the loan was provided to them in the village in the shape of technology and inputs.


TYPES OF LOANS :-

1. Long Term Loan :-
It is providing long term loan to the framers for the purchase of tractors, tube-well, machinery and construction of warehouses.

2. Medium Term Loan :-
These loans are provided for the purchase of agricultural machinery, leveling of land and setting up of agro based industries.

3. Short Term Loans :-
These loans are provided for the processing, marketing and other agro based industries.

4. Rural Credit Programme :-
It was set up by the ADBP in 1987. Its main objective to improve the economic condition of the small farmer and tenant. Under this scheme maximum loan limit is Rs. 50,000.

5. Small Scale Enterprises :-
The ADBP started this programme in 1992. This scheme was also introduced for the small farmers. The bank distributed Rs. 69 million up to June 2000.

6. One Window Operation :-
The ADBP provides the facility of loan up to Rs. 50,000 to a farmer for the purchase of imputs, through this scheme.

7. Loans To Small Farmers :-
This loan is provided to the small farmers holding up to 25 acre land. Its objective is that poor farmer who can not use the latest inputs, he must be encouraged.

8. Women Lending Programme :-
To improve the condition of rural women ADBP has started this programme in its 30 branches. This loan is provided for farming and non farming activities. This loan is advanced for Poultry, fishing and forestry also.

9. Farm Mechanization :-
To promote farm mechanization ADBP has proffered to provide loan for the purchase of tractors. It provided credit of Rs. 5744 million during the year of 1999-2000.

10. Use Of Foreign Aid :-
The ADBP obtained the foreign aid from various international agencies and has utilized for the agricultural development.

11. Recovery Position :-
The ADBP has played very effective role to boost up the agriculture sector but its recovery condition is not satisfactory. Our farmer borrows from the bank and does not use it properly, so loan becomes a problem for him.    

Discuss the role of industrial development bank in the development of our economy

INDUSTRIAL DEVELOPMENT BANK (IDBP) :-
The IDBP was set up in 1961. Its paid up capital before 1974 was Rs. 50 million. Its 51% was held by the Federal government and 49% by the Provincial governments commercial banks and private sector. After nationalization the private sector share was transferred to Federal government. It is an important source which supplies the funds for industrial development.


FEATURES AND FUNCTIONS OF INDUSTRIAL DEVELOPMENT BANK :-

1. Its paid up capital is Rs. 157 million. It is the main source of its funds.

2. It provides medium term and long term credit facilities.

3. It provides loans for the establishment of new industrial units.

4. It also provides loan for the replacement needs of the old units.

5. It acts as a merchants banking.

6. It undertakes the commercial banking.

7. It provides consultancy facility to its clients.

8. It provides loan in the form of equity.

9. It encourages the establishment of industries in the less developed areas of the country.

10. It pays due regard to the export oriented industries which are based on domestic raw materials.

11. It is working as an credit agency of the world bank Asian development bank for small scale industry.

Its main objectives is to spread the benefits of industrialization in all  the classes of the people. But the financial condition of the bank is not satisfactory. People borrowed the money from the IDBP adversely. The general investment climate is not favourable in the country. The government has tried its best to recover the loans but still a big amount is recoverable. The present government is paying proper attention to improve its efficiency and now it has focused on commercial banking.
NIT was merged in National bank in 2001, because it was suffering a loss.

Write a note on national bank of Pakistan or Discuss the role of national bank of Pakistan in the development

NATIONAL BANK OF PAKISTAN :-
In 1949, India refused to purchase our jute government of Pakistan decided to solve the problems of East Pakistan farmers. In November 1949, the NBP was established to purchase the jute. The NBP performed this job very efficiently up to June 1950. Later on it started the commercial banking.

Capital :-
Now this authorized capital in Rs. 2.5 billion. While its issued and paid up capital is Rs. 1.46 billion. The Govt. has also offered 49% on NBP shares in the stock exchange for sale.

Deposits :-
The NBP is the most popular bank in the country. Its total deposits were more than Rs. 310 billion at the end of the year 2000.

Advances :-
The national bank made advances Rs. 145 billion in the form of long run and short run period up to December 2000. It has written off bad debts of Rs. 2.6 billion in the year 2000.

Profits :-
Its profit is also increasing every year during the year 2000 it had earned more than one billion rupees. It is the most profitable institution.

Branches :-
Its branches inside and outside the country are more than 1420.

Trustee Of The Govt. :-
The NBP acts as a trustee of the government and Semi government financial institutions. It was also the trustee of the NIT. In 2001 NIT was merged in the National Bank and all the deposits and liabilities were transferred to him.

Agent Of State Bank Of Pakistan :-
Where the SBP branches are not available NBP performs the duty of SBP agent.

Increase In Investment :-
The NBP takes keen interest in doing the investment. It has improved its managements. Its total investment in Federal and Provincial government securities increased up to Rs. 115 billion at the end of year 2000. The total investment in various instruments of debt were Rs. 2.6 billion.

Financing To Trade :-
The NBP has played very important role in financing the domestic and international trade. It has provided finance more than Rs.47.76 billion to the traders.

Use Of New Technology :-
It is using the latest technology like E-Commerce and Electronic Banking in its branches. The use of technology has improved its quality of services.
The NBP is playing very effective role in the development of Pakistan. It is playing proper attention to the human resources development.

Why the Govt. of Pakistan has decided to privatize the commercial banks or Discuss the advantages of regularization and denationalization of commercial banks

Govt. Of Pakistan has decided to privatize the commercial banks on the following grounds :

1.    Self Reliance :-
It is the main objective of the economic policy of the Govt. That it wants to rely on the internal resources instead of foreign aid. To meet the financial requirements Govt. Has collected the finance by selling the various industrial units and shares of commercial bank. So dependence on foreign aid has been curtailed due to privatization.

2.    Sense Of Ownership :-
After privatization the sense of ownership and confidence among the people has been developed.
For example Allied banks shares are purchased mostly by the employees of the bank. Now they are the partners of the banks, so they have shown the positive attitude and profit amount of the ABL has risen to 2.68% with in one year.

3.    Careful Lending :-
A private bank manager proves himself very careful while lending the amount because he knows that in case of any default will be held responsible. In case of loan recovery he uses his personal efforts and chances of fraud or loss reduces.

4.    Better Services :-
After privatization of commercial banks customers will find better services of borrowing and lending from the banks, because private sector provides better incentives to their employees who perform their duties more honestly and efficiently.

5.    Increase In Profit :-
The profit seeking behaviour of private sector managers will increase the rate of profit for example Allied bank of Pakistan profit increases up to 268% with in one year after privatization.

6.    Increase In Industrial Financing :-
There will be also an increase in the investment rate after privatization. Example Allied bank of Pakistan in a one year after privatization has increased the industrial financing up to56%.

7.    Increase In The Inflow Of Capital :-
Due to better policies of the private commercial banks the inflow of foreign capital will increase. Example there is 59% increase in the inflow of capital from other countries. There is 85% increase in the foreign currency deposits, with in one year after privatization.

8.    Increase In Deposits :-
People have also shown more confidence on a private banks. Employees have also shown greater efficiency and have improved the currency deposits. Example after privatization of Allied bank there is 46% increase in the deposits in a one year. Number of accounts holder has increased to 13% with in one year.

9.    Increase In Loans :-
 Aggregate lending will also increase due to privatization. Example with in one year after privatization if Allied bank lending  increased upto 31%.

10.    Healthy Competition :-
Policy of privatization will promote the healthy competition among the various commercial banks. They will compete, in deposits, loans, interest and in services. So this healthy competition will improve their efficiency.

11.    No Political Pressure :-
While issuing the loans private banks will not accept the political pressure and loan will be issued on merit. The chance of loans right off will be also reduced.

12.    Quick Decisions :-
Some times due to delay in decisions financial institutions suffer a loss. Example now in case of recovery
Quick and bold steps will be taken by the executives of the banks and such losses will not occur.

NOTE :-
No doubt there are various advantages of privatization of commercial banks but it must not lead to monopolies and concentration of wealth and no room should be left to suspect unfair deals.

What were the causes of nationalization of banks in Pakistan

The Govt. of Pakistan nationalized all the banks, on 1st Jan. 1974. The weaker banks were merged with the strong banks.

Following were the main causes of nationalization :

1. Fair Distribution Of Credit :-
The banks were nationalized to provide the fair distribution of credit. All the classes of the public will enjoy the credit facility.

2. End Of Monopoly Over Banks :-
There was a complete hold of few capitalists over the public savings. Now after nationalization their monopoly finished.

3. Fall In The Rate Of Hoarding And Smuggling :-
Before the nationalization few big capitalists were missing the savings of the whole nation. They used this credit for smuggling and hoarding and they looted the public from both hands.

4. Financing To Agriculture :-
Before nationalization this sector was ignored but now after nationalization proper importance is given to this sector. Now output of this section is increasing day by day.

5. Credit For Small Industries :-
It was also stated that credit needs of the small businessmen can be me if the banks are in the public sector.

6. Service Motive :-
Before nationalization, there was only profit motive for the bankers and service motive was ignored.

7. Mobilization Of Resources :-
It was also claimed that nationalization of banks will encourage and stimulate mobilization of savings in the country.

8. Social Justice :-
It was also claimed that nationalization of banks will provide social justice in the country by proper  allocation of credit to the different classes of the society.

9. Improvement In Efficiency :-
When the credit facilities will be provided to the underdeveloped  areas the marginal rate of capital return can increase. But it was possible only if the banks were nationalized.

10. Price Stability :-
It was also claimed that state bank can minimize the fluctuation in the economic activity with the help of nationalized commercial banks. So price stability can be provided by not issuing credit for the hoarding and smuggling.

11. Increase In Production :-
Nationalization to take loans for different development projects. In this way total out put of the country can increase.

12. Abolition Of Malpractices :-
The banks were nationalized to stop the malpractices of the bank owners like heavy advances to the directors and their friends and misuse of foreign exchange.

13. Security To The Depositor :-
The banks were also nationalized on this ground that public will feel more security in depositing the money in nationalized banks.

14. Check On wasteful Competition :-
It was also claimed that the commercial banks compete with each other and spend a huge amount of money on advertisement, costly furniture and buildings. If these are nationalized then this loss can be sloped.

15. Uniform Policy :-
It was argued that all the banks will adopt uniform policy about credit expansion after nationalization. While before nationalization it was no possible.

16. Islamisation Of Banking :-
If the commercial banks would be in the private sectors then Islamic Banking System introduction would be very difficult.

17. Use Of Credit :-
Before nationalization all the profit of the bank industry was in few hands but after nationalization it is used for the best interest of whole nation. So Govt. nationalized them in 1974.

Discuss the role of commercial banks in economic development of Pakistan

ROLE OF THE COMMERCIAL BANKS IN THE DEVELOPMENT OF PAKISTAN :-
The banking system in Pakistan is very well organized and commercial banks are playing very important role in the economic development of the country. All the banks are operating their business under the supervision of the State Bank of Pakistan. We can discuss the role of commercial banks under the following heads :

1. Mobilization Of Savings :-
It is a very big task for the banks. Savings of the people in urban and rural are mobilized by the commercial banks and these are used for investment.

2. Increase In Investment :-
The banks and financial institutions advances loans for various development projects to public and private sector. By increasing the rate of investment it has increased the rate of economic growth in the country.

3. Helpful For The Govt. :-
Government of Pakistan is introducing the various types of monetary and fiscal measures to stable the economy, time to time. The commercial banks under the guidance of the SBP help to achieve the objectives of the monetary policy.

4. PLS Scheme :-
The bank have also introduced the profit and loss sharing accounts. At the end of the financial year they announce the profit. The depositors receive profit instead of interest.

5. Agency Services :-
The banks perform various types of services for the customers. They keep the valuable goods in their safe custody. They collect the utility bills of Gas and phone and electricity etc. They receive and pay the deposits.

6. Promote Exports :-
The commercial banks are providing finance to promote the exports. In this regard letters of credit are issued. For the guidance of exporters export promotion cell is established by the banks.

7. Capital Formation :-
It is the basic requirement for the economic development. The banks are very helpful in increasing the real assets of the nation. The banks are very helpful in financing the new development in the country.

8. Qarze Hasna :-
This scheme is introduced by the commercial banks to provide  loan to the poor students. This facility is provided to Pakistani students in side and out side the country.

9. Trade Promotion :-
The banks are providing finance for domestic and international trade. This facility has increased the volume of trade and encouraged the exports.

10. Loans For Consumable Items :-
Now banks are also providing loans for consumable items like car, house etc. The people are paying the debt in small investments and enjoying all the facilities.

11. Entry Of New Banks :-
Now in the banking sector Government has allowed the private banks to play their role in mobilizing the savings and advancing the loans. Due to competition their services for the customers are improving.

12. Demand Oriented Banking :-
Now the banks will have to play their role according to the demand of the market. A bank may earn a high reward if he meets the demand of the customers and solves their problems. Now in Pakistan commercial banks have accepted this challenge and they are trying their best to meet the demand of the customers.

What are the different kinds or types of banks and what is their importance in development of the country

Types or Kinds of Banks

There are various kinds of banks in present age. Every has different features. Following are the main classes of banks :

1. Central Bank :-

All the banking structure of any country revolves around it. It has the monopoly of note issue. It is a financial advisor of the Govt. It is a bankers bank. Monetary and credit system is also controlled by the central bank. It is very helpful in the utilization of the resources of the country for the productive purposes.

2. Commercial Banks :-

These are profit seeking in situations. These accept the deposits and provide, short term,  medium term and long term loans. These also perform the agency and utility services demanded by the people.

3. Exchange Banks :-

These banks deal with the foreign exchange. These banks finance foreign trade. These banks are also performing a general banking functions with the foreign exchange business. In developing countries commercial banks have established the exchange department in their main branches.

4. Industrial banks :-

These banks provide loans medium term and long term credit only to the industrial sector. Commercial banks only provide loan for short term and only for the working capital. While industrial banks provide loan for the fixed capital. In the western countries there are a large number of industrial banks.

5. Agricultural Banks :-

The banks which provide loan to the agricultural sector are called agricultural banks. These banks provide credit facilities to the rural sector of the economy.

6. Investment Banks :-

The main functions of these banks are the merchandising of shares bonds and securities.

7. Saving Banks :-

In real sense saving banks are not banks. They only provide saving facilities and encourage the savers. Saving banks usually invest their funds in Govt. securities.

IMPORTANCE OF THE BANKS :-

Bankers play very important role in the economic life of the nation. The health of the economy is closely related to the soundness of its banking system. Although banks create no new wealth but their borrowing, lending and related activities facilitate the process of the production, distribution, exchange and consumption of wealth. In this way they become very effective partners in the process of economic development. Today modern banks are very useful for the utilization of the resources of the country. The banks are mobilizing the savings of the people investment purposes. The savings are encouraged and saving rate increases. If there would be no banks then a great portion of a capital of the country would remain idle. In the less developing countries rate of saving is very low and due to this rate of investment and rate of economic growth remains very low.

A bank as a matter of fact is just like a heart in the economic structure and the capital provided by it is like blood in it. As long as blood is in circulation the organs will remain sound and healthy. If the blood is not supplied to any organ then the part would become useless. So if the finance is not provided to agricultural sector or industrial sector it will be destroyed. Loan facility provided by banks works as an incentive to the producer to increase the production.Manufacturers and merchants expand their business knowing that they can rely upon banks for financial help. Bank provide transfer of payment facility which is cheaper, quicker and safe. Many difficulties in the international payments have been over come and volume of transactions have been increased. Cheques, drafts, bill of exchange and letter of credit are very important instruments of the banks. The banks collect these instruments drawn on banks in other cities or countries and proceeds according to the accounts of the customers concerned. This facility is very helpful for the development of trade and commerce. Moreover it saves a lot of labour time and money of the traders and other people. Banks also finance and expand international commercial transactions. In developing countries commercial banks are playing very effective role for the development of industrial and agriculture sector.

Discuss the main instruments of monetary policy or How central bank controls the credit or Write a note on 1. open market operation 2. bank rate policy

The central bank is the controller of credit and it adopts two types of techniques, qualitative and quantitative.

QUANTITATIVE CONTROLS :-
These methods are used to expand or contract the total quantity of credit. These are following :

OPEN MARKET OPERATION :-
Buying and selling of Govt. bonds and securities by the central bank with a view to influence the money supply is called open market operation.

1. In Case Of Inflation :-
When the central bank finds that inflation wind is blowing which is harmful for the economy, it will try to control the credit by selling the bonds and securities in the open market. These bonds and securities will be purchased by the commercial banks or by the public. The payment will be made by the public and by the commercial banks. Cash balances of the commercial banks will be reduced and they will reduce the rate of lending. The volume of credit will be contracted. So money supply will decrease and it will reduce the rate of inflation.

2. In Case Of Deflation :-
In case of deflation central bank tries to increase the volume of credit. The central bank purchases the treasury bills and bonds. The money will move from central bank to commercial banks and to the public, i will increase the purchasing power or demand. The price level will rise and deflation will remove. The commercial banks will also lower the rate of interest will lend more money due to increase in cash balances.


ADVANTAGES OF OPEN MARKET OPERATION :-

1. It provides the initiative to the central bank to influence the economic activity for promoting the output and to stable the price level.

2. These instruments provide the elasticity in the economic activity.

3. The adverse fiscal policy effects can be removed.

4. This instrument is very useful for influencing the price and yield of securities.

5. This operation is also very useful for influencing the price and yield of securities.


LIMITATIONS OF OPEN MARKET OPERATION :-

1. Limited Scope :-
Open market operation methods is only useful in few countries like U.K, USA and Canada. While in other countries it is not useful because money market is not well organized.

2. Excess Reserves :-
If the commercial banks possess excess reserves then this policy is not useful.

3. Deficit Financing :-
A large scale deficit financing may offset the loss of cash  reserves by expanding the deposits of banks.

4. Wrong Assumption :-
It has been assumed that an increase in cash reserves of banks will lead to credit expansion and decrease in them to credit contraction, but it is not necessary that it should happen. In some developing countries this policy is hardly used for credit control.


BANK RATE POLICY OR DISCOUNT RATE POLICY :-
Bank rate is the rate of interest which is charged by the central bank in providing the re-discount facility to other banks. The first class bills of exchange and Govt. securities are used for the re-discount.

Importance :-
Keep in mind bank rate is different than the market rate. If money market is well organized and economic structure is elastic a rise in discount rate followed by the rise in market rate. Discount rate is kept slightly above the market rate.

EFFECTS OF BANK RATE POLICY :-

1. Rise In Bank Rate :-
When the central bank increase its discount rate. Commercial banks also increase the rate of interest. Margin of profit falls and it discourages the businessman to borrow the money. So the rate of investment, employment and output falls which leads to depression.

2. Fall In Bank Rate :-
When the bank rate is lower the commercial banks also, decrease the rate of interest, on credit. As the rate of interest falls, margin of profit will increase. It will encourage the investors to borrow and increase the rate of investment. So the volume of credit will expand. So there will be a favourable, effect on the economy.

3. Change In Discount Rate :-
The change in the discount rate affect the future market rates, such as the rates charged by the discount houses.

LIMITATIONS :-

1.    Higher Marginal Efficiency Of Capital :-
If the marginal efficiency of capital is higher than the rate of interest then the volume of credit will expand.

2.    Rise In Prices :-
As the rate of interest increases the producer can increase the price instead curtailing the investment or borrowing.

3.    Deficit Financing :-
In case of deficit financing policy may not be applicable.

4.    Rise In Bank Rate May Rise Deposit :-
Sometimes the rise in bank rate may increase the rate of profit interest on deposits. In this way lending power of banks will rise.

5.    Lower Profit Expectations :-
During depression and falling of prices, the bank rate policy weapon is useless. During great depression of 1980 this policy failed


CHANGES IN RESERVE RATIO :-
The amount of money which the banks are legally required to keep with central bank is called “Cash Reserve Ratio” when the ratio increases, the rate of credit contracts. When this rain falls the rate of credit expands.


CHANGE IN LIQUIDITY RATIO :-
It means the assets which banks are legally required to hold in the form of
1.    Cash in hand.
2.    Balances with central bank approved securities.

Credit Ceiling :-
The central bank fixes the upper limit for the credit extension for the commercial banks.


SELECTIVE OR QUALITATIVE CREDIT CONTROL :-
There are many weapons which are used to regulate the total supply of money and credit.
These are following :

1.    Moral Persuasion :-
The central bank can ask the commercial banks in friendly manner to follow the credit policy framed by the central bank. This method can be effective in the short period only. In this connections appeals and warnings can be issued to the commercial banks.

2.    Direct Action :-
If the commercial banks are not ready to follow the instructions of the central bank then central bank can take direct action. It can refuse to re-discount the bills of exchange, or can impose penalty.

3.    Rationing Of Credit :-
This method is used in financial crises. The credit is rationed by fixing the amount which each bank can receive by re-discounting bills of exchange.

4.    Margin Requirements On Security Plans :-
The minimum margin requirements on securities may be relaxed to encourage the borrowing and can be imposed to discourage the borrowing.

5.    Control On Consumer Credit :-
The grant of credit for consumption goods or non-essential items may be banned.

6.    Publicity :-
The central bank may convince the borrowers and the lenders through publications to adopt a specific credit policy keeping in view the nation interest.

Write an essay or discuss the functions of state bank of Pakistan

STATE BANK :-

It was established on 1st of July1948. The state bank of Pakistan Act 1956, throws light on its functions and importance in the following words,
"To regulate the monetary and credit system of Pakistan to faster the growth in the best national interest with a view to securing stability and full utilization of the country's productive resources.

The original share capital of the bank is three crore rupees. Its 51% of the total share capital was contributed by the government and remaining 49% by the private sector. It is not guided by profit motive in its operations. Its major objective is stability of the economy.
One board of directors supervises its affairs Governor is the Chief Executive of the bank, who controls the affairs of the bank on behalf of the central board. It has 14 departments.

FUNCTIONS OF STATE BANK OF PAKISTAN :-

1. Right Of Note Issue :-

The state bank of Pakistan is the only bank which has the right to issue the note above then one rupee in Pakistan. Proportional reserve system was adopted up to Dec. 1965. Now minimum reserve system of note issue is prevailing. The amount of notes in circulation can be increased according the demand of the public, but it keeps in view the price level in the country.

2. Bankers Bank :-

All the commercial banks in Pakistan having paid up capital 5 or more then 5 million rupees maintain their cash reserve with the state bank of Pakistan. They keep at least 3.5% balance of the total demand. The state bank acts as a custodian of these cash reserves. The state bank settles these debts with the daily clearing cheques. The state bank takes various measures to control the commercial banks.

3. Banker To The Govt. :-

Federal and Provincial Governments cash balance are deposited with the state ban. It controls foreign exchange reserves on behalf of the government. It also floats new loans to the provincial government on behalf of the government. So the state bank of Pakistan acts as a banker to the government.

4. Stable Exchange Rate :-

The state bank of Pakistan is also responsible to maintain the stability in the exchange rate. Our currency value fluctuates in the market because Pakistani rupee is linked with the basket of currencies of trading countries. So the state bank of Pakistan  maintains the official exchange rate.

5. Financial Adviser :-

The SBP is the financial adviser to the government of Pakistan. The state bank provides advice to the government about the balance of payment condition its impact on the economy. It also provides advice to the commercial banks and financial institutions keeping in view the national interest.

6. Acts As Clearing House :-

A clearing house is a place where the representative of all the commercial banks sit together daily to settle their cheques drawn upon each other. The state bank acts as a clearing house for the. SBP helps them in making payments by minimum transactions.

7. Credit Controller :-

The state bank has the power to control the credit by using the credit instruments. In case of inflation it contracts the credit while in case of deflation it expands the volume of credit. It uses the policy of open market operation, bank rate policy and cash reserve percentage according the economic condition of the country. In 2001 the SBP reduced the interest rate from 16% to 13.7%. To encourage the investment in the country this policy has been adopted.

8. Lender Of Last Resort :-

If any time commercial banks are short of cash reserve the SBP saves them from this problem. The bank is the lender of the last resort. The SBP provides cash to the commercial banks by re-discounting their bills. It saves the commercial banks from solvency.

9. Role In The Economic Development :-

The bank is playing very important role in increasing the growth and economic stability in the country. It has promoted various investment activities in the country.

10. Role For Capital Market :-

SBP has played very effective role in improving the capital market. Due to his efforts rate of investment has increased. Foreign investments has also shown the positive indication in the capital market.

11. Growth And Control Of Banks :-

It is the duty of the SBP to promote the growth of banking system on sound footing. The SBP controls the commercial banks to follow the government policies.

12. Assistance To Specialized Institutions :-

The SBP is also extending the finance to the various specialized financial institutions like ADBP, PICIC, ICP, HBFC and IDBP, NDFC had been merged in National Bank of Pakistan in 2001 and SBP has provided assistance to NBP.

13. Export Promotion :-

The commercial banks are providing finance to the exporters at the concessional rates under the export finance scheme provided by the state bank of Pakistan. The SBP also formulates the various policies to increase the exports.

14. Price Stability :-

It is also the duty of the SBP to provide stability in the price level in side the country. To achieve this objective SBP adopts various types of credit measures to remove the inflationary and deflationary pressure.

15. Fixation Of Mark up Rate :-

To promote the development activities and to encourage the investment and savings SBP fixes the suitable interest rate for the savers and investors.

16. Fixation Of Official Exchange Rate :-

The SBP fixes the rupee exchange rate with the other basket of currencies. All the foreign exchange transactions are made at official exchange rate. It controls the visible and invisible payments coming and going out of the country.

17. Credit Fixation To Various Sectors :-

Keeping in view the priority of various sectors like industry, agriculture and transport, SBP gives targets to commercial banks. These targets for various errors has promoted the growth of various sectors.

18. Training :-

The SBP has stated various types of banking  diplomas to improve the skill in the employees of banks. The SBP has also introduced the training schemes to improve the quality of the worker.

19. Publishes Economic Survey :-

The SBP issues the statistics about working and efficiency of the banking sector. After every three months it issues report about the economic condition of the country. At the end of the financial year it publishes the "Economic Survey" which throws light in all the sectors of the economy.

20. Autonomy Of SBP :-

In the past government of Pakistan has misused the financial institutions. There is a need that SBP should work independently and maximum autonomy should be given to check the political and financial abuses. Now SBP has greater authority to regulate the money supply and government borrowing from the SBP.

Different types or kinds of letter of credit

Following are the various kinds of letter of credit

1. Revocable L.C :-
A recoverable L.C can be cancelled or modified without the consent of all the parties.

2. Irrevocable L.C :-
It can not be cancelled or modified without the the consent of all the concerned parties.

3. Confirmed L.C :-
The confirmed letter has the protection of the credit standing of the importers as well as the exporters bank. The exporters bank gives undertaking to honour the drafts.

4. Unconfirmed L.C :-
The intermediately bank forward the L.C to the beneficiary but does not takes any liability.

5. Fixed L.C :-
It is issued for a fixed amount, it is exhausted when the total amount is received.

6. Revolving L.C :-
The amount of this L.C is automatically renewed or revived when the draft is drawn under it is paid.

7. Documentary L.C :-
The drafts drawn under this L.C is accompanied by different documents, relating to the merchandise.

8. Special L.C :-
This L.C is restricted in its operations to a particular intermediately bank written in L.C. This bank acts as advising as well as negotiating bank.

9. Without Resource L.C :-
The L.C under which the drawer of the draft is not liable to holder if the draft is not honoured.

10. Red Clause L.C :-
The L.C authorizes the intermediary to grant an advance to the seller before shipment. The advance may be for packing and handling.

11. Green Clause L.C :-
This is an improvement over the red clause L.C. In addition it also allows the storage in the name of the opening bank.

12. Transferable L.C :-
Under this L.C the beneficiary has the right to give instructions to the intermediary bank to make the L.C available in the whole or in part to second beneficiary.

13. Buy To Back L.C :-
This L.C achieves much the same purpose as a transferable L.C. In this L.C beneficiary is not actual supplier. He produces his own L.C to his bank.

14. Freely Negotiable L.C :-
Under this L.C the beneficiary is allowed to get the documents negotiated through any bank. But negotiating bank may differ from the advising bank.