4.

DEFINITIONS/TERMINOLOGIES
A. Description of major components of assets & liabilities
4.1. Currency
Notes (paper money) and coins issued by the central bank and / or government that are of
fixed nominal values and accepted as legal tender (payment that cannot be refused in
settlement of a debt, i.e. money used as a unit of exchange within a country) in an
economy. Pakistani Rupee is the currency unit for Islamic Republic of Pakistan.
When we talk of cash, this category would also include currency that is no longer legal
tender, but that can be exchanged immediately for legal tender.

Pakistani Bank Notes

These are promissory notes (or bank notes) issued by the State Bank of Pakistan in
various denominations, with the promise to pay the said denomination (face value)
in Rupee when called for payment. These are issued with the guarantee of the
Government of Pakistan.

Pakistani Rupee Coins

These are the currency coins issued by the Islamic Republic of Pakistan with
various denominations of currency units (Rupee). All Pakistani currency coins
(excluding subsidiary coins) issued by the federal government are to be reported
here.

Pakistani Subsidiary Coins

The decimal coins issued by the federal government in sub-denomination of a
rupee are called subsidiary coins (paisa 50 / 25).

Encashment of Government Bonds and Certificates

These are bonds / certificates like prize bonds purchased over the counter for value
to surrender to State Bank of Pakistan / Savings centres. The value of the
instruments on the reporting date is reported under cash against this head.

Foreign Currency (Foreign Currency Notes and Coins)

All foreign currency notes and coins are liability of the foreign governments or
non-resident issuing authorities / central banks. These are claims of the economy
upon non-residents.
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4.2. Transferable Deposits
All demand deposits in national or in foreign currency i.e., exchangeable on demand at par
without penalty or restriction, freely transferable by cheque or otherwise, commonly used
to make payments, are known as transferable deposits. These deposits include special
savings accounts with a possibility of direct payments to third parties, savings accounts
balances subject to automatic transfer to regular transferable deposits, and money-market
fund that have unrestricted third-party transferability privileges. Deposits denominated in
national currency should be recorded at book value (outstanding amount plus accrued
interest) in equivalent Pak rupees.

4.3. Restricted / Compulsory Deposits

These are the deposits for which withdrawals are restricted on the basis, regulatory or
commercial requirements. Examples are; import deposits, payment instruments
(instruments belonging to the corporation itself), like checks, pay orders, etc. posted in the
transferable deposits with other corporation and not available for withdrawals, employees
compulsory deposits / contribution to their funds etc, blocked FC accounts, sundry
deposits for which claimant is not available, e.g., dormant accounts of non-operative
accounts etc, deposits in financial corporations in liquidation or reorganization etc.

4.4. Other Deposits

These represent all claims other than transferable and restricted deposits in national
currency or in foreign currency that are represented by evidence of deposits. Other
deposits include:
Sight deposits (which permit immediate cash withdrawals but not direct third-party
transfers);
Non-transferable savings deposits and term deposits;
Financial corporations liabilities in the form of shares or similar evidence of
deposits that are legally or in practice, redeemable immediately or at relatively
short notice;
Shares of money-market funds that have restrictions on third-party transferability;
Call money deposits
Special notice deposits
Other deposits

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4.5. Securities other than Shares
Securities other than shares are negotiable instruments serving as evidence that units have
obligations to settle by means of providing cash, a financial instrument, or some other item
of economic value. Financial assets that are normally traded in the financial markets and
that give holders the unconditional rights to receive stated fixed sums on specified dates or
the unconditional rights to fixed money incomes or contractually determined variable
money incomes. These securities are classified as short-term and long-term securities
other than shares such as government treasury bills, federal government bonds, federal
investment bonds, commodity bonds, Pakistan investment bonds, corporate bonds and
Federal debentures, negotiable certificates of deposits (not negotiable would be
categorized under deposits), commercial papers, TFCs, PTCs, Modaraba certificates,
negotiable CODs, and negotiable securities backed by loans or other securities. Preferred
stock or shares that pay a fixed income but do not provide for participation in the
distribution of residual value of an incorporated enterprise on dissolution are also included
in this category.

Government Treasury Bills

These are short-term debt instrument issued by the government treasury to raise
funds for the government or to regulate money supply through open market
operations of the central bank. The market transactions are managed by the State
Bank of Pakistan on behalf of the treasury.

Pakistan Investment Bonds

These are long term (3, 5, 10, 15 & 20 years maturity) debt obligations issued by
the government, offering a risk free investment to the bond holders at premium
interest rates depending on the maturity of the bond. Interest on PIBs is paid
through bank accounts.

Federal Investment Bonds

This is a long term (3, 5 & 10 years maturity) debt obligation issued by the
government from June 1991, offering a risk free investment to the bond holders at
premium interest rates fixed as 13%, 14% and 15% depending on the maturity of
the bond. Interest payments on FIBs are made through interest warrants.

Federal Government Bonds

This is a long-term debt obligation issued by the government started during
nationalization. These were issued for various purposes such as for banks

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nationalization, petroleum, shipping, vegetable oil, Shahnawaz Bhutto Sugar Mills,
Heavy Mechanical Complex, and land reforms etc.

Federal Government Commodity Bonds

These bonds are issued by the government when repayment of commodity
financing by the government institutions is not materialized at the maturity date. In
other words it is negotiation / conversion of commodity operation loans in to
bonds.

Other Federal Government Bonds / Securities

This category would also include the residual bonds / securities issued by the
federal government and not covered anywhere else. These loan securities have a
fixed interest rate. Subscription to this loan was received for one day only. The
interest was paid on half yearly basis. These loans were issued in the forms of
certificates and promissory notes.

Provincial Government Securities / Bonds / Permanent

Loans
This category includes any type of provincial governments debt obligations /
bonds and negotiable certificates etc. Provincial governments loan securities have
a fixed interest rate. Subscription to these loan securities was received for one day
only. The interest was paid on half yearly basis. These loans were issued in the
forms of stock certificates and promissory notes.

Local Government Securities / Bonds

All type of certificates issued by the local / city governments, which are evidence
of debt on which the issuer promises to pay the holder a specified amount of
interest for a specified length of time, and to repay the loan on its maturity.

Commercial Papers
Commercial papers are unsecured promissory notes of relatively low risk and short
maturity of 3 to 6 months, issued by highly rated large corporations who usually
maintain backup credit lines with their banks to ensure payment at maturity i.e
notes, bills, and acceptances arising out of commercial, industrial or agricultural
transactions of short - term maturity, self liquidating and used as trade financing
instruments for non-speculative purposes.

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Bankers Acceptances
A bankers' acceptance involves the acceptance by a financial corporation of a draft
or bill of exchange and the unconditional promise to pay a specific amount at a
specified date i.e., held for maturity. These are treated as actual financial assets
even though no funds may have been exchanged.

Negotiable CODs
A deposit instrument; a receipt issued by a bank as an evidence of a deposit
specifying the amount, the period of the deposit, and the rate of the interest is
known as negotiable COD. There are several types of deposit certificates issued in
domestic or foreign currency; since certificate of deposits are negotiable
instruments, these are freely traded in secondary money market. The CODs that are
not negotiable would be treated as other deposits.

Negotiable Loans
Loans that have become negotiable de facto (securitization of mortgage loans,
claims on credit card holders and other loans) are known as negotiable loans.

Debentures
Long-term securities that give the holders the unconditional right to one or both of:
(a) a fixed or contractually determined variable money income in the form of
coupon payments, i.e. payment of interest is not dependent on earnings of the
debtors, (b) a stated fixed sum as a repayment of principal on a specified date or
dates when the security is redeemed.

WAPDA Bonds
Certificates issued by WAPDA promising to pay the holder a specified amount of
interest for a specified length of time, and to repay the loan on its maturity.

Participation Term Certificates

Participation Term Certificates are transferable corporate instruments based on the
principles of profit and loss sharing and are intended to replace debentures for
medium and long-term local currency loans for industrial and other financing.
Instead of receiving interests, as in the case of debentures, the PTC shareholders
share the profit or loss of companies involved.

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 Investment in Foreign Securities
Investments in bonds / financial assets issued by the non-residents that are
normally traded in the financial markets and that give the holders the unconditional
right to receive stated fixed sums on a specified dates or the unconditional right to
fixed money incomes or contractually determined variable money incomes.

4.6. Loans
Financial asset resulting from the delivery of cash or other assets by a lender to a borrower
in return for an obligation to repay on a specified date or dates, or on demand, usually with
mark-up or interest. They include repurchase arrangements not included in national broad
money definitions (Repo), money at call, government lending funds, overdrawn local
account, overdrawn nostro accounts, borrowings from subsidiary companies, borrowings
from managed modarabas, borrowings from associated undertakings, borrowings from
directors, borrowings from chief executive, borrowing from SBP, borrowings from
financial institutions abroad, financial leases, subordinated loans etc. Borrowings are
further classified by short-term and long-term. The value of a domestic currency loan
should be the amount of the creditors outstanding claim (equal to the debtors obligation),
which comprises the outstanding principal amount plus any accrued interest (i.e., interest
earned but not yet due for payment). Such valuation is herein referred to as the book value
of a loan.
The loan valuation is not adjusted for expected losses. The value of a loan portfolio should
be adjusted downward only when (1) loans are actually written off as un-collectible or (2)
when the outstanding amount of the loan has been reduced through formal debt
reorganization. Loans are categorized as short-term and long-term loans. They include:-
commodity operations
trade financing
government self employment schemes
working capital loans
fixed investment loans
bills purchased & discounted
repo / reverse repo
money at call
consumer financing
financial leases & similar arrangements

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Repurchase Agreement Borrowings (Repo)
Sale of securities to financial institutions against cash with an arrangement to
repurchase the same at a fixed price either on a specified future date (often one or a
few days hence, but increasingly further in the future) or with an open maturity
fall under this category. The agreement is called a repo when viewed from the
perspective of securities selleri.e., the cash taker".

Money at Call and Short Notice in Pakistan

These are unsecured borrowing transactions from financial institutions without
underlying collateral. These transactions are based entirely on trust and goodwill of
the players. These are usually overnight transactions but can extend for a week or
even months, if mutually agreed upon between lender and borrower. However, a
lender places its money on call and has the right to 'call' it back even before its
maturity.

Government Lending Funds

This is actually line of credit for financial institutions provided by the Government
of Pakistan (GOP) through international donor agencies like World Bank, ADB
etc. who provide funds for industrial credit (for purchase of machinery, equipment
etc.) only. The GOP guarantees these funds. International agencies provide these
funds to GOP and GOP lend these funds for industrial credit to financial
institutions only.

Financial Leases and Similar Arrangements

Goods acquired for disposal from a financial institution that purchases these goods
and receives rentals to cover all or virtually all costs including interests over the
period of contract. The entire risks and rewards of ownership are de facto
transferred to from the legal owner of the goods (lesser) to the user of the goods
(lessee) of an asset. Title may or may not eventually be transferred. This de facto
change in ownership is financed by a financial claim, which is the asset of the
lesser and liability of the lessee. At the time of ownership change the market value
of the asset is recorded as liabilities of the lessee. For subsequent periods principal
payments will be subtracted for determining the outstanding liability.

Subordinated Loans from Subsidiary Companies

Funds rose by the financial institutions from subsidiary companies, managed
modarabas, associated undertakings, director or chief executives with the provision

16
that all other liability holders have priority in the event of failure of the institution.
Such debts are created by a subordination agreement under which a creditor
acknowledges that his claim is secondary to the claim of other creditors, such as
depositors. Subordinated TFCs issued by a financial institution to subsidiary
companies managed modarabas, associated undertakings, director or chief
executives according to SBPs guidelines are also to be reported under subordinated
loans.

Commodity Operations
Advances provided either to public sector corporations (including government) or
private sector for the procurement of commodities that is, cotton, rice, wheat, sugar
etc. Advances to government provided other than the commodity operations should
not be reported here.

Export Financing - Export Finance Scheme Pre-Shipment

Part-I
This is pre-shipment concessionary finance to the exporters for financing the
exports of eligible commodities on case-by-case basis against individual Firm
Export Order or Irrevocable Letter of Credit.

Export Financing - Export Finance Scheme Post-Shipment

Part-I
This credit facility exclusively at post-shipment stage is admissible for maximum
180 days from the date of shipment or up to the date of realization of export
proceeds, whichever is earlier.

Export Financing - Export Finance Scheme Part - II

Under this Scheme, an exporter may avail of a concessionary export finance limit
in a financial year equal to half of the export performance, through export of
eligible commodities, in the preceding financial year (July June). The limit is
available to the exporter on a revolving basis like a cash credit account.

Export Financing - Others

Any other financing extended to the exporters by the financial institutions out of
their own resources other than under any type of export finance scheme.

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Import Financing
It is financing to importers to provide liquidity to pay for imports. Each loan is
related to one specific import transaction and the term of the financing can vary
depending on the type of products imported and the requirements of the importer.

Advances under Government Self Finance Scheme

In order to create self-employment opportunities for young people i.e., to start their
own business, government of Pakistan introduces self-employment schemes for
them. Advances made by banks / financial institutions under these schemes are
advances under government self-employment schemes.

Working Capital
Short-term financing other than trade finance made to support the current
operations of a business enterprise mainly for the procurement of raw material and
stock in trade etc. The working capital facility is provided for short periods,
generally from six months to one year, depending upon the cash flow projections
of the borrower.

Fixed Investment - LMM

Advances provided for the purchase of locally manufactured machinery for the
projects on concessionary rates. Such facility is extended usually for long periods
of time. The repayment is staggered over a number of years depending upon the
cash generation and repayment capacity of the project.

Fixed Investment
Advances (small & heavy loans) provided for the purchase of land, building, and
foreign manufactured machinery etc. for the projects. Such facility is extended
usually for long periods of time. The repayment is staggered over a number of
years depending upon the cash generation and repayment capacity of the project.

Consumer Financing
Consumer loans are mostly extended to households to finance consumer durables,
or retail purchases as a line of credit pre-approved by a financial institution or
customized loan for a single purchase. These include house building loans, auto
loans, credit cards, consumer durables, and other personal loans to meet personal,
family or house hold needs.

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Bills Purchased & Discounted
Advances extended through discounting or purchasing of a bill of exchange
including export bills that is both drawn and made payable in Pakistan or abroad.

Call Money Lending

Money at call in fact is unsecured lending transactions with no underlying
collateral. Transactions are based entirely on trust and goodwill of the players.
These are usually overnight transactions but can be extended if mutually agreed
upon between lender and borrower. However, the lenders place its money on call
and have the right to 'call' it back even before its maturity.

Repurchase Agreement Lending (Reverse Repo)

This is a mode of financing in which the seller (financial institution) of the
securities agrees to repurchase them subsequently from the purchaser (financial
institution) at a fixed rate and on a specified date. This is different from trading in
securities in the stock exchanges where transactions are not based on repurchase
agreement and the prices are determined as per market conditions. The agreement
is called a reverse repo when viewed from the perspective of securities buyer - i.e.,
the cash provider"

Import Bills
Under the usual circumstances, the importer would be required to have cash on
deposit with the Letter of Credit (LC) issuing bank in an amount equal to the LC
value (plus bank fees). When cash flow position does not permit the importer to
make such a deposit, the banker provides the solution. Import bills advance is a
kind of short-term finance offered by the bank to the importer according to its
demand upon receiving the bills under LC and collection.

Financial Leases and Similar Arrangements

A finance lease is a contract where by lesser purchases goods put at the disposal of
the lessee and the lessee pays rentals that enables the lesser over the period of
contract to cover all or virtually all costs including interests. The entire risks and
rewards of ownership of an asset are de facto transferred from the legal owner of
the goods (lesser) to the user of the goods (lessee). Title may or may not
eventually be transferred. This de facto change in ownership is financed by a
financial claim, which is the asset of the lesser and liability of the lessee. At the
time of ownership change the market value of the asset is recorded as assets /

19
 liabilities of the units. For subsequent periods principal payments will be
subtracted for determining the outstanding claim / liability. Therefore, these are
calculated as lease rentals receivable plus residual value of leased assets minus
financial charges for future periods on leased assets.

Corporate Sector Advances

Include advances provided to public limited companies, government corporations
formed under special charters / statutes and such entities, which do not come under
the definition of SMEs.

Advances to SMEs
Advances provided to an entity, ideally not a public limited company, which does
not employ more than 250 persons (if it is manufacturing concern) and 50 persons
(if it is trading / service concern) and also fulfils the following criteria of either a
and c or b and c as relevant:
a. A trading / service concern with total assets at cost excluding land and
building up to Rs 50 million.
b. A manufacturing concern with total assets at cost excluding land and
building up to Rs 100 million.
c. Any concern (trading, service or manufacturing) with net sales not
exceeding Rs 300 million as per latest financial statements.
The advances provided to individuals for business purposes will also be reported
under SMEs.

Other Advances
Any other advances provided to any entity, which do not fall under the above
mentioned categories.

4.7. Shares and Other Equity

Shares and other equity comprise all instruments and records acknowledging claims to the
residual value of companies / corporations, after the claims of all creditors have been met
are categorized as shares and other equity. Stock or share most commonly refers to a share
of ownership in a company that entitles the owner of that share to literally a share in the
ownership of the company, including the right to a fraction of the assets of the company, a
fraction of the decision-making power, and potentially a fraction of the profits, which the
company may issue as dividends. There are several types of shares, including common
stock, preferred stock, treasury stock, and dual class shares. Preferred shares have priority

20
over common shares in the distribution of dividends and assets. A dual class equity
structure has several classes of shares (for example class A, class B and class C) each with
its own advantages and disadvantages. Treasury stocks are shares that have been bought
back from the public. Preferred stocks or shares are also included in this category. Shares
and other equity as assets are to be reported separately as quoted and non-quoted. Mutual
funds and NIT units are to be included under this category, for the reason that they give
rise to the equity of issuing institution. Financial transactions by non-residents related to
immovable assets and unincorporated enterprises are included under shares and other
equity. Reinvested / retained earnings of non-resident corporations are also recorded in
this category.

Paid-Up Capital
The term, Paid-up capital (share capital) or Shares would the used synonymously
for the money raised through sale of stocks. It includes shares fully paid in cash,
issued as bonus shares and shares issued for consideration other than cash.
Preferred stocks or shares, which also provide for participation in the distribution
of the residual value on dissolution of an incorporated enterprise (preferred in
distribution over ordinary shareholders), are included. Corporations sometimes
purchase their own shares in the market. These reacquired shares (called treasury
shares) are not included in holdings of shares. Branches of foreign banks would
report Head office capital account / assigned capital under this head as non-
quoted shares.

Paid-Up Capital Cash

Total amount fully paid in cash by shareholders for their shares of capital stock.

Paid-Up Capital Bonus Shares

Bonus shares are issued free of cost to shareholders to convert reserves into capital
stock. The equity remains unchanged, so that the shareholder's participation, while
remaining constant, is distributed over a larger number of shares.

Paid-Up Capital in Consideration other than Cash

Shares of the institutions issued in consideration other than cash means the shares
issued against services or any other obligations provided by the shareholders.

Paid-Up Capital Unquoted / Not-Listed

These are unquoted shares, which are not traded on stock exchanges or other
organized financial markets.

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Other Equity
The portion or part of equity that is not paid-up capital (shares) will be treated as
other equity. This item would include retained earnings, current year result, general
& special reserves and revaluation adjustments.

Retained Earnings
The category of retained earnings shows all earnings (after-tax profit) from the
overall operations less any amount allocated to general and special reserves, which
is established as a capital cushion to cover operational and financial risks.

Current Year Result

Accumulated revenues during the year minus expenditures minus taxes minus
retained earnings minus general and special reserves minus dividend payable are
the current year result.

General and Special Reserves

General and special reserves are capital redemption reserve, profit prior to
incorporation, share premium, statutory reserves and appropriations of retained
earnings. General and special reserves should be valued as the nominal amount of
earnings that have been retained.

Valuation Adjustment
Valuation adjustment represents the net counterpart of all changes (Surplus / deficit
on revaluation) in the values of assets and liabilities on the balance sheets except
for valuation changes recorded in the profit and loss accounts. The valuation
adjustment is market valued by definition.

Quoted Shares - Ordinary

Shares are usually traded on a stock exchange, where people and organisations
may buy and sell shares in a wide range of companies. A given company will
usually only trade its shares in one market, and it is said to be quoted, or listed, on
that stock exchange. However, some large, multinational corporations are listed on
more than one exchange. They are referred to as inter-listed shares.

Non-Quoted Shares - Ordinary

The shares those are not traded on a stock exchange are defined as non-quoted
shares.

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Preferred Stocks / Shares with Claims on Residual Value
Preferred stocks are shares of a corporation, which represent ownership in a
corporation with the distinction that if company earnings are sufficient, and
dividends are to be paid, dividends must be first paid to these holders of stock.
Preferred shares have priority over common shares in the distribution of dividends
and assets.

NIT Units
These are open-end mutual funds that are issued by National Investment Trust.
NIT units unique attraction is that it provides investors with a one-window entry
to Pakistans equity markets, which at times can be illiquid and volatile.
Capitalization is not fixed and normally shares are issued, as people want them.

Mutual Funds
These are pooling together the savings of large number of investors for attractive
yield and appreciation in value. A mutual fund is a diversified portfolio of
investment, managed by fund manager, who has necessary expertise of investment.
Investment is made in types of securities (equity or debt) according to the
investment policies laid down in the prospectus / offering document.
There are two types of mutual funds, which are:
Open-end mutual funds
Close-end mutual funds
Open-End Mutual Funds
Open-end mutual funds are those where subscription and redemption of
shares are allowed on continues basis. The price at which the shares of
open-end funds offered for subscription and redemption is determined by
the NAV after adjusting for any sales load or redemption fee. In Pakistan
there exists only four open ended mutual funds; National Investment (Unit)
Trust (NIT) in the public sector and Pakistan Stock Market Fund (PSM),
Pakistan Income Fund (PIF) and Unit Trust of Pakistan (UTP) in private
sector.
Close-End Mutual Funds
Close-end mutual funds are those where the shares are initially offered to
the public and are then traded in the secondary market. The trading usually
occurs at a slight discount to the NAV.

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 Over a period of time, the mutual fund managers have developed a variety
of investment products to cater for the requirement of investors, having
different needs. These include:
Growth funds
Balanced funds
Income funds
Growth Funds
The "growth funds" offer potential for appreciation in share value,
while the current income may be low. The fluctuation in share price
may also be high. Such funds invest in stocks and have tendency to
outperform other funds and other modes of savings over a period of
time.
Balanced Funds
The "growth and income funds" or "balanced funds", offer
prospects of both moderate appreciations in share value as well as
current income. The fluctuation in share price may be low. Such
funds invest in stocks, corporate debts and Government paper.
Income Funds
The "bond fund" or "income funds", offer good current income but
very little potential for growth. Such funds invest in government
paper, bonds issued by municipal or local bodies, corporate debts
and in stocks of utility companies, offering regular return.

Investment in Shares outside Pakistan

An investment in the companies outside Pakistan, which makes the investor a part-
owner of that company whose shares he has bought. Shareholders are rewarded
with annual dividends if the company makes sufficient profits and capital growth
in the value of their shares if the company attracts other interested investors. These
should be reported under non-residents category.

4.8. Insurance Technical Reserves

These are current claims of policyholders and beneficiaries rather than net equity of
insurance corporations. Generally these are classified as under:-
Prepayments of premiums, and
Outstanding claims with insurance companies

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 Pre Paid Insurance Premium
These are prepayments of premium held by insurance corporations (including
automobile, health, term life, accident / injury, income maintenance, and other
forms of non-life insurance). At the end of the accounting period when the balance
sheet is drawn up, parts of the insurance premium payable during the accounting
period are intended to cover risks in the subsequent period. These prepayments of
premiums are assets of the policyholders and form part of the insurance technical
reserves. Total premium paid for the subsequent period less premium consumed
during the reporting period would be reported.

Outstanding Insurance Claims

These are reserves that insurance enterprises hold in order to cover the amounts
they expect to pay out in respect of claims that are not yet settled or claims that
may be disputed. Outstanding claims are therefore considered assets of the
beneficiaries and liabilities of the insurance enterprises.

4.9. Financial Derivatives

Financial derivatives are financial instruments that have no intrinsic value, and are linked
to another specific financial instrument, indicator (foreign currencies, government bonds,
share price indices, interest rates, etc.), or commodity (gold, coffee, sugar, etc.) through
which specific financial risks can be traded in financial markets in their own right.

Unrealized Gain on Forward Foreign Exchange Contracts

In a forward contract, the counter parties agree to exchange, on a specified date, a
specified quantity of an underlying item (real or financial) at an agreed-upon
contract price. Either party to a forward contract is a potential debtor. The
unrealized gain to be received due to difference between the rates agreed upon and
the rate prevailing in the market should be reported under this item. You lock in
today's exchange rate instead of a volatile currency exchange rate in the future that
could significantly devalue your purchasing power.

Unrealized Gain on Currency Swaps

The best way to outline how Currency Swaps can save you money is by using an
example.
Let's say the deal you just signed has to be paid in Euros today. However, you don't
have Euros but you will be getting a payment in Euros in a few weeks. Instead of
buying Euros today and then selling them back when you receive your payment,

25
 you can arrange a Swap. It allows you to borrow the Euros you need to pay for the
purchase you just made, and then pay them later. The one feel that you pay for the
Swap, will be less than the two fees you'd pay if you bought today, and sold
tomorrow.

Unrealized Gain on Interest Rate Swaps

It is the exchange of one set of cash flows for another. A pre-set index, notional
amount and set of dates of exchange determine each set of cash flows. The most
common type of interest rate swap is the exchange of fixed rate flows for floating
rate flows.

Unrealized Gain on Option Contracts

The purchaser of an option contract pays premium to the writer of the option. In
return, the buyer acquires the right but not the obligation to buy (call option) or sell
(put option) a specified underlying item (real or financial) at an agreed-upon
contract price (the strike price) on or before a specified date. The buyer of an
option acquires an asset, and the option writer incurs a liability. However, an
option may expire without worth; it is exercised only if settling the contract is
advantageous to the buyer. Therefore, unrealized gains through these contracts
would be reported here.

Unrealized Gain on Futures Contracts

Futures are standardized forms of forward contracts mostly traded on organized
exchanges. An exchange-traded obligation to buy or sell a financial instrument or
to make a payment at one of the exchange's fixed delivery dates, the details of
which are transparent publicly on the trading floor and for which contract
settlement takes place through the exchange's clearing house. The counter party in
a futures transaction is the exchange. On the other hand, a forward is mostly an
over-the-counter (OTC) transaction and the counter party is the contracting party.
Therefore, unrealized gains through these contracts would be reported here.

4.10. Others Accounts Receivable

Financial assets consisting of trade credit and advances, dividends receivable, settlement
accounts, items in the process of collection, accrued income, head office / inter-branch
adjustment, expenditure account, suspense items and miscellaneous asset items.

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Trade Credit & Advances
Unlike loans, trade credit is non-interest bearing credit facility. It is extended
directly for sales of goods, supplies and materials on deferred payments to a buyer.
Interest is charged if the debtor defers payments from the schedule.
Advances are extended for work in progress (if classified or to be classified as such
under inventories by the debtor) and prepayments for goods and services. These
do not include loans to finance trade credit, which are classified under loans.

Dividends Receivable
Dividends receivable on corporate shares arise from the recording of dividends
when the dividends are declared, rather than when the dividends are paid.

Settlement Accounts
Settlement accounts should be used to account for differences in the time of
recording of (1) purchases or sale of financial assets, on the trade dates when
change of ownership occur and (2) the subsequent payments for the financial assets
on the settlement dates.

Items in the Process of Collection

Items in process of collection include cheques or other types of transferable items
that are posted directly to depositors accounts, but these are unavailable for use
until after the transferable items have cleared through the central bank or clearing
organization. If neither posted to depositors accounts nor cleared, these are contra
assets / liabilities.

Head Office / Inter-Branch Adjustment

All adjustments made with head offices or branches and are receivable would be
reported under this head.

Deferred Cost / Preliminary Expenses

This relates to the cost incurred for subsequent periods, which are reflected as
assets. This includes preliminary, formation and pre-operating expenses, discount
allowed on the issue of shares if any and expenses incurred on the issue of shares
including any sums paid by way of commission or brokerage on the issue of
shares, to the extent not written off or adjusted.

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 Suspense Account
It is a temporary holding account for errors and omissions, items that having no
proper classification pending until the determination of the proper account about
their allocation.

Miscellaneous Asset Items

These include claims, damages, accruals for miscellaneous fees, fines, forfeitures,
penalties, other prepaid expenses, receivable from brokers, receivable from
government under VHS (voluntary golden hand shake) scheme, stationery and
stamps on hand etc, etc.

Prepayment of Taxes
Prepaid taxes for the subsequent periods are classified under this category.

Prepayment of Rent
Rent prepaid for the subsequent periods is classified under this category.

4.11. Other Accounts Payable

These accounts consist of provision for loan losses, provision for other losses,
accumulated depreciation, adjustment for head office / branch, dividends payable,
settlement accounts, suspense accounts, deferred tax liabilities, accrued wages, rent, social
contributions, accrued taxes, mark-up / return / interest payable, mark-up on NPL &
investment, income account, miscellaneous liability items.

Provision for Loan Losses

Setting aside a part of income to cover anticipated loan losses; such provisioning
may be made as a percentage of various classes of non-performing loans or may be
for specific loan identified as irrecoverable, and is part of banking supervision
guidelines and requirements.

Provision for Other Losses

Setting aside a part of income to cover anticipated losses other than loan losses are
reported here.

Accumulated Depreciation on Non-Financial Assets

Accumulated depreciation on non-financial assets means total reduction in value of
non-financial assets at the end of the accounting period resulting from physical
deterioration, normal obsolescence or normal accidental damage etc.

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Settlement Accounts
A settlement account is any account you wish to have funds settled into at the end
of the transaction. Settlement accounts within other accounts payable should show
a financial corporations obligations for payments on future settlement dates for
assets that were purchased on trade dates.

Dividends
Distribution of earnings to shareholders prorated by the class of security and paid
in the form of money, stock, scrip, rarely, company products or property. The
amount is decided by the Board of Directors and is usually paid quarterly. Mutual
fund dividends are paid out of income, usually on a quarterly basis from the fund's
investments. Dividend payable is the liability and fall under this category.

Head Office / Branch Adjustment Account

All adjustments made with head offices or branches and are payable.

Advance Payments
Amounts received in advance for any contract but the contract has not yet fully
materialized.

Current Taxation (Provisions less Payments) Accrued Tax

Taxes chargeable to an accounting period but not yet paid.

Social Contributions
These are the actual or imputed payments by the bank / DFI to social insurance
schemes to make provisions for social insurance benefits to be paid or to the
employees benevolent funds.

Staff Pensions Funds

Liability in the form of staff pensions funds contributed by the financial institution.

Suspense Accounts
An account that is used to store short-term funds or securities until a permanent
decision is made about their allocation.

Deferred Tax Liabilities

Deferred tax liabilities arise from timing difference between recognized tax
liabilities in a financial institutions account and tax liabilities reported to the tax
authorities; the tax amount due in one period but deferred for payment in another
period.
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 Accrued Wages
Wages and salaries, which have not been paid and are outstanding at the end of the
accounting period

Accrued Rent
In finance, rent is a fixed income per period from property, land or any real estate.
It is also a contractual amount paid for the use of machinery or equipment such as
transport vehicles.

Miscellaneous Liability Items

Includes credit balances in the cash credit, certificates, margin on L/Cs and on
guarantees, and other liabilities items not specified elsewhere. This includes
provision against off-balance sheet obligations.

4.12. Non-Financial Assets

Entities from which their owners may derive economic benefits by holding them or using
them over a period of time are called non-financial assets. Non-financial assets consist of
tangible assets, both produced and non-produced, and intangible assets for which no
corresponding liabilities are recorded. Produced assets comprise non-financial assets that
have come into existence as outputs from production processes.

Produced assets
These include:
Fixed assetsassets that are used repeatedly, or continuously, in production
processes for more than one year. These assets may be tangible (dwellings,
other buildings and structures, machinery and equipment, and cultivated assets,
such as livestock for breeding and plantations) or intangible (mineral
exploration, computer software, and entertainment, literary, or artistic
originals),
Inventories (materials and supplies, work-in-progress, finished goods, and
goods for resale), and
Valuables (assets that are acquired and held primarily as stores of value).
a. Residential Building / Dwellings on Free Hold Land
Dwellings on freehold land are buildings on freehold land that are used entirely
or primarily as residences, including any associated structures, such as garages,
and all permanent fixtures customarily installed in residences; movable

30
structures, such as caravans, used as principal residences of households are
included.
b. Other Buildings and Structures on Freehold Land (Capital
Work In Progress - Civil Works)
The other buildings and structures on freehold land category of non-financial,
produced, tangible fixed assets consists of non-residential buildings and other
structures, such as civil engineering works on freehold land.
c. Residential Building / Dwellings on Lease Hold Land
Dwellings on leasehold land are buildings on leasehold land that are used
entirely or primarily as residences, including any associated structures, such as
garages, and all permanent fixtures customarily installed in residences;
movable structures, such as caravans, used as principal residences of
households are included.
d. Other Building and Structures on Leasehold Land (Capital
Work In Progress - Civil Works)
The other buildings and structures on leasehold land category consist of non-
residential buildings and other structures, such as civil engineering works on
freehold land.
e. Furniture and Fixture
All type of furniture and fixtures other than those acquired under financial
leases for the purpose of business are included.
f. Electrical, Office and Computer Equipments
All office equipments other than those acquired through financial leases use for
the business including counting and computing equipments, printers, scanners,
photocopiers, fax machines etc.
g. Other Machinery and Equipment
The other machinery and equipment category of non-financial, produced,
tangible fixed assets other than those acquired through financial lease consists
of machinery and equipment assets not classified as transport equipment and
office equipment.
h. Vehicles
Vehicles (as assets) other than those acquired through financial leases consist
of equipment for moving people and objects, other than any such equipment

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acquired by households for final consumption. Transport equipments such as
motor vehicles, trailers, ships, aircrafts, motorcycles, bicycles etc.
i. Furniture and Fixtures under Finance Lease
All type of furniture and fixtures those acquired through financial leases for the
purpose of business are included.
j. Electrical, Office and Computer Equipments under Finance
Lease
All office equipments acquired through financial leases use for the business
including counting and computing equipments, printers, scanners,
photocopiers, fax machines etc, are included.
k. Other Machinery and Equipment under Finance Lease
The other machinery and equipment category of non-financial, produced,
tangible fixed assets acquired through financial lease consists of machinery and
equipment assets not classified as transport equipment and office
equipment.
l. Vehicles under Finance Lease
Vehicles (as assets) acquired through financial leases consists of equipment for
moving people and objects, other than any such equipment acquired by
households for final consumption. Transport equipments such as motor
vehicles, trailers, ships, aircrafts, motorcycles, bicycles etc.

m. Other Tangible Fixed Assets (Produced)

Consists other tangible produced assets not specified elsewhere. Produced
assets are non-financial assets that have come into existence as outputs from
production processes.
n. Computer Software (Intangible Fixed Assets)
Computer software is an asset consisting of computer programs, program
descriptions and supporting materials for both systems and applications
software; included are purchased software and software developed on own
account, if the expenditure is large.

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 o. Entertainment, Literary or Artistic Originals (Intangible
Fixed Assets)
Entertainment, literary or artistic originals are the original films, sound
recordings, manuscripts, tapes, models, etc, on which drama performances,
radio and television programming, musical performances, sporting events,
literary and artistic output, etc, are recorded or embodied.
p. Other Intangible Fixed Assets (Produced)
Other intangible fixed assets are new information, specialized knowledge, etc,
not elsewhere classified, whose use in production is restricted to the units that
have established ownership rights over them or to other units licensed by the
latter.
q. Gold (Valued At Price Not Exceeding Current Market Price)
- Valuables
Gold held primarily as stores of value. Gold coins not in active circulations will
be reported in this category.
r. Other Valuables
Other valuables that is produced assets that are not used primarily for
production or consumption, that are expected to appreciate or at least not to
decline in real value, that do not deteriorate over time under normal conditions
and that are acquired and held primarily as stores of value. These also include
commemorative coins, paintings and sceneries etc.

Non-produced non-financial assets

This item includes both tangible and intangible assets that come into existence
other than through processes of production. Tangible non-produced assets include
land, subsoil assets, water resources, etc. Intangible non-produced assets include
patents, leases, and purchased goodwill, etc.
a. Free Hold Land (At Cost) Underlying Building and
Structure
Value of freehold land on which dwellings, non-resident buildings and
structures are constructed or into which their foundation are dug, including
yards and gardens deemed an integral part of dwellings.

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b. Free Hold Land- Other Than Underlying Building and
Structure
Freehold land other than freehold land underlying buildings and structures
consist of land not elsewhere classified, including private gardens and plots not
cultivated for subsistence or commercial purposes, communal grazing land,
land surrounding dwellings in excess of those yards and gardens deemed an
integral part of farm and non-farm dwellings.
c. Recreational Freehold Land
Recreational freehold land that is used as privately owned amenity land,
parklands, pleasure grounds, publicly owned parks and recreational areas.
d. Leasehold Land Underlying Building and Structure
Value of leasehold land on which dwellings, non-resident buildings and
structures are constructed or into which their foundation are dug, including
yards and gardens deemed an integral part of dwellings.
e. Leasehold Land- Other Than Underlying Building and
Structure
Leasehold land other than leasehold land underlying buildings and structures
consist of land not elsewhere classified, including private gardens and plots not
cultivated for subsistence or commercial purposes, communal grazing land,
land surrounding dwellings in excess of those yards and gardens deemed an
integral part of farm and non-farm dwellings.
f. Leasehold Land - Recreational
Recreational leasehold land that is used as privately owned amenity land,
parklands, pleasure grounds, publicly owned parks and recreational areas.
g. Other Tangible Non-Produced Assets
Any other tangible non-produced assets not specified elsewhere are covered in
this category.
h. Leases and Other Transferable Contracts
Leases or contracts where the lessee has the rights to convey the rights to a
third party independently of the lessor. Examples include leases of land and
buildings and other structures, concessions or exclusive rights to exploit
mineral deposits or fishing grounds, transferable contracts with athletes and

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 authors and options to buy tangible assets not yet produced. Leases on the
rental of machinery are excluded from non-financial intangible assets.

i. Purchased Goodwill Intangible Non-Produced Assets

Purchased goodwill is the difference between the value paid for an enterprise
as a going concern and the sum of its assets less the sum of its liabilities, each
item of which has been separately identified and valued; the value of goodwill
includes anything of long-term benefit to the business that has not been
separately identified as an asset.
j. Other Intangible Non-Produced Assets
Other intangible non-produced assets not elsewhere classified that are
constructs of society. They are evidenced by legal or accounting actions, such
as the granting of patent or the conveyance of some economic benefit to a third
party.

B. Sectoral Definitions
1. Deposit Money Institutions
These consist of resident depository corporations and quasi corporations, which have any
liabilities in the form of deposits payable on demand, transferable by cheques or otherwise
useable for making payments. Scheduled banks, specialized banks and Punjab provincial
cooperative banks in Pakistan fall under this category.

2. Foreign Controlled
Foreign controlled non-financial corporations are resident non-financial corporations
controlled by non-residents. It is difficult to determine the degree of effective control in a
corporation that has majority ownership shares; the general rule is that owners should
exercise majority control in the form of greater than 50% the voting shares.

3. Public Enterprises
Resident corporations controlled by the government. Control may be exercised through
ownership of more than half the voting shares, legislation, decree, or regulations that
establish specific corporate policy or allow the government to appoint the directors.

4. Other Deposit Accepting Institutions

These consist of resident depository corporations and quasi corporations, which have any
liabilities in the form of deposits that may not be readily transferable or in the form
35
financial instruments such as short-term certificates of deposits, which are close
substitutes for deposits.

5. Other Financial Intermediaries

Corporations engaged in financial intermediation, which raise funds on financial markets,
but not in the form of deposits, and use them to acquire other kind of financial assets.
These include discount houses, venture capital companies, mutual funds, housing finance
companies and cooperative banks except Punjab provincial cooperative bank etc.

6. Financial Auxiliaries
Corporations such as securities brokers, loan brokers, floatation corporations, insurance
brokers, exchange companies etc are financial auxiliaries. They also include corporations
whose principal function is to guarantee by endorsement, bills or similar instruments
intended for discounting or refinancing by financial corporations, and corporations, which
arrange hedging instruments such as swaps, options, and futures or other instruments,
which are continually being developed as a result of wide-ranging financial innovation.

7. NPIs (Market)
NPIs engaged in market production are classified as entities, which charge fees determined
by their costs of production and which are sufficiently high to have a significant influence
on the demand of their services, but any surpluses must be retained within these entities as
their status as NPI.

8. NPIs (Non-Market)
Non-market producers that provide most of their output free or at prices that are not
economically significant (i.e., at prices that do not significantly influence amounts
supplied or amounts purchased). NPIs engaged mainly in non-market production fall into
two main groups:
The NPIs that are mainly controlled and financed by the government
The NPIs providing non-market goods and services to households and financed
mainly by transfers from non-government sources households, corporations, or
non-residents etc, these are commonly termed as NPISHs, a separate sector of the
economy.

9. Employers
The employers are self-employed persons with paid employees.

10. Own Account Workers

The employers are self-employed persons without paid employees.
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11. Employees
These are persons, which receive income from their employers.

12. Recipient of Property and Transfer Incomes

These are persons, which receive income from property or transfers as the largest source.

C. Other Definitions
1. Leading Indicators
An economic indicator that changes before the economy has changed. Examples of
leading indicators include production workweek, building permits, unemployment
insurance claims, money supply, inventory changes, and stock prices. Leading indicators
foreshadow actual results long before they show up in conventional business statistics.

2. Coincident Indicators
Coincident indicators, change about the same time as the overall economy. An economic
indicator which varies directly with and at the same time as, the related economic trend,
thereby providing information about the current state of the economy.

3. Lagging Indicators
Lagging indicators change after the overall economy, but these are of minimal use as
predictive tools. An economic indicator that changes after the overall economy has
changed; examples include labour costs, business spending, the unemployment rate, the
prime rate, outstanding bank loans, and inventory book value.

4. Monetary Base
The monetary base comprises central bank liabilities (currency and central bank deposits)
that support the expansion of broad money and credit. The monetary base is sometimes
called "high powered money", base money, reserve money or narrow money, because
changes in monetary base usually lead to increases in money and credit that are larger than
the monetary base. Central bank deposits that other depository corporations use to satisfy
reserve requirements and for clearing purposes are always included in the monetary base.
However, other depository corporations holdings of central bank liabilities that (1) do not
qualify for satisfying reserve requirements and (2) are restricted from use for the other
purposes are often excluded from the monetary base. The monetary base changes as a
result of open market operations and exchange market intervention. Monetary policy can
be implemented by changing the size of the monetary base.

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5. Draining Reserves
The actions taken by the central bank to decrease the money supply by reducing the
amount available to banks for lending purpose. The course of action to tighten the Money
supply by (1) raising a banks minimum reserve requirements, (2) selling T-bills in the
open market at such attractive rates that dealers will reduce their bank balances to buy
them, (3) raising the rate at which banks Borrow from the central bank.

6. Money Overhang
A money supply that is larger than people want to hold at prevailing prices.

7. Net Foreign Assets

This is the net value of the assets that a country owns abroad and the domestic assets
owned by foreigners. This net value of foreign assets and liabilities equals the balance of
indebtedness or the net foreign assets.

8. Net Claims on Government

In the depository corporations survey, these are net position of the depository
corporations holding of government securities, and direct lending to the government less
the government deposits holding by the depository corporations.

9. Money Multiplier
The money multiplier is the amount of money that the banking system generates with each
rupee of reserve. The money multiplier is the reciprocal of the reserve ratio M=1/R

10. Velocity of Money

A term used to describe the rate at which money is exchanged from one transaction to
another. Velocity is important for measuring the rate at which money in circulation is used
for purchasing goods and services. This helps investors gauge how robust the economy is.
It is usually measured as a ratio of GNP to a country's total supply of money.

11. Debt Sustainability Analysis

The standard approach for evaluating debt sustainability focuses on the ratio of
government debt to GDP. The debt is considered sustainable if this ratio is stable or
declining overtime, while a rising ratio is considered unsustainable.

12. Sterilization
Sterilization refers to the process of neutralizing the additional money that enters the
economy. The central bank purchases US dollar from the market expecting to create
demand for dollars to prevent the US currency from sharply depreciating against the

38
rupee. When the central bank buys dollars, it releases fresh rupees into the economy. As
long the central bank has portfolio of government bonds it can sterilize money supply by
selling these bonds and squeezing the money. As the central bank depletes its portfolio of
government bonds it reduces its ability to continually sterilize money supply in the
economy.

13. Credit Money

This is money created by a depository institution when it credits an account with a new
deposit to fund a loan. When the loan is re-paid, that amount of credit money vanishes.

14. Capital Ratio

This is the ratio of a bank's capital to its risk-weighted assets. When a bank issues a loan,
its assets increase but not its capital since its liabilities increase equally by the deposit
created to fund the loan. However interest earned on loans, together with fees and income
from its other investments, increase both its capital and assets.

15. Reserve Ratio

This is the ratio of a bank's reserves to the amount of its demand deposits, i.e. its checking
deposits. Even with no specified minimum ratio, banks would have to maintain sufficient
reserves to cover checks written by depositors and to provide cash on demand.

16. Discount Window

The SBP lends short-term to healthy banks through this facility. The rate of interest on the
loan is known as the discount rate. It is set above (basis points) the target bank rate.
Banks use the discount window sparingly because they can usually borrow at a lower rate
in the money market.

17. Monetary Independence

The ability of a country to determine its own monetary policy, as opposed to allowing the
money supply to be determined by the exchange market intervention required to maintain
a fixed exchange rate.

18. Monetary Integration

The adoption of a common currency by two or more countries

19. Monetary Union

Two or more countries sharing a common currency

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