COMMERCE As LEVEL(FORM FIVE) NOTES – MONEY AND BANKING

MONEY AND BANKING

1. As a medium of exchange, it facilitates achievements and satisfaction of mans wants.
2. It encourages specialization because specialization facilitates exchange and exchange require a medium upon which it should be carried.
3. By use of money one can borrow, lend and save.
4. The used of money avoids the problems (disadvantages of butter trade/system).

3. Later beeds, cowrie shells were used as money.
4. Precious metals e.g. silver, gold, iron copper were used because they had more value, were scarce and therefore had some qualities of good money.
5. Paper money which is now operational in all countries (completely unbacked by Gold)
6. Fiduciary issue, This is money which is completely unbacked by Gold.

7. Credit money (Cheque deposit/Demand deposit Cheques are now used as the medium of exchange. Cheques are not legal tender but are acceptable in settlement of debts.
8. Fiat money.This is money issued on the directive of the government irrespective of the level of economic activity.
9. Managed currencies.Managed currency is that which is used only within a country.

1. Token or coins
2. Money which means near money.

1. ACCEPTABILITY

2. PORTABILITY OR TRANSFERABILITY

3. DIVISIBILITY

4. HOMOGENEITY

5. SCARCITY

6. STABILITY IN VALUE

7. UNCOUNTERFEITABILITY

8. DURABILITY

9. COGNIZABILITY

1. MEDIUM OF EXCHANGE

2. UNIT OF ACCOUNT

3. MEASURE OF VALUE

4. STORE OF WEALTH (VALUE)

5. STANDARD OF DIFFERED PAYMENT.

6. Money can enables specialization to take place i.e through demand.
7. Money solves the problem of double coincidence of wants

1. They accept deposits from the public for custody.
2. They transfer money from one account to another to facilitate transactions on behalf of customers.
3. They lend money, the banks lend at a lower rate of interests.
4. Transferring money from one place to another within the country and also from one city to another by means of cheques, credit transfers, Banks standing orders, Bank drafts, discounting bills of exchange etc.
5. They keep valuable articles and documents in safe custody on behalf of clients (customers) e.g wills, Jewellery, Tittle deeds, academic certificates.
6. They exchange currencies with customers.
7. They issue traveler’s cheques to traders in foreign trade.
8. They facilitate international trade by selling traveler’s cheques, arranging payments and transfer of documents eg Bills of exchange between importers and exporters, letters credit etc.
9. They can act as guarantors to others partly when their customers want to borrow money from them or sale goods and services on credit.

1. There are many poor customers who are scattered and it’s then difficult to mobilize savings.
2. There are few credit worthy customers. lending is also limited by lack of collateral securities by most borrowers.
3. The problem of insecurity which necessitates the need to have armed men to protect the bank staff, premises and money in banks.
4. Most customers are illiterate, others do not even keep their accounts and it becomes difficult to access their credit worthiness.
5. Commercial banks are concentrated in urban areas and hence they compete for business/customers.
6. Inflation, This discourages lending and leads to lose of real value of money.
7. Political instabilities leads to lose of money and properties. Also because of the economic uncertainty, people don’t borrow for investment and finance for funds remain idle in the banks.
8. Lack of communication facilities e.g unreliable telephone and telegraphic equipment.
9. Lack of trained man power development and staff training.
10. Higher interest rate fixed by government which may be too higher and thus discourage borrowers.
11. Foreign commercial banks are at time faced with problem of unfavorable government policies.

1. Physical cash

2. Token coins

3. Legal tender

4. Decimal coinage system

5. Cheques

(b)Drawee.

1. The name and address of the paying bank.
2. The date when the cheque was drown (in the above are 25/06/2000).
3. The Cheque no (in above are No 05477).
4. The name of the payee are sometimes the cheque may not bear the actual name of the payee of bearer.
5. Amounts in words and also in figures.
6. The signature of the drawer.
7. The account no (12345) in above case

1. It eliminates the need of counting and checking the currency.If payment is made by physical cash, it is time consuming.
2. It is a safer means of payment than hard cash since normally the money doesn’t leave the bank e.g in case of a crossed cheque.
3. Since the payment is recorded by the bank, a paid cheque acts as a receipt i.e it can be used as most for payment to show that money was actually received.
4. It is a flexible means of payment. ie depending on how it was written out, one can obtain cash or deposit into his bank A/C or use that very cheque to pay some other person or party.
5. Sending cheque through post office is possible than physical money.

1. OPEN CHEQUES

The crossing are normally traversing at the top left hand corner of the cheque. Some time additional words are inserted between the lines. Crossed cheques are only payable in a person’s account and not in physical cash. The crossing of the cheques forms a safety and precautionary measures warning the bank not to pay across the counter such a crossed cheque.
Once it is presented at the counter, but only to pay the amount through the payee’s accounts or his order to the bank account. Therefore it is a precaution against fraud i.e. in case of falling into wrong hands.

1. General crossing
2. Special crossing

Examples of general crossings

Examples of Special crossings.

AN OPEN CHEQUE (ORDER CHEQUE)

1. Money can be deposited any time.
2. No overdrafts one allowed on this account.
3. Account holders are required to maintain the minimum balance at all time.
4. With draw are allowed only once a week.
5. Account holders are required to deposit not less than a certain amount when opening a saving A/C
6. No cheque books are provided on A/C holder, wishing to withdraw money, he or she has to go to the bank personally
7. A/C holders are issued which a pass book which contain record of their deposits and withdraws.
8. Banks allows interests on deposit held on saving account.

1. A/C holder an deposit any amount anytime in any form ie cash, cheques, drafts, postal order etc
2. There is no minimum required to be maintained. an account holder can with drawer all his deposits.
3. Banks pay no interests on deposits held to their customers
4. Banks after allow over drafts facilities to their customers
5. Cheque books are provided by the banks.
6. Banks use to their clients, bank statement at the end of each month it records all the transaction a correct account holder had with the bank during that month.

1. Where a cheque is incorrectly made. ie where a cheque has an error on it e.g when the amount in figure does not correspond with the amount in words on the cheque.
2. Signature of the drawer on the cheque does not correspond which the specimen signature of the drawer at the Banks.
3. When the cheque is stale.
4. When the payment of cheque has been stopped by the drawer of the cheque.
5. When the cheques presented to bank before the date on it i.e. in case of postdated cheque.
6. When the owner has closed his A/C with the Bank.This its self is criminal offence ie when a person date belatedly issue a cheque.
7. When the cheque aspect to have been altered changed. All alternations should be entitled to the drawer. If a bank is satisfied it will never let on the cheque to the payee.
8. Where the drawer may have forgotten to sign on the cheque in which case went back through the system of the signature to be added.
9. When the drawer is dead or has been bankrupt or insane.

1. Drawee –This is a person who writes out a bill i.e. the creditor, sometime the actual payee of the bill.
2. Drawer –This is a person or party to whom the bill of exchange is addressed in other words that person owing money to the drawer i.e. the debtor.
3. Payee- is that person or party to be paid by a bill.

SPECIMEN EXAMPLE OF A BILL OF EXCHANGE.

3.Any ambiguous wording ie without any omission

4. The date on which it was made out

Comparison between a bill of exchange and a promissory note

1. Both evidences, are the acknowledgment of debt.
2. Both may be discounted and endorsed before maturity.
3. They allow enough time before payment is endorsed.

1. Both of them acknowledge a debt. A person holding one of them does not have to prove before the court of law the circumstances giving a debt.
2. They may be discounted before the maturity date. This enables the seller to get ready cash almost immediately after the sale of goods.
3. They allow enough time for a buyer to dispose 77 the stock he has bought so that by the time the maturity date arrives, he is in position to settle the debt.
4. An accommodation bill helps trader out of the temporally financial difficulties.

1. CASH

2. CHEQUE

3. BANK DRAFT

4. BANK OVER DRAFT

5. POSTAL ORDER

6. MONEY ORDER

7. POSTAGE STAMP

8. REGISTERED POSTS

1. Currency management.This involves printing notes, minting coins and replacing worn out notes.

2. A central bank is a banker to govern, this means that it accepts deposit of government accounts, makes payment on behalf of the government makes temporally advances of loans to government.
3. It controls the volume of money supply as well as credit advances in bank system.
4. It is custodian to valuable financial instrument which are valuable to a country such as gold, Treasury bill and bonds.
5. The central bank is a banker to commercial banks. This involves accepting and keeping commercial bank deposits acting as a lender of last resort, controlling lending activity, training of the commercial bank staff and acting as the leaning house to settle interbank debtness.
6. A central bank is a controller of investment in a country, turn establishment of interest rate to charge commercial banks.
7. Controller of foreign exchange by fixing the exchange rate, controlling of foreign exchange reserve.
8. It manages and keeps foreign currencies.
9. It keeps the funds of international institution or organization operating in a country eg. International monetary funds (IMF) Red Cross etc. i.e. It’s a banker to foreign central banks and international organizations.
10. It has to initiate as accelerate economic grown and development it operates policies aimed at rapid economic growth and development.
11. It also runs schools and collages for training bankers since commerce bank are small and may not be in position to finance training facilities to man power.
12. It has to control the activities of foreign banks whose activities may not be in line with development policies of e.g. profit repatriation.
13. It suppresses and examine the activity of all commercial banks so as to promote sound commercial banking.

1. They experience a lot of government interference and do not act independently e.g bank of Tanzania.
2. Some central banks lack trained more power in the field of banking to effectively and control commercial bank.
3. There is a lot of corruption and frauds in the banking system and central bank its self.
4. The commercial banks do not surrender all their money which deposited in the central banks and so they cannot be monitored by the central banks.
5. Some commercial are subsidiaries of foreign banks. e.g. standard chartered bank in Tanzania and have offer sources of finances in case of unfavorable policies in central bank.
6. Less developed countries have large sub-stance sectors whose operation is not influenced by actions of monitory policy as directed by the central bank.
7. L.D.C. economies have poor record keeps and lack statistics which are needed in the planning monitoring exercises of commercial banks.
8. Commercial banks are urban centres which implies a limited geographical scope/content with economic activities.
9. There is lack of entrepreneurs that the central banks may collaborate with to regulate the investment levels.
10. L.D.C Lack well spelt out term development plan which central bank should follow when formulating policies.

MONETARY POLICIES
These are methods used by the central bank to control money supply and money demand in an economy for economic growth and development.Central bank uses the following tools to control money
supply:

– Open Market Operation(OMO)
-Selective credit control
-Bank rates
-Compulsory deposit by commercial banks.
-Moral suasion
-Legal reserve requirement