I.Com (Intermediate in Commerce) Banking Syllabus

What is "Murabaha" in Islamic banking?

Murabaha is a cost-plus sale in which the bank buys an asset and sells it to the customer at the original cost plus an agreed, disclosed profit margin, usually on a deferred-payment basis.

What is "Ijarah" in Islamic banking?

Ijarah is an Islamic leasing arrangement in which the bank purchases an asset and leases it to the customer for an agreed rental over a fixed period, with ownership remaining with the bank.

List the two primary functions of commercial banks.

Accepting deposits from the public and advancing loans and credit (lending).

Name three forms in which commercial banks advance loans.

Cash credit, overdraft, discounting of bills of exchange, and term/demand loans.

What is an "overdraft" facility provided by a commercial bank?

An overdraft allows a current-account holder to withdraw more money than the balance in the account up to an agreed limit, with interest charged only on the amount actually overdrawn.

What is "cash credit" provided by a commercial bank?

Cash credit is a loan facility under which the bank allows a borrower to draw money up to a sanctioned limit against the security of goods or assets, charging interest on the amount actually used.

What is meant by "discounting of bills of exchange" by a bank?

The bank purchases a bill of exchange from its holder before maturity, paying the bill's value less a discount (interest), and collects the full amount from the drawee on the maturity date.

Define credit creation by commercial banks.

Credit creation is the process by which commercial banks expand the money supply by making loans, since every loan creates a new deposit; banks can lend a multiple of their cash reserves while keeping only a fraction as reserve.

What principle makes credit creation possible?

The principle that banks keep only a fraction of deposits as a cash reserve (because not all depositors withdraw at once) and lend out the rest, and that loans return to the banking system as new deposits.

State the formula for the credit (deposit) multiplier.

Credit multiplier = 1 / r, where r is the required cash reserve ratio (expressed as a fraction).

If the cash reserve ratio is 20%, what is the value of the credit multiplier?

Credit multiplier = 1 / 0.20 = 5.

With a 20% reserve ratio and an initial deposit of Rs. 1,000, what total deposits can the banking system create?

Total deposits = Initial deposit × (1/r) = 1,000 × 5 = Rs. 5,000.

Name two factors that limit the credit-creating power of commercial banks.

The cash reserve ratio, the amount of cash/leakage held by the public outside banks, the availability of creditworthy borrowers, and the central bank's monetary policy.

What is a bank deposit?

A bank deposit is a sum of money placed by a customer with a bank for safekeeping, which the bank is obliged to repay on demand or after an agreed period, and on which it may pay interest/profit.

Name the three main types of bank deposit accounts.

Current account (demand deposit), savings account, and fixed/term deposit account.

What are the key features of a current account?

A current account is a demand deposit allowing unlimited withdrawals and deposits without notice, mainly used by businesses; it normally pays no interest and may offer overdraft facilities.

What are the key features of a savings account?

A savings account is meant to encourage small savings, pays interest/profit, allows deposits and limited withdrawals, and is suited to individuals and small savers.

What are the key features of a fixed (term) deposit account?

A fixed deposit places a lump sum for a fixed period (e.g. 3 months to several years) at a higher rate of interest/profit, with the money not withdrawable before maturity without penalty.

Which type of deposit account generally earns the highest rate of interest, and why?

The fixed/term deposit account, because the money is locked in for a definite period, giving the bank stable funds to lend, so it rewards the depositor with a higher rate.

List three main functions of a central bank.

Issuing currency notes, acting as banker to the government, acting as banker's bank and lender of last resort, controlling credit, and managing foreign exchange reserves.

Why is the central bank called the "lender of last resort"?

Because when commercial banks cannot obtain funds elsewhere during a financial emergency, the central bank lends to them (against eligible securities) to maintain confidence and stability in the banking system.

What is meant by the central bank being the "bank of issue"?

It holds the sole/monopoly right to issue currency notes in the country, ensuring uniformity, control over money supply, and public confidence in the currency.

How does the central bank act as "banker to the government"?

It keeps the government's accounts, receives and makes payments on its behalf, manages public debt, advises on financial matters, and provides short-term loans to the government.

Define monetary policy.

Monetary policy is the central bank's program of controlling the supply of money, the level of credit, and interest rates in order to achieve objectives such as price stability, economic growth, and full employment.

State two main objectives of monetary policy.

Price stability (controlling inflation), economic growth, full employment, exchange-rate stability, and equilibrium in the balance of payments.

Distinguish between expansionary and contractionary (tight) monetary policy.

Expansionary (easy/cheap money) policy increases the money supply and lowers interest rates to stimulate the economy; contractionary (tight/dear money) policy reduces the money supply and raises interest rates to curb inflation.

Name the two broad categories of credit control methods used by a central bank.

Quantitative (general) methods and qualitative (selective) methods.

List the main quantitative methods of credit control.

Bank rate (discount rate) policy, open market operations, variation of the cash reserve ratio, and the statutory liquidity ratio.

What is the "bank rate" and how is it used to control credit?

The bank rate is the rate at which the central bank rediscounts bills or lends to commercial banks; raising it makes borrowing costly and contracts credit, while lowering it cheapens borrowing and expands credit.

What are "open market operations"?

Open market operations are the buying and selling of government securities by the central bank in the open market; selling securities absorbs cash and contracts credit, while buying them injects cash and expands credit.

How does varying the cash reserve ratio (CRR) control credit?

Raising the CRR forces banks to keep more cash in reserve, reducing funds available for lending and contracting credit; lowering it frees funds and expands credit.

List three qualitative (selective) methods of credit control.

Fixing margin requirements, credit rationing, regulation of consumer credit, moral suasion, and direct action/directives.

What is "moral suasion" as a method of credit control?

Moral suasion is the central bank's use of persuasion, advice, and requests (rather than compulsion) to encourage commercial banks to follow its credit policy.