INTRODUCTION TO

BANKING AND
INSURANCE

COURSE CODE: IBFT 04101

PRESENTED BY Mr. Hafidhi T. Saidi

Module description

• Course status: Core

• Module credit: 14
• Pre-requisite: None
Sub-enabling Outcomes
• Explain loan, different types of account and other services of the bank.;
• Explain how products and services are issued in the banking industry;
• Explain types of insurance;
• Demonstrate various products/covers under life insurance (long term and
short-term covers) as well as non-life insurance covers i.e. motor, marine
etc.;
Mode of delivery

• Lectures and Seminar

Learning Context

• Lecture,

• Group discussions,

• Demonstrations, and

• Seminars
Learning
Materials
• Text books,

• Journals,

• Manual,

• Handout,

• Internet browsing, etc.

Integrated Method of Assessment

• Coursework:
60%
• Assignments: 15%
• Test 1: 20%
• Test 2: 20%
• Quizzes:
5%
• Semester Examination:
40%
 Required
Readings
• Reading List:
• Fredric S.Mishikin (1994), Money Banking and Financial
Markets, Prentice-Hall.
• David S. Kidwell, Richard L. Peterson, David W. Blackard (2003),
Financial Institutions Market and Money, McGraw-Hill.
• Fredrick S.Mishkin, Stanley G. Eakins (2006), Financial Markets
and Institutions, Pearson International Edition
 Topic 1

• History of money
• Mean and types of money
• Evolution of money
 Meaning and types of money
• The word "money" can mean many things. It is used with different
connotations in our everyday speech. On the one hand, if people say
that a person has a lot of money, they usually mean that the person is
wealthy/ Affluent. On the other hand, to economists money has a very
specific meaning. They define money as “anything that is generally
accepted in payment for goods and services or in the repayment for
debts.” (Mishkin, 1992, p.G-7) It should be mentioned at this point
that currency, e.g. the euro (€), is one type of money. However, to
define money merely as currency would be too narrow for economists
 Meaning and types of money
• This general acceptability mentioned in the definition is the most
important requirement of money. No matter how precious a material
is, if it is not generally acceptable by the people as a means of
exchange, it will not qualify as money. Thus it is a peculiar feature of
any form of money.
• Generally, money is any thing that can be acceptable for the exchange
as a consideration in payment of goods or service. For instance a trade
man from Tanzania may go to America for trade tripe with his
Tanzanian shilling thus it can’t be easy for this man to transact with
his homeland currency in America due to acceptability constraint.
 Meaning and types of money
• After be well acquainted with the meaning of money and salient
feature of it, its time to look various types of money form its essence.
 EVOLUTION OF
MONEY
• The barter system
Before the evolution of money, individuals were used to transact in a barter way,
in which the exchange of goods and services were made directly.
Thus in a barter system, exchange was done on the basis of direct exchange of
goods and services.

Barter involves the direct exchange of one good for some quantities of another
good. For example, a horse may be exchanged for a cow, or three sheep or four
goats. Hence, for a transaction to take place there must be a double coincidence
of wants. For instance, if the horse-owner wants a cow, he has to find out a
person who not only possesses the cow but also wants to exchange it with the
horse.
 EVOLUTION OF
MONEY
• In other cases, goods are exchanged for services. A doctor may be paid in kind as
payment for his services. For example, he may be paid a cock, or some wheat or
rice or fruit.
• Thus a barter economy is a moneyless economy. It is also a simple economy
where people produce goods either for self-consumption or for exchange with
other goods which they want. Bartering was found in primitive societies. But it is
still practiced at places where the use of money has not spread much. Such non-
monetized areas are to be found in many rural areas of under-developed countries.
• Generally barter system is the system of exchanging goods for goods or goods for
services or service for service.
 EVOLUTION OF
MONEY
• Thus, exchanging through barter system perceived to have several difficulties when
trade transactions were to be done and It involves loss of much time and effort on
the part of people trying to exchange goods and services. Thus The barter system is
the most inconvenient method of exchange.
• As a method of exchange, barter system has the following difficulties and
disadvantages:
i) lack of double coincidence
ii) lack of a common measure of value
iii) indivisibility of some goods
iv) difficulty in store value
v) difficulty in making different payments
vi) lack of specialization
 LACK OF DOUBLE COINCIDENCE OF
WANTS
The functioning of the barter system requires double coincidence
of wants on the part of those who want to exchange goods or services. It
is necessary for a person who wishes to trade his good or service for
another, find some other person who is not only willing to buy his good
or service, but also possesses that good which the former wants
For example, suppose a person possesses a horse and wants to exchange
it for a cow. In the barter system, he has to find out a person who not
only possesses a cow but also wants a horse. The existence of such a
double coincidence of wants is a remote probability
 LACK OF DOUBLE COINCIDENCE OF
WANTS
For it is a very laborious and time-consuming process to find out a
person who wants the other's goods. Often times, the horse-owner
would have to carry through a number of intermediary transactions. He
might have to trade his horse for some sheep, sheep for some goats and
goats for the cow he wants. To be successful, the barter system involves
multilateral transactions which are not possible practically.
Consequently, if the double coincidence of wants is not matched
exactly, no trade is possible under barter. Thus a barter system is time-
consuming and is a great hindrance to the development and expansion
of trade.
 LACK OF A COMMON MEASURE OF
VALUE
• Another difficulty under the barter system relates to the lack of a
common unit in which the value of goods and services should be
measured. Even if the two persons who want each other's goods meet
by coincidence, the problem arises as to the proportion in which the
two goods should be exchanged. There being no common measure of
value, the rate of exchange will be arbitrarily fixed according to the
intensity of demand for each other's goods. Consequently, one party is
at a disadvantage in the terms of trade between two goods.
 INDIVISIBILITY OF SOME
GOODS
• The bailer is based on the exchange of goods with other goods. It is
difficult to fix exchange rates for certain goods which are indivisible.
Such indivisible goods pose a real problem, under barter. For example A
person may desire a horse and the other a sheep and both may be willing
to trade. The former may demand more than four sheep for a horse but
the other is not prepared to give five sheep and thus there is no exchange.
If a horse had been divisible, a payment of four and a half sheep for a
horse might have been mutually satisfactory. Similarly, if the man with
the horse wants only two sheep, then how will he exchange his horse for
two sheep. As it is not possible to divide his horse, no trade will be
possible between the two persons. Thus indivisibility of certain goods
makes the barter system inoperative.
 DIFFICULTY IN STORE
VALUE

• Under the barter system, it is difficult to store value.

Anyone wanting to save real capital over a long period
would be faced with the difficulty that during the
intervening period the stored commodity may become
obsolete or deteriorate in value. As people trade in cattle,
grains and other such perishable commodities, it is very
expensive and often difficult to store and to prevent their
deterioration and loss over the long period.
 DIFFICULTY IN MAKING
DEFERRED PAYMENTS

• In a barter economy, it is difficult to make payments in future. As

payments are made in goods and services, debt contracts are not possible
due to disagreements on the part of the two parties on following grounds.
It would often invite controversy as to the quality of the goods or services
to be repaid. The two parties would often be unable to agree on the
specific commodity to be used for repayment. Both parties would run the
risk that the commodity to be repaid would increase or decrease seriously
in value over the duration of the contract. For example, wheat might rise
markedly in value in terms of other commodities, to the debtor's regret, or
decrease markedly in value, to the creditor's regret. Thus it is not possible
to make just payment involving future contracts under the baiter system.
 LACK OF
SPECIALIZATION

• Another difficulty of the baiter system is that it is associated with a

production system where each person is a jack-of-all-trades. In other
words, a high degree of specialization is difficult to achieve under the
barter system. Specialization and interdependent in production is only
possible in an expanded market system based on the money economy.
Thus no economic progress is possible in a barter economy due to lack
of specialization. The above mentioned difficulties of barter have led
to the evolution of money.
 MONEY CAME INTO
EXISTENCE
• In fact, in a barter system we discussed several issues such as meaning
of barter, the way people practiced the system, its constraints and
disadvantages or weaknesses. Nevertheless, money was invented
purposely not only to control the economy but also to facilitate
business in case of saving time and less effort consuming in
transaction, for, the invention of money was the huge fraction in the
development of trade as people may engage in trade transaction
without any fear of lack of double coincidence and many other
obstacles that were big challenges in barter system in whole.
 Evolution of money
• Thus after identifying different issues people encountered when
trading through barter system, let us now look several stages money
went through until its invention.
• The type of money in every stage depended on the nature of its
livelihood. In a hunting society, the skins of wild animal were used as
money. The pastoral society used livestock, whereas the agricultural
society used grains and food stuffs as money. The Greeks used coins
as money. Therefore, the development of money was to overcome the
various ••difficulties of trade by barter. Money is, therefore, anything
that is generally acceptable as a means of exchange. This general
acceptability is the most important requirement of money.
 Evolution of
money
• No matter how precious a material is, if it is not generally acceptable
by the people as a means of exchange, it will not qualify as money.
• Stages in the evolution of money
• Commodity Money
• Metallic Money
• Paper Money
• Credit Money
• Near Money
 STAGES IN THE EVOLUTION OF MONEY
• Commodity money
• After barter system seem inconvenient in trade transaction people
decided to select few commodities as their measure of value and
medium of exchange regardless their intrinsic value. For, at this
stage Various types of commodities have been used as money from
the beginning of human civilization. Stones, spears, skins, bows
and arrows and axes were used as money in the hunting society.
The pastoral society use cattle as money. The agricultural society
used grains as money. The Romans used cattle and salt as money at
different times. The Mongolians used squirrel skins as money.
Precious stones, tobacco, tea, shells, fishhooks, and many other
commodities served as money depending upon time, place and
economic standard of society
 STAGES IN THE EVOLUTION OF
MONEY
• The use of commodity as money had the following defects:
• (a) All commodities were not uniform in quality, such as cattle, grains,
etc. Thus lack of standardization made pricing difficult,
• (b) Difficult to store and prevent loss of value in case of perishable
commodities,
• (c) Supplies of such commodities were uncertain,
• (d) They lacked in portability and hence were difficult to transfer from
one place to another,
• (e) There was the problem of indivisibilities in the case of such
commodities as cattle.
As a way back to a solution metallic money was invented
 STAGES IN THE EVOLUTION OF
MONEY
• Metallic money
• With the spread of civilization and trade relations by land and sea
metallic money took the of commodity money. Many nations
started using silver, gold, copper, tin, etc. as money. But metal was
an inconvenient thing to accept, weigh, divide and assess in quality.
Accordingly, metal was made into coins of predetermined weight.
Thus innovation is attributed /associated to king Midas of Lydia in
the eighth century B.C. But gold coins were in use in India many
centuries earlier than in Lydia. Thus coins came to be accepted as
convenient method of exchange. But some ingenious person started
debasing the coins by clipping a thin slice of the edge of coins
 STAGES IN THE EVOLUTION OF
MONEY
• .This led to the hoarding of full-bodied coins with the result that debased
coins were found in circulation. This led to the minting of coins with a
rough edge. As the price of gold began to rise, gold coins were melted in
other to earn more by selling them as metal. This led the government to
mixed copper or silver in gold coins so that their intrinsic value might be
more than their first value. As gold became dearer and scarce, silver
coins were used, first in their pure form and later on mixed with alloy or
some other metal.
• However, metallic had the following defect:
• (a) It was not possible to change its supply according to the
requirements of the nation both for internal and external use.
 STAGES IN THE EVOLUTION OF
MONEY
• (b) Being heavy, it was not possible to carry large sums of money in
the form of coins from one place, to another by merchants,
• (c) It was unsafe and inconvenient to carry precious metals for trade
purposes over long distances,
• (d) Metallic money was very expensive because the use of coins led
their debasement and their minting and exchange as the mint cost a lot
to the government.
 STAGES IN THE EVOLUTION OF
MONEY
• Paper Money
• The development of paper money started with goldsmiths who kept
strong safes to store their gold. As goldsmiths were thought to be
honest merchants, people started keeping their gold with them for
safe custody. In return, the goldsmiths gave the depositors a receipt
promising to return the gold on demand. These receipts of the
goldsmiths were given to the sellers of commodities by the buyers.
Thus the receipts of the goldsmiths were a substitute for money.
Such paper money was backed by gold and was convertible on
demand into gold. This ultimately led to the development of bank
notes.
 STAGES IN THE EVOLUTION OF
MONEY
• Credit Money
• Another stage in the evolution of money in the modem world is the
use of the cheque as money. The cheque is like a bank note in that
it performs the same function. It is a means of transferring money
or obligations from one person to another. But a cheque is different
from a bank note. A cheque is made for a specific sum, and it
expires with a single transaction. But a cheque is not money. It is
simply a written order to transfer money. However, large
transactions are made through cheques these days and bank notes
are used only for small transactions.
 STAGES IN THE EVOLUTION OF
MONEY
• Near Money
• The final stage in the evolution of money has been the use of bills
of exchange, treasury bills, bonds, debentures, savings certificates,
etc. They are known as "near money". They are close substitutes
for money and are liquid assets. The final stage of its evolution
money has become intangible. Its ownership is now transferable
simply by book entry. Thus the evolution of money has been
through various stages: from commodity money to metallic money,
and to paper money, and from credit money to near money.