Principles of Banking FBISE BOARD PAPERS SOLUTION (2010 To 2024)

Teacher: Asma Nadeem Banking - Chapter # 2, Commercial Bank

FBISE PAST PAPER SOLUTIONS

2010 – 2024
BANKING
CHAPTER # 2 COMMERCIAL BANK

GRADE XII COM

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Principles of Banking FBISE BOARD PAPERS SOLUTION (2010 To 2024)
Teacher: Asma Nadeem Banking - Chapter # 2, Commercial Bank

SECTION A
Q1. Choose the right answers.
1. Commercial banks create credit:
a. By discounting the bill b. By investment
c. By advancing loans d. All of these
2. Credit money in the country is controlled by:
a. Central bank b. Commercial bank
c. Saving bank d. Agriculture bank
3. The primary function of commercial bank is:
a. Accepting deposits b. Advancing loans
c. Transacting foreign exchange d. Advice to customers
4. For the process of credit creation all the deposits (liabilities) of the bank are in the form of
_____________
a. Demand deposits b. Time deposits
c. Saving deposits d. Foreign currency deposits
5. Credit creation is done under which of the following methods?
a. Providing loans b. Discounting bill of exchange
c. Making investments d. All of these
6. Which of the following is NOT a function of the commercial banks?
e. Receiving deposits f. Issuing loans
g. Rediscounting of bills h. Safe custody of valuables
7. Which bank accepts the deposits from public?
a. Commercial banks b. Central bank
c. Both A and B d. All of theses
8. Commercial bank is a financial adviser of its __________________________________
a. State bank b. Non schedule banks
c. Account holder d. Financial institution
9. Which of the following functions are performed by commercial bank?
a. Issuance of currency notes b. Credit creation
c. Rediscounting of bills d. Preparation of monetary policy
10. The part of deposits kept with the central bank is called:
a. Cash reserve b. Margin
c. Interest rate d. All of these
11. For the bank, the amount of money in the account of accountholder is called:
a. Profit b. Interest
c. Deposits d. Loan
12. Which of the following statements is alike “loan creates deposit?”
a. Deposits create loan b. Bank creates credit
c. Credit creates loan d. Credit creates deposits

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Principles of Banking FBISE BOARD PAPERS SOLUTION (2010 To 2024)
Teacher: Asma Nadeem Banking - Chapter # 2, Commercial Bank
13. Commercial bank is called:
a. Bankers Bank b. Bank of public
c. Custodian of Foreign Exchange d. Banker of the Government
14. What kind of power does Commercial bank possess regarding credit creation?
a. Unlimited Power b. Limited Power
c. No power d. Undermined
15. Which of the following bank accepts deposits and advances loan?
a. Cooperative bank b. Mortgage Bank
c. Commercial Bank d. Central Bank
16. Overdraft facility is only provided on:
a. Current account b. Fixed account
c. Saving account d. Profit and loss sharing account
SECTION B

Q2. Define Commercial Bank. (2010)

What is commercial bank? Write to basic functions of commercial banks. (2023)
DEFINITION:
“A Commercial bank is intermediatory financial institution who in the ordinary course of business, receives
deposits from the general public and advances it to the borrowers. Deposited money is repayable on demand
by honoring cheques. Commercial bank’s objective is to earn profit by investing the others people money. It is
a public bank and works under the policies / rules and regulations of central bank”

Basic/primary functions are Receiving deposits and Advancing Loans.

Q3. Write any four utility services performed by Commercial Bank (2014)
1. Foreign exchange:
Banks deal in foreign exchange (convert one currency into another currency) with the permission of
central bank to facilitate both foreign trade and foreign travel.
2. Easy medium of exchange:
Use of cheques minimizes the use of cash in business transactions which is considered an easy medium
of exchange.
3. Acceptance of Bill of Exchange:
Commercial banks give loans against the accepted bill of exchange on the behalf of customers/exporters
so that they can meet their financial need.
4. Arbitrator:
Banks act as arbitrator and provide information to other banks relating to the credit worthiness and
also resolves customers issue to settle any dispute.
Q4. Write a short note on creation of credit (2012, 2016)
DEFINITION:
Credit creation is the process of multiple expansion, bank’s demand deposits. Where the money
deposited by customers in banks are used by the bank to lend to borrowers. Credit creating is called
money creation or multiple creation of credit. It is a combine function of all commercial banks.

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Principles of Banking FBISE BOARD PAPERS SOLUTION (2010 To 2024)
Teacher: Asma Nadeem Banking - Chapter # 2, Commercial Bank

Q5. Point out any four factors which affect the cash reserves (2015)
1. Legal requirements:
If the law requires that every bank must maintain a certain percentage of its deposits as cash reserve
with the central bank of the country then the banks must maintain at least that ratio as reserve.
2. Nature of accounts:
If people deposit in current account then bank keeps more money as cash reserve, but in case of fixed
or term deposit bank does not keep heavy cash reserve.
3. Development of investment habit:
If people have habit of investing saving in banks then a smaller cash reserve is required
4. Habit of saving:
If local people are in habit of saving the bank will require less cash reserve but if people are not willing
to invest in saving accounts, then more cash reserve will be required.
Q6. List any four limitation of Credit creation (2010, 2011, 2014, and 2017)

1. Cash reserve:
A commercial bank cannot lend all of its fund, it keeps a reasonable portion of its fund with the central
bank to meet the demand of the customer. So, it is the one of the limitations in creating credit.
2. Primary deposit:
A commercial bank can create credit only if they get primary deposit that is why it said that "deposit
create credit and credit create deposit"
3. Shortage of Securities: -
Banks demand the securities from borrowers at the time of granting loan. If the borrower is not in a
position to fulfil this requirement, then bank will not grant loans. So, it is the one of the limitations in
creating credit.
4. Willingness to borrow:
If people are not willing to borrow then credit will not be created.

Q7. Discuss four types of loans according to issue. (2017, 2021)

1. Mortgage Loan:
Mortgage loans are granted by banks against the security of immoveable fixed assets Ex: Land, factory,
building and house etc. usually these are given for long term periods.
2. Overdraft/ Running Finance:
This loan is given to Current account holders mostly businessmen. Banks allow their trustful customers
to withdraw more than the deposit amount from their accounts. Bank charge interest on utilized
amount only on daily basis. It is a short-term loan given only for the period up to 1 year.
3. Discounting of Bill:
Discounting of bill of exchange means that bank accepts the bill as security for granting loan. It is a
short-term loan only given to exporters against their accepted bills.
4. Cash credit:
It’s a type of secured loan, given against liquid security (Current Assets) examples: Shares/ Stocks /
bonds/ sugar/ rice). Sanctioned amount of loan transferred to the cash credit loan account. Bank
charges interest on the utilized or withdrawn amount only.

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Principles of Banking FBISE BOARD PAPERS SOLUTION (2010 To 2024)
Teacher: Asma Nadeem Banking - Chapter # 2, Commercial Bank
Q8. List down the secondary functions of commercial bank. (2022)
SECONDARY FUNCTION- AGENCY FUNCTIONS
1. Collection & Payment of Cheques:
2. Collection of Dividends:
3. Purchase & Sale of securities:
4. Execution of Standing Instructions:
5. Trustee:
6. Transfer of Funds:
7. Agent:
SECONDARY FUNCTION- GENERAL / UTILITY FUNCTIONS
8. Foreign Exchange Transactions
9. Easy Medium of Exchange
10. Arbitrator
11. Acceptance of Bill of Exchange (B/E)
12. Credit Instruments
13. Trade Information
14. Precious Articles
15. Special Services
16. Issuance of Credit Cards
17. Automated Teller Machines (ATM)
18. Cash Deposits Machines (CDM)
19. Underwriting

Q9. Write down the methods of creating credit by commercial banks. (2023)
DISCOUNTING OF BILLS:
In this method bank discount, the bill and issue a cheque book after opening an account for the amount
discounted bill instead of giving cash.
SUPPLY OF LOANS:
When bank grant loan to a borrower. It opens an account of the borrower for the granted amount
instead of giving cash. If borrowers want to give cash to another person then they issue cheque. Which
receiver deposited into his bank.
MAKING INVESTMENT:
Bank also creates credit by making investment into securities. They buy securities from Stock Exchange
and then credits/deposit the amount in the account of seller or it pays a crossed cheque to the seller.
Which seller deposited into his bank accounts.

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Principles of Banking FBISE BOARD PAPERS SOLUTION (2010 To 2024)
Teacher: Asma Nadeem Banking - Chapter # 2, Commercial Bank
SECTION C

Q10. Discuss the functions of Commercial Bank (2012)

FUNCTIONS OF COMMERCIAL BANK

There are two functions of commercial banks:
- Primary functions
- Secondary functions

RECEIVING DEPOSITS – PRIMARY FUNCTION

1. Current Account: (CA)
This account is suitable for the business community and governments departments. In this account,
money can be deposited and withdrawn from bank at any time. Interest/profit is not paid on this
account.
2. Profit and Loss Sharing Saving Account: (PLS-SA)
This account is suitable for people with little savings, low income or low-salaried persons and house
wife. In this account, deposits can be withdrawn on demand up to a certain limit. Banks also pay interest
on these accounts.
3. Profit and Loss Sharing Fixed Deposit Account/ PLS- Term Deposit Account: (PLS- FDA)
High rate of interest is paid on this deposit. The account holders are not allowed to withdraw money
from the account before maturity. Fixed period is from 1 to 5 years. This account can be used as a
security of loan.
4. Foreign currency Account: (FCA)
This account is opened in foreign currency instead of local currency. This account is exempted from
zakat and tax deductions. FCA can be opened in saving, fixed and current accounts.

ADVANCES LOAN – PRIMARY FUNCTION

ACCORDING TO TERM:
1. Demand loan:
These loans can be demanded by the lending institution at any time. Demand loans are short term loans
and can be recovered on lump sum/ installment basis. This loan has floating interest rate which can be
changed by the bank. Demand loans may be unsecured or secured. These loans are generally issued to
trust worthy people.
2. Short term loans:
The period of short-term loan is up to 1 year, issued to Businessmen to meet their day-to-day
requirement of the business.
3. Medium term loan:
The period of medium-term loan is from 1 to 5 years, issued to Businessmen for purchase of raw
material and to meet the administrative expenses.
4. Long term loan:
The period of long-term loan is from 6 to 10 years, issued to Businessmen for the purpose of investment
and to purchase fixed assets like building, plant and machinery.
5. Project loans:
These are the loans, which are issued by the banks to complete the projects of big industries.
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Principles of Banking FBISE BOARD PAPERS SOLUTION (2010 To 2024)
Teacher: Asma Nadeem Banking - Chapter # 2, Commercial Bank

ACCORDING TO ISSUE:
1. By opening New Account:
Bank opens loan account in the name of its customer instead of giving cash as loan. The customer can
draw money according to need. In this method, bank charges interest on the total amount of the loan
whether withdrawn or not.
2. Mortgage Loan:
Mortgage loans are granted by banks against the security of immoveable fixed assets Ex: Land, factory,
building and house etc. usually these are given for long term periods.
3. Overdraft/ Running Finance:
This loan is given to Current account holders mostly businessmen. Banks allow their trustful customers
to withdraw more than the deposit amount from their accounts. Bank charge interest on utilized
amount only on daily basis. It is a short-term loan given only for the period up to 1 year.
4. Discounting of Bill:
Discounting of bill of exchange means that bank accepts the bill as security for granting loan. It is a
short-term loan only given to exporters against their accepted bills.
5. Cash credit:
It’s a type of secured loan, given against liquid security (Current Assets) examples: Shares/ Stocks /
bonds/ sugar/ rice). Sanctioned amount of loan transferred to the cash credit loan account. Bank
charges interest on the utilized or withdrawn amount only.

SECONDARY FUNCTION- AGENCY FUNCTIONS

1. Collection & Payment of Cheques:

Commercial banks collect and make payment by cheques on behalf of the customers
2. Collection of Dividends:
Commercial banks collect dividend and interest shares on behalf of the customer.
3. Purchase & Sale of securities:
If the customer directs his bank to purchase and sale securities on his behalf bank will do this by charging
nominal commission.
4. Execution of Standing Instructions:
Bank also executes instructions of his customers by charging nominal charges. Example, Bank makes
monthly payments on the written order of its customer.
5. Trustee:
Bank acts as a trustee on the behalf of Customer.
6. Transfer of Funds:
Bank also transfers fund from one place to another on behalf of customer.
7. Agent:
Bank also acts as an agent or representative of customer in the country and abroad.

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Principles of Banking FBISE BOARD PAPERS SOLUTION (2010 To 2024)
Teacher: Asma Nadeem Banking - Chapter # 2, Commercial Bank

SECONDARY FUNCTION- GENERAL / UTILITY FUNCTIONS

8. Foreign Exchange Transactions

Banks deal in foreign exchange with the permission of central bank to ease both foreign trade and
foreign travel.
9. Easy Medium of Exchange
Issued cheques of banks are considered as an easy medium of exchange, because their presence
minimizes the use of cash in business transactions.
10. Arbitrator
Commercial bank act as an arbitrator and provide information of the customer related their credit
worthiness and transaction to settle any dispute
11. Acceptance of Bill of Exchange (B/E)
Commercial bank receives bill of exchange on the behalf of their customer to meet their financial
need.
12. Credit Instruments
Banks issue various credit instruments which are of considerable benefit to the business community
e.g., Cheque, Bank Draft and L.C etc.
13. Trade Information
Banks collect and furnish useful financial and trade information for their customers.
14. Precious Articles
Bank accepts valuable ornaments, lockers documents, securities, insurance policy etc. from their
customers for the safe custody.
15. Special Services
a. Receipt of Zakat and Ushr
b. Receipt of Haj Applications
c. Receipt and payment of bills
d. Fee receipt of educational institution
e. Receipt of donation
16. Issuance of Credit Cards
It’s a modern facility of banking. The commercial banks issue credit cards for different limits, which are
helpful in making payments to various institutions.
17. Automated Teller Machines (ATM)
A.T.M. are computerized counters used by modern commercial banks that provide 24-hour cash
services to customers.
18. Cash Deposits Machines (CDM)
C.D.M. is another 24-hour banking service in which customer/account holder can deposit cash anytime
through this machine.
19. Underwriting
Banks underwrite shares, bonds etc issued by government, public bodies or trading corporations in
order to raise capital or fund or loan.

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Principles of Banking FBISE BOARD PAPERS SOLUTION (2010 To 2024)
Teacher: Asma Nadeem Banking - Chapter # 2, Commercial Bank

Q11. Loan creates deposits and deposits create credit. Explain. (2015)
The above said statements “Bank is the factory of creating credit” is given by Reynold and
“Loans create deposits and deposits create loan” statement given by Hartly.
DEFINITION OF CREDIT CREATION:
Credit creation is the process of multiple expansion in bank’s demand deposits. It is a combine function
of all commercial banks. Where the money deposited by customers in banks are used by the bank to
lend to borrowers. Loan of one bank becomes the deposit of another bank.

WAYS OF CREDIT CREATION:

1. DISCOUNTING OF BILLS:
In this method bank discount, the bill and issue a cheque book after opening an account for the amount
discounted bill instead of giving cash.
2. SUPPLY OF LOANS:
When bank grant loan to a borrower. It opens an account of the borrower for the granted amount
instead of giving cash. If borrowers want to give cash to another person then they issue cheque. Which
receiver deposited into his bank.
3. MAKING INVESTMENT:
Bank also creates credit by making investment into securities. They buy securities from Stock Exchange
and then credits/deposit the amount in the account of seller or it pays a crossed cheque to the seller.
Which seller deposited into his bank accounts.

PROCESS /CHAIN OF CREDIT CREATION:

BANK TOTAL DEPOSITS RATIO OF RESERVE CASH RESERVE CREDIT CREATION

A 2,000 20% 400 1,600
B 1,600 20% 320 1,280
C 1,280 20% 256 1,024
D 1,024 20% 205 819
… … … … ….
… … … … ….
TOTAL 10,000 2,000 8,000

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Principles of Banking FBISE BOARD PAPERS SOLUTION (2010 To 2024)
Teacher: Asma Nadeem Banking - Chapter # 2, Commercial Bank
EXPLANATION:
A customer deposits Rs. 2000/- in bank. Bank A grants loan of Rs. 1600/- to another customer after keeping Rs
400/- (20%) as reserve. The customer deposits the amount of loan Rs. 1600/- in its bank B. now the bank will
grant Rs. 1280/- as loan after keeping Rs. 320/- (20%) as reserve. This is how a chain process of credit creation
takes place and credit money manufacture in the country.

FORMULA OF CREDIT CREATION:

1
1. TOTAL DEPOSIT = PRIMARY (NEW) DEPOIST X 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅
1
TOTAL DEPOSIT = 2000 X 20 %
TOTAL DEPOSIT =10,000/-

2. CREDIT CREATION = TOTAL DEPOSIT - PRIMARY (NEW) DEPOIST

CREDIT CREATION = 10000 - 2000
CREDIT CREATION = 8000/-

LIMITATION OF CREDIT CREATION:

1. Cash reserve:
A commercial bank cannot lend all of its fund, it keeps a reasonable portion of its fund with the central
bank to meet the demand of the customer. So, it is the one of the limitations in creating credit.
2. Primary deposit:
A commercial bank can create credit only if they get primary deposit that is why it said that "deposit
create credit and credit create deposit"
3. Shortage of Securities: -
Banks demand the securities from borrowers at the time of granting loan. If the borrower is not in a
position to fulfil this requirement, then bank will not grant loans. So, it is the one of the limitations in
creating credit.
4. Willingness to borrow:
If people are not willing to borrow then credit will not be created.
5. Habit of customers:
If the borrowers get the loan in cash and make the payments in cash instead of cheques then the banks
cannot create the credit. so, use of cheques is necessary for multiple credit expansions.
6. Political Condition:
If the country is politically stable then there are more chances of credit creation. While in case of
political disturbance the people hesitate to invest or to obtain loan, which stops the process of credit
creation.
7. Effect of Religion:
Interest is prohibited in Islam. Therefore, the people avoid taking loans on interest basis.

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