ACCOUNT

A bank account is a financial account recording the financial transactions between a bank customer and a bank and the resulting financial position of the customer with the bank Type Of Bank Accounts All banks have their own names for the various accounts which they open for customers. Some accounts are categorized by the function.

1. Fixed Deposit Account: In this account the money is deposit for the fixed period of time by the customer and the bank safely advance it in the loan and earn profit. The rate of interest is varies with the time to time. Fixed amount is deposited for fixed period. Amount of profit can be obtained after each six months. Higher will be the time period, higher will be the rate of profit, and vice versa. 2. Current Account: In this account the customer is authorized to deposit or withdraw money any time in or from the bank. The bank does not pay any interest. This account is also known as running balance account. Minimum amount for opening this account is Rs.500 Bank act as custodian of money Customer can withdraw money through cheque supplied by bank 3. Saving Bank Account: This account enables small savers to save and earn income on it. This account is also opened with the Post Office in Pakistan. The customer is entitled to withdraw the money twice a week. If the amount exceed Rs: 6000/- then the notice in writing given to Bank. Saving account holder is allowed to withdraw. 4. Profit & Loss Sharing Account (PLS): This type of account was introduced in January 1982 after the islamization of banking. The deposit accepted in these accounts is invested in different productive channels remuneration to depositors is made on the basis of profit and loss. No concept of interest is involved. Everybody can open the account by depositing minimum Rs.100. Amount of profit can be obtained after each six months. Instead of having fixed return in the form of interest the deposited money will be shared in profit and loss of the bank. The amount can be withdrawn before maturity after surrendering interest. 5. Home Saving Account: In this type of account, the bank supplies saving box to the depositors, to enable him to drop his small saving into it from time to time. The box is taken to the bank periodically where the amount is taken out from the box and credited to the customer's account. Page 1 of 19

Legal Requirement for Opening an Account To open an account in bank following information is required in the form of Account Opening Form. This form contains: Title of account Address I.D. Card number Telephone No. (Office and Residence) Introductory reference (all above mentioned particulars of introducing him Signatures of the applicant Amount deposited Check book series No. The customer will attach a copy of National Identity Card with the form. Specimen Signature Card. (Specimen of signatures will be obtained from depositor at the time of opening his account. A specially designed card is used for this purpose; the card must be counter signed by an official of the bank not below the rank of an officer)

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KNOW YOUR CUSTOMER

Know you customer refers the procedures which enables bank to know or understand their customers, and their financial dealings better. This helps them manage their risks prudently. According to Prudential Regulation 1, With the view to preserve integrity and safety of the financial system, it is expedient to prevent the possible use of the banking sector for money laundering and terrorist financing. To this end, Customer Due Diligence/Know Your Customer (CDD/KYC) requires special attention and concrete implementation.

Relationship between Customer & Bank 1. Relationship of Debtor and Creditor: When a customer opens an account with a bank and if the account has a credit balance, then the relationship is that of debtor (banker / bank) and creditor (customer) and same become vice versa. 2. Relationship of Pledger and Pledgee When customer pledges (promises) certain assets or security with the bank in order to get a loan. In this case, the customer becomes the Pledger, and the bank becomes the Pledgee. Under this agreement, the assets or security will remain with the bank until a customer repays the loan. 3. Relationship of Licensor and Licensee When the banker gives a sale deposit locker to the customer, in this case banker will become the Licensor, and the customer will become the Licensee. 4. Relationship of Bailer and Bailee When a customer gives a sealed box to the bank for safe keeping, the customer became the bailor, and the bank became the bailee. 5. Relationship of Hypothecator and Hypothecatee In order to get loan, the customer pledges certain property or assets with the banker, then customer became the Hypothecator, and the Banker became the Hypothecatee. 6. Relationship of Trustee and Beneficiary When the customer deposits securities or valuables with the banker for safe custody, banker becomes a trustee and customer becomes the beneficiary for getting profit from their property. 7. Relationship of Agent and Principal When the banker perform functional activities on his behalf like buying and selling securities, payment of bills, premium etc then the banker become an agent and the customer become the Principal. 8. Relationship of Advisor and Client When a customer invests in securities, the banker acts as an advisor and the customer is a Client.

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Importance Of Know Your Customer Following are the five key elements which considered as importance of Know your customer.

1. Customer acceptance: The point at which a new customer is accepted or rejected is the easiest point at which the risk of dealing with illegal money can be avoided. Determination of the customer's risk in terms of propensity to commit money laundering or identity theft

2. Customer identification: By identifying customers effectively, the business is able to deal with them in the appropriate manner. Collection and analysis of basic identity information (CIP)

3. Customer verification: Reliable and independent documentation should be used to support & confirm the identification details a customer provides. Name matching against lists of known parties (such as politically person)

4. Accounts and transactions monitoring: Through checks and thresholds, unusual activities, activities by high-risk customers, or suspicious behavior can be detected and reviewed. Creation of an expectation of a customer's transactional behavior

5. Risk management:
.

To ensure that the risks posed by money laundering and other criminal activities are identified, mitigated and managed good risk management practices are essential.

6. Monitoring Transaction: Monitoring of a customer's transactions against their expected behavior and recorded profile as well as that of the customer's peers.

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BANK / COMMERCIAL BANK

A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank is the connection between customers that have capital deficits and customers with capital surpluses. Function Of Commercial Bank Following are the functions of Commercial Banks 1. Accepting Deposits: Banks attract the idle savings of people in the form of deposits. These deposits may be of any of the following types. (a) Demand Deposits or Current Accounts: There are repayable on demand without any notice. (b) Fixed deposits or time deposits: These deposits can only be withdrawn after the expiry of the period for which these deposits are made with higher interest is paid on them. (c) Savings Bank Deposits: These deposits stand midway between current and fixed accounts. One or two withdraws upto a limit of one fourth of the deposit is allowed in a weak with lower interest is paid. 2. Giving Loans: After collecting money, a bank invests it or lends it out. Money is lent to businessmen and traders usually for short periods only. Money is advanced by banks in any one of the following ways. (a) (a) (b) (c) (d) By allowing an Overdraft By Creating a Deposit Banks make most of their profits thus by giving loans Discounting of bills is another way of lending money The investment in the bills is quite safe, because a bill bears the security of two businessmen the drawer as well as drawer, so that if one proves dishonest or fails, the bank can claim money from other.

3. Remitting funds: Banks remit funds for their customers through bank drafts to any place where they have branches or agencies. This is the cheapest way of sending money, it is also quite safe. Funds can also be remitted to foreign countries. 4. Safe Custody: Bank receives important documents and jewel in custody and take fees to safe it 5. Utility Service: The banks works as an agent of their constituents / utility bills 6. References: They give references about the financial position of their customers within or outside of country 7. Letters of Credit: In order to help the travelers, the banks issue letters of credit. Page 5 of 19

CONCEPT OF GOOD CORPORATE GOVERNANCE IN BANK

According to Prudential Regulations, The following guidelines are required to be followed by banks/DFIs incorporated in Pakistan. They will also follow Code of Corporate Governance issued by the SECP so long as any provision thereof does not conflict with any provision of the Banking Companies Ordinance. Responsibilities of the Board of Directors & Responsibilities: 1. Independent Role: The Board of Directors should focus on policy making and general direction, oversight and supervision of the affairs. 2. Monitoring business plans: The Board shall approve and monitor the objectives, strategies and overall business plans of the institution. 3. Ensure Responsibilities: All the members of the Board should undertake and fulfill their duties & responsibilities keeping in view their legal obligations under all the applicable laws and regulations. 4. Ensure implementation of policies: The Board shall ensure implementation of policies in areas of Risk Management, Credit, Treasury & Investment, Internal Control System and Audit, IT Security, Human Resource, Expenditure, Accounting & Disclosure, and any other operational area. 5. Internal Control System: A separate department of Internal Audit or Internal Control shall be created to conduct audit of the banks/DFIs various Divisions, Offices, Units, and Branches etc. 6. Management Information System: The Board is required to ensure existence of an effective Management Information System to remain fully informed of the activities and operating performance. 7. Arrangement of Board of Director Meetings: The Board should meet frequently & the individual directors of an institution should attend at least half of the meetings held in a financial year. 8. Process of External Audit: The Board should ensure that it receives management letter from the external auditors without delay along with submission of a copy of letter in SBP. 9. Statutory Process for high management profile: For removing of President/CEO/Country Head/Country Manager, State Bank of Pakistan (SBP) must invariably be informed at least two months ahead of the implementation of such decision along-with the reasons for the same. 10. Authority of Paid up Capital: No member of the Board of Directors of a bank/DFI holding 5% or more of the paid-up capital of the bank/DFI either individually or in concert with family members or concerns /companies 11. Criteria for Executive Directors: Further, maximum two members of Board of Directors of a bank/DFI including its CEO can be the Executive Directors. 12. Scale of Remuneration: The scale of remuneration to be paid to the non-executive directors and chairman for attending the Board and/or committee meetings shall be approved by the shareholders on a pre or post fact basis in the Annual General Meeting (AGM). 13. Appointment of advisor: Chairman of the Board of Directors may, if deemed necessary, appoint one advisor to advise and facilitate him in discharge of his duties/responsibilities.

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SOURCES OF FUNDS FOR COMMERCIAL BANK

The funds available to a banker for the purpose of his business comprise of the following. 1. Banks Capital Shareholder equity is an important part of a bank's capital. This is capital that the bank has raised by selling shares to outside investors when they need to repair their capital position a). Owners Funds: These are obtained from following resources. Equity shares: For long term financing the bank issues equity shares and the shareholders are paid dividends Retained profit: The bank uses ploughing back the profits for handling short term structural requirements banking business. Reserves and provisions: Banks use their reserves and provision also to meet unexpected needs.

b). Borrowed Funds: For expansion of banking business the bank also borrows funds. Generally it obtains loans from other commercial banks, debentures and leasing companies. Loans: In case of emergency to meet the withdrawal of customers the commercial banks loan for a very short period from other banks say for a day or two. Debentures: As a joint stock company the bank raises its capital by way of issue of debenture Leasing: Banks can also raise their capital on long term basis by handling operating a leasing business to use the PLS term Deposits.

2. Federal funds purchased: Commercial banks have to keep 7% of their deposits in state bank of Pakistan. Sometimes the balance at state bank falls below or mounts above 7% then a commercial bank with the short balance borrows from the other one with surplus balance at a certain interest rate. Such transaction is called Federal Funds 3. Deposits: The banks major source of obtaining funds is to receive deposits from the account holder. They are of three kinds: a) Demand Deposit: Businessmen and companies, home government funds and foreign government funds make deposits in the commercial banks which can be withdrawn at any time. b) Time Deposit: They are of two kinds Saving accounts & fixed deposits. Both these accounts are interest bearing. c) Euro Dollar: Local/ Home banks open branches in foreign countries and accept large deposits in foreign currency which are called Euro dollars which can be easily converted in US dollars. 4. Borrowings: They are non depository in nature and are obtained in nature and are obtained for a fixed period of time. They are of two forms a) Central Bank Loans: The commercial banks get the bills of exchange rediscounted by central banks and obtain funds. b) Floatation of Bounds: The bank floats its bond in the open market and invites people to invest their money by purchasing bonds.

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LENDING
Banks make money by taking in funds from depositors and other sources and then lending money out to customers. Bank lending is a process whereby money or fund is being given too some one or an organization to be paid back in an agreed time. Forms of Lending Following are the forms of lending: 1. Cash Finance / Cash Credit Cash finance loans are a kind of financial aid or monetary assistance that can be arranged immediately and help us tackle sudden financial problems. Cash finance loans are mostly unsecured loans and therefore do not need any collateral. 2. Over draft An overdraft allows the individual to continue withdrawing money even if the account has no funds in it. Basically the bank allows people to borrow a set amount of money. 3. Loan / Term Finance Term Loans are the counter parts of Fixed Deposits in the Bank. Banks lend money in this mode when the repayment is sought to be made in fixed, pre-determined installments. This type of loan is normally given to the borrowers for acquiring long term assets like: Purchases of plant and machinery etc. 4. Purchase and Discounting of Bills This type of lending, Bank takes the bill drawn by borrower on his (borrower's) customer and pays him immediately deducting some amount as discount/commission. The Bank then presents the Bill to the borrower's customer on the due date of the Bill and collects the total amount. 5. Hire Purchase and Leasing Finance A finance lease is a rental agreement; the vehicle is owned by the finance provider and then leased to the user for a set term. A finance lease allows the user to have full use of the vehicle and has a predetermined residual value. Principles Of Lending There are few general principles of good lending which every banker follows when appraising an advance proposal. 1. Safety: "Safety first" is the most important principle of good lending. When a banker lends, he must feel certain that the advance is safe; that is, the money will definitely come back. 5C Approval: The five elements of character, capacity, capital, condition, and cash flow can help a banker in arriving at conclusions regarding the safety of funds allowed by him as advance. a. Character: A borrowers character can indicate the intention to repay the advance, since his honesty and his integrity is of primary importance .If the past record of the borrower shows that his integrity has been questionable ,the banker should avoid him

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b. Capacity: This is the management ability factor which tells how successful a business has been in the past and what the future possibilities are. If a person has no insight into the particular business for which he wants to borrow funds from the banker, and has no management ability, they are more chances of loss to the banker. c. Capital: The bank considers the importance or requirement of funds by the firm and issues them accordingly after specific procedure done. d. Conditions: Business is influenced by internal and external factors like: Weather conditions affect the agriculture, which ultimately influences the textile, foods, garments and a number of business and industries. Therefore, the bankers must carefully examine the conditions to issue the funds. e. Cash-Flows: The banker must analysis the cash flow and credit cycle of the company to evaluate whether the business will generate sufficient funds to repay the principal amount of loan and agreed markup. 2. Liquidity: It is not enough that the money will come back; it is also necessary that it must come back on demand or in accordance with agreed terms of repayment. The borrower must be in a position to repay within a reasonable time after a demand for repayment is made. 3. Purpose: The purpose should be productive so that the money not only remain safe but also provides a definite source of repayment. The purpose should also be short termed so that it ensures liquidity. 4. Profitability: Equally important is the principle of 'profitability' in bank advance like other commercial institutions, banks must make profits. 5. Security: Security is considered as insurance or a cushion to fall back upon in case of an emergency. The banker carefully scrutinizes all the different aspects of an advance before granting it.

Types of Securities for Lending Securities refer to something given as a guarantee of repayment of debts. The creditor acquires rights to the property of the debtor. They are of following types. 1. Mortgage: It refers to the transfer of interest in specific immovable property for the purpose of securing the payment of money advanced by way of loan. 2. Pawn or pledge: It is a contract under which an article is surrendered to the tender as security against the loan. The articles include jewelry, share certificates documents and other valuable (delivery of article is compulsory). 3. Charge: It is similar to mortgage in which the transfer of interest in the property does not involve. 4. Lien: It refers to the right of holding in the goods of the debtor till he clears the debt. 5. Hypothecation: It refers to mortgage of property without transferring the possession of the goods. Page 9 of 19

Types of Loans: To borrow money from banks with repayment of interest is called Loan. Loan is issued for a specific purpose, such as financing a new car, paying college tuition and buying or renovating a home. To get a debt consolidation loan, this combines all current debts from various creditors into a single reducedinterest payment plan. Loans are generally divided into two types: 1. Secured loans It is guaranteed by collateral, which is an item of equal or greater value than the amount of the loan, such as a car, home or cash deposit. Secured loans are such advances which are granted to customers who provide assets as tangible securities apart from promotes promising to repay the loans which are signed by the customers. Following are the importance of Secured Loans: a) Bankers Rights: The banker gets rights over the assets offered as the cent percent backing as security to be sold to realize the amount of loans with interest in case the borrower fails to repay the loan. b) Wise Policy of Offering Loan: Advancing secured loans is a wise policy of lending bank funds to the borrowers/ customer ensuring safety of customers deposits. The bank accepts readily marketable securities to protect the repayment of loan. The banks cannot refuse to get security whether it is desirable or not but the security should be safe other wise it would be of no use. c) Ideal Securities: The banker should however demand ideal security to be offered by borrower to grant secured advances. Infect some securities happen to be good and some of them are not ideal to be accepted to offer loans. In town and cities gold and silver and stock exchange securities are provided by customers which are good securities. 2. Unsecured loans It does not require collateral and are made based on your credit score and ability to repay. Unsecured advances are granted on personal security of the borrower who sells him promise to the bank, the borrower signs promote. These are also called clean advances. Following are the importance of Unsecured Loans: a) Reliance on credit of customer and prospects: The bank depends upon good will of the borrower. If present conditions and future prospects of borrowers business are good the unsecured advance would be safe and may be expected to be repaid by the borrower. b) Effect on balance sheet: The effect of secured and unsecured advances on the balance sheet entries remains the same. However the interested parties (dealers creditors and suppliers etc) form an opinion that the performance of management is poor due to grant of unsecured advances. c) Practice of grant of unsecured loans: In Pakistan unsecured advances are nominal part of total advances. d) Minimum Precautions To Advance Unsecured Advances: As the risk of the non repayment is very large in respect of unsecured advances the bank should invariably examine character, capital, collected and capacity of the borrower. Still in case of default there exists no other go except to file a suit in the court of low for its recovery.

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CLEARING
Movement of a check from the bank in which it was deposited to the bank on which it was drawn, and the movement of its face amount in the opposite direction. This process (called 'clearing cycle'). In other words The clearing process begins with the deposit of a cheque in a bank. The cheque (along with other cheques) is delivered to the bank/branch where it is drawn. Types of Clearing There are two types of clearing as below: 1. Inward Clearing Inward clearing is where the customer draws cheque in the favor of a non- customer. The inward clearing process decreases the deposits of the bank. 2. Outward Clearing Outward clearing means cheques drawn by non - customers in favor of the bank and deposited in one of the branches of the respective bank. The outward clearing increases the deposits of the bank. The outward cheque clearing process is now centralized meaning there by all the posting of the cheques is done at the Central Processing Unit.

Process Of Clearing The clearing process begins with the deposit of a cheque in a bank. The cheque (along with other cheques) is delivered to the bank/branch where it is drawn. The cheque is passed for payment if the funds are available and the banker is satisfied about the genuineness of the instrument. The cheques that are unpaid are returned to the presenting bank through another clearing called the Return Clearing.

Example of Clearing When A deposits a cheque in to his account in the bank for local collection, then it is sent through clearing for claiming money from the concerned bank by the bank in which A deposited a cheque for crediting to his account. After getting money from that bank A`s bank will credit the amount to A`s account. Normally banks do not allow you to withdraw the money before three days from the day it was deposited.

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ISLAMIC BANKING
A banking system that is based on the principles of Islamic law (also known Shariah) and guided by Islamic economics, it is based on following principles Islamic banking is the sharing of profit and loss. The prohibition of the collection and payment of interest. Concepts Of Islamic Banking Islamic banking introduces concepts such as: 1. Profit Sharing (Mudarabah) Mudarabah is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. 2. Safekeeping (Wadiah) A bank is deemed as a keeper and trustee of funds. A person deposits funds in the bank and the bank guarantees refund of the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands it. 3. Joint (Musharakah) The partners investing the capital shares equally in both the profit and loss, which is different from an interestbased system where the upside is limited while the downside is very nearly non-existent. 4. Leasing (Ijarah) Ijarah means lease, rent or wage. Under this concept, the Bank makes available to the customer the use of service of assets / equipments such as plant, office automation, motor vehicle for a fixed period and price.

Impact of Islamic Banking Islamic banks, while functioning within the framework of Shariah, can perform a crucial task of resource mobilization, their efficient allocation on the basis of both Profit Loss Sharing (Musharaka and Mudaraba) and non-Profit Loss Sharing (trading & leasing). Its payment system to contribute significantly to economic growth and development. Sharing modes can be used for short, medium and long-term project financing, import financing, preshipment export financing, working capital financing and financing of all single transactions. In order to ensure maximum role of Islamic finance in development of the economy it would be necessary to create an environment that could induce financiers to earmark more funds for Musharakah / Mudarabah based financing of productive units, particularly of small enterprises.

Islamic Equity Funds In an Islamic equity fund the amounts are invested in the shares of joint stock companies. The profits are mainly derived through the capital gains by purchasing the shares and selling them when their prices are increased. Profits are also earned through dividends distributed by the relevant companies. SUKUK (Islamic Bond) Sukuk is the financial certificates that are the Islamic equivalent of bonds. Sukuk are securities that comply with the Islamic law (Shariah) and its investment principles, which prohibit the charging or paying of interest. Page 12 of 19

STATE BANK OF PAKISTAN

Central Bank is an institution which performs the function of expansion and contraction of money supply and control the credit. The Governor General of Pakistan Quaid-e-Azam Muhammed Ali Jinnah issued order of establishment SBP on 1st July 1948. Management Structure of State Bank Of Pakistan a) Top Management: Governor is the head of the SBP and has two Deputy Governors, one each for Banking and Corporate Services. The Governor is the chairman of the Central Board and manages the affairs of the Bank on its behalf. There is one Chief Economist in charge of Banking Regulations. b) Central Board of Directors: Except for the Governor, all directors of the Central Board are non-executive members. To assist the Central Board, various committees of the Central Board have been constituted comprising non-executive directors, representatives from the management, and independent experts as required. These committees review and analyze various proposals before these are placed before the Central Board.

Role And Functions Of State Bank Of Pakistan According to SBP Act 1956, the following functions are required to perform 1. State Bank as a bank of issue: The SBP has the role right to issue notes except subsidiary coins which are issued by the Government. 2. Framing and operation of monetary policy: The SBP frames and operators the monetary policy, It regulate and control the volume of money and credit supply in the country in order to achieve specific economic objectives such as price stability, reducing unemployment, etc. The main instruments of monetary policy (i) (ii) (iii) Open market Operations: By buying the Govt. securities in the open market, the SBP expands the money supply and by selling securities it contracts the money supply in the country. Changing the reserve requirements: SBP requires the scheduled banks to maintain at least 35% of demand and time liabilities through controlling the money supply in the country Changing Discount rate: SBP change discount rate of first class bills of exchange time to time to raise the bank rate for pushing up the cost of borrowing of commercial banks and reduces money supply in the country.

3. Regulation and supervision of banks: SBP regulates and issue licenses of banks, and their branch, expansion, liquidity of assets of banks, management and methods of working of the banks amalgamation and reconstruction and liquidation of banks, inspection of banks etc. 4. Foreign exchange management: The SBP maintains the exchange value of the rupee in terms of other major currencies of the world. 5. State bank as a clearing house: The SBP acts as Clearing House for the commercial banks to exchange cheques drawn on and for settlement of amount among them. 6. Advisor to government: The SBP also acts as advisor to government in all financial matters. 7. Lender of last resort: The SBP is the lender of last resort for the commercial banks and fulfills the shortage of cash reserves and maintains liquidity and solvency of the commercial banks.

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FOREIGN EXCHANGE MARKET

The foreign exchange market (forex, FX, or currency market) is a form of exchange for the global decentralized trading of international currencies. The foreign exchange market assists international trade and investment by enabling currency conversion. The important dealers the foreign exchange market are banks, brokers, acceptance houses, central bank and treasury authorities.

Methods or Instruments Of Making Foreign Payments The main devices which have been adopted for making international payments by these agencies are as follows: (1) Letter of Credit: Letter of credit is a very important instrument of making merchandise payments, A letter of credit is a document by which one person (usually a banker) authorizes another (also a banker) to give credit to the person in whose favor it is drawn. (2) Bill of Exchange: The bill of exchange is a most effective instrument in making international payments. A bill of exchange is an order in writing from the drawer (creditor) to the drawer (debtor) to pay the specified sum of money on demand or on some specified future date (usually three months). (3) Cable transfer: The cable transfer or telegraphic transfer is the quickest method of making international payments. A cable transfer is a telegraphic order sent by a bank to its correspondent bank abroad to pay the specified amount to certain person from its deposit account. (4) Mail Transfer: When the money isnt required immediately, the remittances can also be made by mail for payment. (5) Foreign Bank Draft: The most direct and simple method of making international cash payment is to purchase a foreign bank draft. The foreign bank draft is an order drawn by a bank on its foreign branch to pay a specific sum of money on demand to bearer (6) International money order: Money can also be remitted to a person living in foreign country by international money order. The payee receives a definite amount sent by the payer, in the currency of his own country. (7) Traveler cheque: A traveler cheque is an order drawn by a bank upon its own branch to pay a specified sum of money on demand to the purchaser of the cheque. The paying bank after comparing the signature of the purchaser, which he has signed at the time of the purchase of cheques, makes the payment.

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NEGOTIABLE INSTRUMENT
A negotiable instrument is a signed document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. Examples include checks, bills of exchange, and promissory notes.

Characteristics of a Negotiable Instrument 1. Property: The possessor of the negotiable instrument is presumed to be the owner of the property contained therein. 2. Title: The transferee of a negotiable instrument is known as holder in due course. 3. Rights: The transferee of the negotiable instrument can sue in his own name, in case of dishonor. 4. Presumptions: Certain presumptions apply to all negotiable instruments e.g. a presumption that consideration has been paid under it. 5. Prompt Payment: A negotiable instrument enables the holder to expect prompt payment because a dishonor means the ruin of the credit of all persons who are parties to the instrument. Example of negotiable instruments 1. Negotiable instruments recognized by statute: Bills of exchange, Promissory notes & Cheques. 2. Negotiable instruments recognized by usage or custom: Hundis, Share warrants, Dividend warrants, Bankers drafts, Circular notes, Bearer debentures, Debentures of port trust, Railway receipts & Delivery orders. Example of Non-negotiable instruments Money orders, Deposit receipts, Share certificates, Dock warrants & Postal orders

Kinds of Credit Instruments (a) Cheque: A cheque is a bill of exchange drawn on a specified banker and not expressed to payable otherwise than on demand. Parties of Cheque: 1. Drawer: A drawer is a person, who draws a cheque. 2. Drawee: A drawee is a bank on whom a cheque is drawn. 3. Payee: A payee is a person in whose favor a cheque is drawn Requisite of Cheque: 1. 2. 3. 4. 5. 6. 7. 8. 9. It must be in writing and contained unconditional order It must by signed by drawer Cheque is always payable on demand The cheque is always drawn on a specified banker As a matter of practice, cheque leaves are in printed form The amount payable should be specified in the form of legal tender money and is paid accordingly. The amount must be certain amount The cheque is payable to specified person or order of or to bearer. Date of issue must be mentioned on the cheque.

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Types of Cheques: 1. Bearer Cheques: In this type cash is payable to anyone presenting the cheque for payment at the cash counter of bank. 2. Order Cheques: Such cheques are payable to the specified person on proper identification of the payee. 3. Crossed Cheques: Crossing may be of different types, we shall discuss all these types of crossing. However if the cheque is crossed as payees account only such cheques cannot be paid at the cash counter of the bank and these must be credited to the bank account of the payee. (b) Bills of Exchange: A bill of exchange is defined as an instrument in writing containing an unconditional order, signed by the banker directing a certain person to pay certain sum of money, only to or to the order of the certain person or to the bearer of instrument. Parties of bill of exchange: 1. Drawer: The person who draws the bill is called the drawer and he gives the order to pay money to the third party. 2. Drawee: The party upon whom the bill is drawn is called the drawee. 3. Payee: The party in whose favor the bill is drawn or is payable is called the payee. (c) Promissory Note: A promissory note is defined as an instrument in writing (not being a bank note or currency note) containing an unconditional undertaking signed by the maker to pay a certain person or to the bearer of the instrument. Parties of Promissory Note: 1. Maker: The person who makes the note and undertakes to pay the amount stated in the promissory note. 2. Payee: The person to whom the amount is payable under promissory note. 3. Holder: The person who is entitled to the possession of the instrument in his own name and also entitled to receive the amount due under a promissory note. 4. Endorser: The person who by endorsement transfers the promissory note to another person. 5. Endorsee: The person to whom the promissory note is transferred by endorsement.

(d) Drafts: These are bills of exchange issued by a banker on his branch office. Bank drafts like bills of exchange are of great in pretence in the financing of trade, especially foreign trade. (e) Hundies: These are bills of exchange in Vernacular Language, which have been in common use in our country for purpose of business. (f) Letters of Credit: It is a letter written by one person or bank to another requesting the letter to pay any amount of money up to certain limit to the person named in the letter or in whose favor the letter is written. A letter of credit is a promise to pay. Banks issue letters of credit as a way to ensure sellers that they will get paid as long as they do what they've agreed to do. Letters of credit are common in international trade because the bank acts as an uninterested party between buyer and seller. Page 16 of 19

Types of a Letter Of Credit 1. Sight L/C: If the beneficiary of a credit is to obtain payment immediately on presentation of stipulated documents, it is a Sight Credit In this form of credit the exporter draws a sight or demand draft payable at the counters of the advising bank or the bank specified in the letter of credit. The draft (bill of exchange) is paid on presentation provided that all the other terms of the credit have been complied with. 2. Usance L/C: When a credit stipulates payment to the beneficiary upon the maturity of a bill of exchange drawn under the terms of the credit, it is an acceptance credit, terms credit or Usance Credit. In this form of credit the beneficiary draws a draft for a particular Usance (e.g. 30, 60 or 90 days etc.), payable upon either the correspondent bank or the issuing bank Clauses of a Letter Of Credit 1. Type of Credit: The heading of a credit indicates the type of credit and its purpose. For this purpose, every bank has prescribed its own letter of credit forms. 2. Value of Credit: The fixed amount to which the bank is liable is specially mentioned in the letter of credit. 3. Specifications of Documents: The documents required are specially mentioned in the credit 4. Description of Goods: A brief description of goods that are required by the importer is given. 5. Partial-Shipment and Trans-Shipment: Part-shipment means shipment of goods in lots or installments i.e. in more than one shipment. Trans-shipment means the carriage of goods by more than one vessel or mode of transport. 6. Validity period: This is a very important clause and because every credit indicates an expiry date or the validity period. This period is so fixed to provide sufficient time to complete the transaction. 7. Reimbursement clause: This clause indicates the method for obtaining the reimbursement by the foreign negotiating bank. It will be discussed elaborately in later part. Forms of a Letter Of Credit 1. Revocable L/C: This form of credit gives the buyer maximum facility but it places the seller in difficult position when the goods are in transit and the credit is revoked before the documents are presented and payment has not been made on presentation. 2. Irrevocable L/C: This form of credit can be amended or cancelled only with the agreement of all parties to it. Therefore, it gives the seller complete protection. 3. Confirmed & Unconfirmed L/Cs: A confirmed credit is the one that has been confirmed by the advising bank. The bank agrees to take the liability of making payment to the seller if the issuing bank defaults for any reason. Whereas, an unconfirmed credit is one that exclusively depends upon the issuing banks obligation.

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Advantages of Letter of Credit a. Since a letter of credit is opened only by the importers with established credit standing, the exporter is sure of receiving the price of his commodity. b. An exporter may obtain necessary finance immediately on shipment under a letter of credit (through negotiation, OD Buying). c. A letter of credit may help the importer to meet its financial difficulties. He may obtain some finances against the L/C (as FIM, FATR etc.). d. Similarly, an L/C enables the exporter to obtain finances from his bank, for the operations of production even before shipment (e.g. Pre-shipment finance (g) Circular Letters of Credit: This letter is different from the letter of credit for it is addressed to several branches of the issuing banker. The amount of credit can be taken in cash or against bill of exchange drawn, which depends upon the condition of letter (h) Travelers Cheque: Such cheques are very useful to tourists or travelers, for against delivery of these, holders can obtain funds from any branch. (i) Treasury Bills: In sub-continent, for the first time, these bills were issued by the Government on 5 November 1790 to raise money for war purposes and are issued even now. (j) Book Credit: Book credit are effected when a tradesman sells on credit or a bank advances money, the sale or advance being entered into the account books for the tradesman or of the bankers.

HOLDER IN DUE COURSE

"Holder in due course" means any person who for consideration becomes the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or endorsee thereof, if payable to order, before it became overdue, without notice that the title of the person from whom he derived his own title was defective. Requisite for Holder in Due Course He must be holder He obtains the instrument for valuable consideration He must become the holder of the instrument before maturity He must have obtained the instrument in good faith He must take the instrument complete and regular on the face of it.

ENDORSEMENT
It is derived from the Latin word lndorsum which means the back. It defines the writing of a persons name either on the back or the face of instrument followed by ones signature for the purpose of negotiation is called endorsement. There may be endorsement on a separate piece of paper attached to the instruction called allonge. Requisite for Endorsement a. It must be written and signed by the transferor called as endorser. b. There must be a person to whom endorsement is to be made called endorsee. Page 18 of 19

Kinds of Endorsement (1) Blank or general endorsement: If the holder of the instrument signs his name only and delivers it to the endorsee, it is called general or blank endorsement. (2) Full endorsement: It contains not only the signature of the endorser but specifies the endorsee or to his order also. (3) Restrictive endorsement: Here the endorser uses such words in endorsement which restricts further negotiation and transfer of bills. (4) Sans Recourse endorsement: In this type of endorsement, the endorser refuses to accept any liability on the instrument to any subsequent party in case of dishonor of the instrument. (5) Conditional endorsement: It contains an order to pay only when a condition expressly laid down by the endorser is met with. (6) Partial endorsement: If contains an order to pay only a part of the amount mentioned in the instrument. This type of endorsement is not valid in law. (7) Facultative endorsement: If refers to waiver of some right at the time of endorsing by adding appropriate words by the endorser.

PAY ORDER
Pay Order is used by the banks to settle payment obligations on behalf of their customers. This instrument is guaranteed by the bank for its full value and is similar to a demand draft.

DIVIDEND WARRANT
A cheque sent by a company to a shareholder in payment of dividends.

ELECTRONIC BANKING
Online Banking or Electronic banking, also known as electronic fund transfer (EFT), uses computer and electronic technology as a substitute for checks and other paper transactions. Many financial institutions use ATM or debit cards and Personal Identification Numbers (PINs) for this purpose.

ATMs are electronic terminals that are used to withdraw cash, make deposits, or transfer funds between accounts through inserting an ATM card and enter your PIN. Direct Deposit authorizes specific deposits, (like paychecks and Social Security checks and other benefits) to customer account on a regular basis. It is used as pre-authorize direct withdrawals so that recurring bills (like insurance premiums, mortgages, utility bills, and gym memberships) are paid automatically. Pay-by-Phone Systems: It is used to pay certain bills or to transfer funds between accounts based on phone instruction. You must have an agreement with the institution to make such transfers. Personal Computer Banking: It handles many banking transactions via personal computer. For instance, Customer may use his computer to view account balance, request transfers between accounts, and pay bills electronically. Debit Card Purchase or Payment Transactions: It makes purchases or payments with a debit card, which also may be via ATM card. This could occur at a store or business, online, or by phone. Electronic Check Conversion converts a paper check into an electronic payment in a store or when a company receives customers check in the mail. Page 19 of 19