World-Class Study Notes on Money and Banking

Mind Map Overview

  • Discusses the importance of money and its characteristics
    • Functions of Money
    • Liquidity and Liquidity Preference Theory

Importance of Using Money

Overview

  • Definition of money: Anything acceptable for the exchange of goods and services.
  • Key functions of money:
    • Medium of exchange: Facilitates exchanges.
    • Store of value: Can be saved and used later.
    • Measure of value: Helps in valuing goods.
    • Standard for deferred payment: Settles debts over time.

Deep Content on Money

Types of Money
  1. Currency/Fiat Money
    • Physical notes and coins, representing 100% liquidity.
  2. Bank Money
    • Demand deposits, payments via cheque, liquidity not as high as cash.
  3. Near Money
    • Assets convertible to cash quickly (e.g., savings accounts).
  4. E-Money
    • Digital forms of money (e.g., credit/debit cards).
  5. Token Money
    • Money with intrinsic value (coins, etc.)
Functions and Characteristics of Money

  • Key functions:

    1. Medium of Exchange:
    • E.g., Purchasing items with currency eliminates barter's double coincidence problem.
    1. Store of Value:
    • Can be saved for future use, maintains nominal value over time.
    1. Measure of Value:
    • Prices can be assigned to goods, e.g., a mobile priced at Rs. 100,000.
    1. Standard for Deferred Payments:
    • Facilitates credit transactions, increases total sales value.

  • Characteristics of Good Money:

    • Acceptability, Divisibility, Durability, Portability, Easy Identifiability, Uniformity, Difficulty in Imitation.
Liquidity & Liquidity Preference
  • Liquidity: The ease of converting assets to cash.
  • Liquidity Preference Theory: Explains why people hold cash:
    1. Transaction Motive: Everyday transactions.
    2. Precautionary Motive: For emergencies.
    3. Speculative Motive: To exploit future opportunities.

Money Supply

  • Definition: Total money available in an economy.
  • Types:
    1. Narrow Money Supply (M1): Includes cash and demand deposits.
    2. Broad Money Supply (M2): Encompasses M1 plus savings deposits.
    3. Consolidated Broad Money Supply (M2B)
    4. Financial Survey Money Supply (M4)
  • Real vs. Face Value: Real value decreases over time due to inflation.

Types of Inflation

  1. Demand-Pull Inflation: Prices rise due to increased demand.
  2. Cost-Push Inflation: Prices rise due to increased costs of production.
  3. Structural Changes: Economic changes affecting price levels.

Legal Tender

  • Definition: Money recognized by law to settle debts
  • Unlimited legal tender (e.g., LKR notes) can pay any amount. Limitations on lower denominations.
Security Features of Money
  • Watermark, security thread, special paper, authorized signatures, colorful paper, serial numbers, see-through features, light sensitivity, raised ink, etc.

Black Money

  • Definition: Money earned through illegal means (e.g., drug trafficking).
Money Laundering
  • Process to convert black money into legal currency through various stages to inscribe into economic circulation.

Financial Institutions

Overview of Financial Bodies

  1. Central Bank: Controls monetary policy.
  2. Licensed Commercial Banks: Accept deposits, offer loans.
  3. Licensed Specialized Banks: Focus on specific banking activities.
  4. Licensed Finance Companies: Provide financial services based on deposits.
  5. Co-operative Rural Banks: Provide loans to members.
  6. Investment Companies: Help in investments and financial services.

Contributions of Financial Institutions to Business Activities

  • Central Bank: Issues currency, controls monetary policy, etc.
  • Commercial Banks: Accept deposits, provide loans, underwriting services, etc.
  • Specialized Banks: Accept savings and term deposits but no current accounts.
  • Cooperatives: Promote savings among rural communities.

Commercial Banks

Services Offered to Businesses

  1. Collection of Cheques: Facilitate payment processing.
  2. Leasing Services: Provide assets for business operations.
  3. E-banking: Offers online banking facilities.
  4. Mortgage Transactions: Loans secured by property.
  5. Pawning Services: Loans against valuable items.
  6. Safety Locker Facilities: Secure storage of valuables.

Bank Loans

  • Bank Overdraft: Short-term borrowing allowing withdrawal exceeding the account balance.
  • Bank Loans: Long-term loans requiring repayment over time, assessed on applicants’ credibility and purpose.
  • Types of bank loans include:
    • Business loans: For operational needs.
    • Consumer loans: For personal financing.

Central Bank of Sri Lanka

Overview

  • Established under Monetary Act in 1949.
  • Functions to maintain financial stability and implement government policies.

Objectives & Functions

  1. Controlling prices and inflation.
  2. Supervision of banks & financial institutions for stability.
  3. Management of public debt and monetary resources.
  4. Financial intelligence against money laundering and terrorism.
Facilities Provided by the Central Bank
  • SLIPS, RTGS, Lanka Pay for payment transactions.
  • Facilitates interbank transactions and international transfers.

Conclusion

  • Overall, understanding these systems enhances financial literacy and helps navigate economic activities effectively, ensuring stability and growth.