Money and
Banking
Lecture 01
Text and Reference Material
• The Primary textbook for the course will be
• “Money, Banking and Financial Markets” by
Stephan G. Cecchetti
International Edition, McGraw Hill Publishers, ISBN 0-07-111565-X”
1-2
Text and Reference Material
• Reference books will be
• “The Economics of Money, Banking and
Financial Markets”, by Fredrick S. Mishkin
7th Edition Addison Wesley Longman Publishers
• “Principles of Money, Banking and Financial
Markets” by Lawrence S. Ritter, Willaim L. Silber
and Gregory F. Udell,
Addison Wesley Longman Publishers
1-3
Course Contents
• Money and the Financial System
• Money and the Payments System
• Financial Instruments, Financial Markets, and
Financial Institutions
• Interest rate, Financial instruments and financial
markets
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Future Value, Present Value and Interest Rates
Understanding Risk
Bonds, Pricing and Determination of Interest Rates
The Risk and Term Structure of Interest Rates
Stocks, Stock Markets and Market Efficiency
1-4
Course Contents
• Financial Institutions
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Economics of Financial Intermediation
Depositary Institutions: Banks and bank Management
Financial Industry Structure
Regulating the financial system
• Central Banks, Monetary Policy and Financial
stability
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Structure of central banks
Balance sheet and Money Supply process
Monetary policy
Exchange rate policy
1-5
Course Contents
• Modern Monetary Economics
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Money growth and Money Demand
Aggregate demand
Business Cycle
Output and inflation in the short run
• Money and Banking in Islam
• Monetary and financial policy and structure for an
Interest-free economy
• Islamic Banking in the contemporary world
1-6
Five Parts of the Financial System
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Money
Financial Instruments
Financial Markets
Financial Institutions
Central Banks
1-7
Five Parts of the Financial System
1. Money
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To pay for purchases
To store wealth
Evolved from gold and silver coins to paper
money to today’s electronic funds transfers
Traditional Paycheck system vs. ATM
Withdrawals
Mailed transactions vs. E-banking
1-8
Five Parts of the Financial System
2.
Financial Instruments
• To transfer wealth from savers to borrowers
• To transfer risk to those best equipped to bear it.
• once investing was an activity reserved for the
wealthy
• Costly individual stock transactions through
stockbrokers
• Information collection was not so easy
• Now, small investors have the opportunity to
purchase shares in “mutual funds.”
1-9
Five Parts of the Financial System
3.
Financial Markets
• To buy and sell financial instruments quickly and
cheaply
• evolved from coffeehouses to trading places
(Stock exchanges) to electronic networks.
• Transactions are much more cheaper now
• Markets offer a broader array of financial
instruments than were available even 50 years
ago
1-10
Five Parts of the Financial System
4.
Financial Institutions.
• Provide access to financial markets
• Banks evolved from Vaults and developed into
deposits- and loans-agency
• Today’s banks are more like financial
supermarkets offering a huge assortment of
financial products and services for sale.
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Access to financial markets
Insurance
Home- and car-loans
Consumer credit
Investment advice
1-11
Five Parts of the Financial System
5.
Central Banks
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Monitors financial Institutions
stabilizes the Economy
Initiated by Monarchs to finance the wars
The govt. treasuries have evolved into the
modern central bank
control the availability of money and credit in
such a way as to ensure
1. low inflation,
2. high growth, and
3. the stability of the financial system.
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State Bank of Pakistan www.sbp.org.pk
1-12
Summary
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Five Parts of the Financial System
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Money
Financial Instruments
Financial Markets
Financial Institutions
Central Banks
1-13
Upcoming Topics
• Five Core Principles of Money and Banking
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Time has Value
Risk Requires Compensation
Information is the basis for decisions
Markets set prices and allocate resources
Stability improves welfare
• Financial System Promotes Economic Efficiency
• Facilitate Payments
• Channel Funds From Savers to Borrowers
• Enable Risk Sharing
1-14
Upcoming Topics
• Money
• Characteristics of Money
• Liquidity
• Payment system
• Commodity vs. Fiat Money
• Cheques
• Other forms of payments
• Future of Money
• Measuring Money
1-15