FORM FIVE COMMERCE – MONEY AND BANKING

                          BILL OF EXCHANGE

A bill of exchange may be defined as an unconditional order in writing addressed in one person to another,signed by the person to whom it is addressed to pay on demand or at fixed or determinable future time, a sum of money to or to the order to a specified person or bearer.

                         PARTIES TO A BILL OF EXCHANGE

1. Drawee –This is a person who writes out a bill i.e. the creditor, sometime the actual payee of the bill.
2. Drawer –This is a person or party to whom the bill of exchange is addressed in other words that person owing money to the drawer i.e. the debtor.
3. Payee- is that person or party to be paid by a bill.

 

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SPECIMEN EXAMPLE OF A BILL OF EXCHANGE.

ACCEPTANCE OF A BILL OF EXCHANGE

This is the act of the drawee writing the word “Accepted across the face of the bill and signing again it. Therefore accepting the bill, the drawee acknowledges that we will pay the money according to the wording of the bill.

N.B. Before the bill is accepted by the drawee it is known as a draft. The drawee after acceptance becomes the accepter meaning that he is legally responsible for the payment of the sum of the money on the bill.

ESSENTIAL OF THE BILL OF EXCHANGE

The bill of exchange must have the following

–          The drawer’s signature

–          Acceptance

                  This means the signature of the drawee and the word accepted across the face of the bill.

3.Any ambiguous wording ie without any omission 

1. The date on which it was made out

 

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TYPES OF BILLS OF EXCHANGE

SIGHT AND USANCES

         Sight bills:are bills which are paid on sights or demand.

         Usance bills: are those bills which are made payable after a specified period of time in future. Normally 90 days or three months.

         Inland bills:are those bills where the drawer and drawee of the bill are from the same country.
         Foreign bills:are bills of exchange whose drawer and drawee are from different countries.
         Treasury bills:are bills through which the government borrows money from the general public.

          THE ENDORSEMENT TO THE BILL OF EXCHANGE. Since all bills of exchange are negotiable instrument or documents and they can be seen as potentially valuable security ie they can be transferred
from one person or party to another for endorsement. The transferability of a bill after being enclosed, will depend upon the reputation of the accepter to the person or party who accepted the bill is of
a doubt ful financial status, key few people are likely to accept such a bill being endorsed to them in payments.

          DISCOUNTING BILLS OF EXCHANGE

This is the selling of a bill to a bank or this count choose or any other form of lending money institution the bill matures.  In return money in cash is less than the interest and expired bill.

N.B: The purchases price of the bill before it matures, will be less than the price value of the bill.

The discount deducted from the face value of the bill will be calculated to an agreed percentage per annual (year) for the period, the bills of exchange approaches the maturity date, its purchase price will also be increased.

          HONORING A BILL

When a bill matures it is presented to the drawee and when payment on it is made the bill has been honored

When the bill has been paid before the maturity date, such a bill is called retired bill.

The act of paying the bill before it matures is called discounting a bill.

         DISHONORING A BILL

When a bill matures and no payment is made it’s called dishonoring a bill. The payee may then agree to extend the date of maturity. The payee may take a legal action against the drawee ie by suing him to the court.

         A PROMISSORY NOTE

A promissory note is a conditional writing made by one person where he promises to pay another person or his order a specified sum of money on demand determinable in future time.

Specimen example of a promissory note.

Comparison between a bill of exchange and a promissory note 

                                                           Differences

                                                        Similarities

1. Both evidences, are the acknowledgment of debt.
2. Both may be discounted and endorsed before maturity.
3. They allow enough time before payment is endorsed.

 

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                  ADVANTAGES OF A BILL AND PROMISSORY NOTE.

1. Both of them acknowledge a debt. A person holding one of them does not have to prove before the court of law the circumstances giving a debt.
2. They may be discounted before the maturity date. This enables the seller to get ready cash almost immediately after the sale of goods.
3. They allow enough time for a buyer to dispose 77 the stock he has bought so that by the time the maturity date arrives, he is in position to settle the debt.
4. An accommodation bill helps trader out of the temporally financial difficulties.

 

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                  MEANS OF PAYMENT IN TRADE

Government, business men and individuals always carry out business the transfer of goods and service in which they pay in various ways.

The following are the means of making these payment.

1. CASH

 

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This involves the use of coins and paper notes both of which are legal tenders and they are more readily accepted by the individuals. Cash is suitable for paying dates especial when the creditors are to hand,

 the disadvantage are that coin become cumber some to carry and they are easily be stolen.

1.  CHEQUE

 

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This is the commonest way of paying debtors.

A cheque is an order to the bank to pay a named person his order specified sum of money. A cheque can be endorsed, crossed or made payable oneself depending on circumstances prevailing. It is an negotiable instrument i.e. ownership of holding can be transferred to another person.

1. BANK DRAFT

 

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This is a special kind of cheques drawn by the bank on its self and it more readily accepted since the government payment is not against it. A bank issues a bank draft after it has received money from the person requesting it. It’s more convenient then a cheque because it can be presented in payment in any bank.

It may also be used especial when overseas suppliers are un willing to accept a person cheque if payment is to be made in a distance place by urgently.

1. BANK OVER DRAFT

 

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This allows the account holder to withdrawn from his account the started amount of money of which is over and above his credit balances. Interest is charged on the extra amount received it is therefore a special of loan.

1. POSTAL ORDER

 

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This is the service by which the post office transfers money from one person to another. It is used to transfer small sums of money and they are issued in various denominations.

The person sending the money fills a form (an order) indicating the amount to be send to the name of the paying post office and the payee. The order is then send by the nest to the payee who can turn be cashes at the post office name.

 Stamp can be stuck to increase the amount being sent. A small commission or fee is charged for the service.

1. MONEY ORDER

 

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This is issued by the post office with large sums of money. A form is filled in which the sum of money to be send is stated filling the name of the sender the payee and the post office will be informed of the details by the issuing post office. The order is then sent to the payee who must prove his identification before receiving the money. He must tell the name of the person who has sent the money and sometimes where he come from.

The money order may be crossed if it has to be paid in the bank account of the payee. A small fee known as a poundage is charged. Both postal orders and money orders are said to be note negotiable. In case of emergency money can be sent by means of a telegram.

1. POSTAGE STAMP

 

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A debtors can send stamps to creditors to pay a small amount of debts. These stamps may be brought bank by paying the post office if the payee needs cash constantly. Or immediately.

1. REGISTERED POSTS

 

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The post office may supply special envelops for sending cash, cheques and drafts or other important document by using registered posts. Since the envelop must have a vertical and horizontal across it, cutting through each other at the center of the envelop.

 A fee is charge for registration it the letter gets lost in the post office the sender is given a receipt which he uses to claim for compensation registered post returns are not sent by the post office to the owner (the payee) but a note on a green card is post in the box of addressee the must produce when claim the later with prof of the identify card. This avoids giving it to the wrong hands.

              THE CENTRAL BANK.

A central bank is a financial institution established by the government with the aim of controlling economic activity time the sound and desired monitory policy or it is an institution charged primarily with controlling a country’s money and banking system. It is the central monitory authority and other intermediaries (agency).

               FUNCTIONS OF THE CENTRAL BANK

1. Currency management.This involves printing notes, minting coins and replacing worn out notes.
2. A central bank is a banker to govern, this means that it accepts deposit of government accounts, makes payment on behalf of the government makes temporally advances of loans to government.
3. It controls the volume of money supply as well as credit advances in bank system.
4. It is custodian to valuable financial instrument which are valuable to a country such as gold, Treasury bill and bonds.
5. The central bank is a banker to commercial banks. This involves accepting and keeping commercial bank deposits acting as a lender of last resort, controlling lending activity, training of the commercial bank staff and acting as the leaning house to settle interbank debtness.
6. A central bank is a controller of investment in a country, turn establishment of interest rate to charge commercial banks.
7. Controller of foreign exchange by fixing the exchange rate, controlling of foreign exchange reserve.
8. It manages and keeps foreign currencies.
9. It keeps the funds of international institution or organization operating in a country eg. International monetary funds (IMF) Red Cross etc. i.e. It’s a banker to foreign central banks and international organizations.
10. It has to initiate as accelerate economic grown and development it operates policies aimed at rapid economic growth and development.
11. It also runs schools and collages for training bankers since commerce bank are small and may not be in position to finance training facilities to man power.
12. It has to control the activities of foreign banks whose activities may not be in line with development policies of e.g. profit repatriation.
13. It suppresses and examine the activity of all commercial banks so as to promote sound commercial banking.

 

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                 PROBLEMS FACING CENTRAL BANK

1. They experience a lot of government interference and do not act independently e.g bank of Tanzania.
2. Some central banks lack trained more power in the field of banking to effectively and control commercial bank.
3. There is a lot of corruption and frauds in the banking system and central bank its self.
4. The commercial banks do not surrender all their money which deposited in the central banks and so they cannot be monitored by the central banks.
5. Some commercial are subsidiaries of foreign banks. e.g. standard chartered bank in Tanzania and have offer sources of finances in case of unfavorable policies in central bank.
6. Less developed countries have large sub-stance sectors whose operation is not influenced by actions of monitory policy as directed by the central bank.
7. L.D.C. economies have poor record keeps and lack statistics which are needed in the planning monitoring exercises of commercial banks.
8. Commercial banks are urban centres which implies a limited geographical scope/content with economic activities.
9. There is lack of entrepreneurs that the central banks may collaborate with to regulate the investment levels.
10. L.D.C Lack well spelt out term development plan which central bank should follow when formulating policies.

 

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                  MONETARY POLICIES
       These are methods used by the central bank to control money supply and money demand in an economy for economic growth and development.Central bank uses the following tools to control money
        supply:

                – Open Market Operation(OMO)
                -Selective credit control
                -Bank rates
                -Compulsory deposit by commercial banks.
                -Moral suasion
                -Legal reserve requirement