Money and Banking Notes Form 5 – Commerce Study Guide

Money and Banking Notes Form 5 – Commerce Study Guide

MONEY AND BANKING

Money is a medium of exchange or money is anything which is generally accepted in the settlement of debts and other obligations.WHY DO WE USE MONEY?

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

CurrencyIt refers to the bank notes and  coins in circulation in a country. The currency in Tanzania,is the shilling.Legal TenderThe money which by law must be accepted in settlement of debts within a country.TYPES OF MONEY

Money evolved through the following stages.

1.Barter system

This was the earliest form of exchange where commodities were exchanged directly for other commodities.

e.g. millet, meat, cassava, Beans,cows,salt etc.

2.Crude commodity money e.g. salt, corn, tea, Tobacco etc. such commodities were used because of their real value. However most of them were perishable.

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

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

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

QUALITIES OF GOOD MONEY(Characteristics of good money)

1. ACCEPTABILITY

It must be a legal tender, all people in the country must accept it in settlement of debts or other types of exchange.

2. PORTABILITY OR TRANSFERABILITY

It should be easily carried from one place to another and it must not be heavy in relation to its value

3. DIVISIBILITY

Money should be easily divided into smaller unit eg 1 shilling, 5 shilling, 50 shillings and 100 shillings so as to facilitates smaller transactions

4. HOMOGENEITY

One unit should be identical with other e.g 100 shilling note should be similar as used in a country.

5. SCARCITY

Money should be relatively source so as to maintain its value and again it should not be too scarce.

6. STABILITY IN VALUE

Money should be able to maintain its value from year to year. In reasonable period of time it should not delay or under go any physical deterioration.

7. UNCOUNTERFEITABILITY

That is money must be difficult to imitate or forge so that it can maintain its value.

8. DURABILITY

Money should be durable. It is to serve its function as a store of value money must not delay or under go any physical deterioration so as to maintain its value.

9. COGNIZABILITY

Money should be easy recognized throughout the all countries. The 100 shilling note, 200, 500, 1000 etc which should be the same throughout the all city.
10. MALLEABILITYMoney  coin should be hammered or beaten into any shape without losing its intrinsic value i.e it should not crush or break and dis-integrate.FUNCTIONS OF MONEY.

1. MEDIUM OF EXCHANGE

Money is used as a medium of exchange simply because goods and service are exchanged in money.

2. UNIT OF ACCOUNT

Money is used as unit that effect or carry out business transactions and accounting procedures.

3. MEASURE OF VALUE

Value of goods and services are expressed in terms of money eg a kg of meat costs so much e.t.c

4. STORE OF WEALTH (VALUE)

Money can be used to store value or wealth because it’s bulky and not perishable.

5. STANDARD OF DIFFERED PAYMENT.

Money facilitates payment of debts and transaction in some future date.

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

N.BAnything doing the above is money hence the expression of money is what it does.BANKINGWhat is a Bank?This refers to an institution that accepts deposits from those who have money in excess of their immediate needs or safe guards the money, receives and advances loans to those who are in need of financial assistance.TYPES OF BANKS.a) Savings BanksThese are intended to provide a safe place for keeping money and promote the habit of saving among individuals. e.g The Post Office Savings Bank.b) Commercial BanksAre institutions engaged in commercial business accepting deposits on various terms with the public and making profits by lending money to the public among other things.They include N.B.C bank, CRDB bank,Bank of Baroda,NMB, Barclays Bank,Stanbic Bank etc.c) Central BanksIt is a government institution established to control,guide and assist commercial banks in the country and to provide banking services and financial advice to the government.d) Merchant Bankse) Specialized BanksThese serve especial type of customers, are aimed at providing especial type of services eg the cooperative banks which mainly serves cooperative societies, The agricultural development bank which serves farmers, The Housing Finance Bank provides finance in buying and building houses only,Mkombozi Bank ltd etc.FUNCTIONS OF COMMERCIAL BANKS.

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

10. They act as trustees, a trustee is someone who acts on behalf of another when he or she is absent. When banks make payment or receive money on behalf of their customers, they act as trustees.11. They give financial advice concerning business and money to their customers.
PROBLEMS OF COMMERCIAL BANK’S IN TANZANIA

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

MEANS OF PAYMENT IN HOME TRADE

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