Electronic payments can involve large amounts of money and so require a stringent set of controls to mitigate the risk of loss-Describe the control mechanism

 To mitigate the risks of loss in electronic payments involving large amounts of money, stringent control mechanisms are necessary. Here are some key control measures that organizations implement:

1.     Access Controls: Access controls ensure that only authorized individuals have access to sensitive systems and data related to electronic payments. This includes user authentication measures such as strong passwords, multi-factor authentication, and role-based access control. Access privileges should be granted o a need-to-know basis to limit the number of individuals with access to critical payment systems.

2.     Segregation of Duties: Segregation of duties is a control-mechanism that ensures that no single individual has complete control over the end-to-end payment process. Different tasks, such as initiating payments, approving transactions, and reconciling accounts, should be assigned to separate individuals or departments. This segregation reduces the risk or fraudulent activities or errors going undetected.

3.     Transaction Monitoring and Fraud Detection: Robust transaction monitoring systems are crucial to identify and flag suspicious or fraudulent activities. Real-time monitoring tools can analyze payment patterns, transaction amounts, and other parameters to identify anomalies and potential fraud. Additionally, implementing anti-fraud measures, such as fraud scoring models, machine learning algorithms, and rule-based alerts, can enhance the detection of fraudulent transactions.

4.     Strong Authentication and Authorization: Strong authentication and authorization mechanisms are essential to ensure that electronic payments are authorized by the appropriate individuals. This includes techniques such as digital signatures, encryption, and secure communication protocols. Additionally, implementing dual control or dual authorization procedures for high-value transactions adds an extra layer of security.

5.     Payment Reconciliation: Regular and timely reconciliation of payments is critical to detect and resolve any discrepancies or errors. This involves comparing payment records with supporting documentation, bank statements, and other relevant information. Automated reconciliation tools can help identify and resolve discrepancies more efficiently, reducing the risk of loss due to incorrect or unauthorized payments.

6.     Payment Limits and Approval Hierarchies: Implementing predefined payment limits and approval hierarchies can help control the size and authorization of electronic payments. Setting limits on individual transactions, daily or weekly limits, and escalation procedures for exceptional cases can help prevent unauthorized or excessive payment.

7.     Disaster Recovery and Business Continuity Planning: Having robust disaster recovery and business continuity plans in place is essential to ensure the continuity of electronic payment operations. This includes regular data backups, redundant systems, alternative communication channels, and contingency plans to address potential disruptions or system failures.

By implementing these control mechanisms, organizations can mitigate the risk of loss associated with electronic payments involving large amounts of money. These controls help protect against fraud, errors, unauthorized access, and system failures, ensuring the security and integrity of electronic payment processes.

Define payment system. What are the motives behind the demand for money? Briefly describe the ‘Demand for Money’ with an example

 Payment System: Payment systems are the means by which funds are transferred among financial institutions, business and individuals, and are considered to be the critical factor for the proper functioning of a country’s financial system. The payments system is the set of institutional arrangements through which purchasing power is transferred from one transactor in exchange to another. For efficient exchange, a common medium of exchange or means of payment is necessary. The payment system is organized around the use of money. An efficient organization of the monetary system is the sine qua non of an efficient payment system.

The organization and running of the payment system involves costs to transactors and to the economy. The more efficient the payment system, the lower the cost of transfer of funds per. The gain of lower costs accurses to the whole economy.

Broadly stating, there are three main motives, for which money is wanted by the people:

a)     Transaction Motive;

b)    Precautionary Motive;

c)     Speculative Motive;

a)     Transaction Motive: It refers to the demand for money for conducting day-to-day transactions. This motive can be looked at from the perspective of consumers, who want income to meet their household expenditure (income motive) and from the perspective of businessmen, who require money to carry on their business activities (business motive).

The transaction motive relates to demand for money to meet the current transactions of individuals and business units. The income, which a person gets, is not continuous whereas, expenditure is continuous, So, to bridge the gap between receipt of income and its expenditure, people hold cash.

 

According to Keynes, transaction demand for money is positively associated with the level of income, i.e. higher the level of income, the larger would be the size of money holdings for transactions.

 

b)    Precautionary Motives: It refers to the desire of people to hold cash balances for unforeseen contingencies. People wish to hold some money to provide for the risk of unforeseen events like sickness, accident, etc. The amount of money held under this motive, depends of the nature of individual and on the conditions in which he lives. The demand of money for precautionary balances is also closely related to the level of income. Higher the level of income, more will be the cash balances for contingencies.

c)     Speculative Motives: It refers to desire of the holder to keep cash balance as an alternative to financial assets like bonds. Under speculative motive, it is presumed that people can hold their wealth either in the form of bonds or in the form of cash balances. The decisions regarding holding of bonds or cash balances depend upon the expectations about changes in the rate of interest or capital value of assets (bond) in future.

The interest rate varies inversely with the market value of securities (bonds), i.e. when interest rate rises, market value of bonds falls. Hence, demand for money for speculative motive becomes less at high interest rates and becomes large at low interest rates.

What are the functions of money and types of Money

 Functions of Money:

Medium of exchange: Money is generally accepted medium of exchange that is used to make all the transactions. Ex-payments of goods, payment of tax, etc.

A Measure of Value: Money expresses the value of every service as well as goods. Therefore, it is a common denomination.

Standard of deferred payments: Money is considered the standard for future payments. Ex-The payment of the electricity bill on the upcoming due date.

Store of Value: It means that money is capable of being stored and transferring the purchasing power from today to the future. Ex: Using the money in a savings account to buy new furniture.

Distribution of social income: Income can be easily be distributed with the help of money. Ex: Distribution of total money earned by a school in the form of salaries, wages, utility bills, etc.

Basis of Credit Creation: The “store of value” function of the money helps in credit creation by the banks. Ex: Using the money of demand deposits as a tool for credit creation.

Liquidity: Money is the most liquid asset of the economy. Ex: Credit cards, debit cards, cash.

 

Types of Money:

Money serves as a medium of exchange, a unit of account, a store of value, and a standard of deferred payment. The types of money can be classified based on different criteria, including their intrinsic value, backing, and form. Let’s discuss these types more elaborately:

1.     Commodity Money: Commodity money has intrinsic value because it is made of a valuable commodity, such as gold, silver, or precious metals.

Characteristics: The value is derived from the commodity itself.

Historically, gold and silver coins have been examples of commodity money.

It has inherent value beyond its use as a medium of exchange.

2.     Representative Money: Representative money is backed by a commodity but it is not the commodity itself. It represents a claim on a commodity like gold or silver.

Characteristics: Paper currency that can be exchanged for a specific amount of a commodity.

The value is based on the backing commodity, and it can be redeemed for that commodity.

3.     Fiat Money: Fiat money has no intrinsic value and is not backed by a physical commodity. Its value is based on the trust and confidence people have in the government that issues it.

Characteristics: Its value is established by government decree and is not tied to any physical asset.

Most of the world’s currencies, like the US Dollar and Euro, are fiat currencies.

4.     Fiduciary Money: Fiduciary money is a currency without intrinsic value and not backed by a commodity. Its value is based on the trust and confidence people have in the issuing authority.

Characteristics: Relies on the trust in the stability of the government or institution issuing it.

It includes most of the paper currency in circulation today.

5.     Cryptocurrency: Digital or virtual currencies that use cryptography for security. cryptocurrencies are an electronic medium of exchange that exists virtually. Crypto is a peer-to-peer system that runs on the blockchain. In simple terms, it is an intangible form of currency with opportunities for international exchange.

6.     Local Currencies:  Money issued and accepted in a particular locality or region.

Characteristics: Used alongside or instead of national currencies in local communities.

May serve to promote local economic development.

7.     Digital Currency: Money in digital form, including both physical and purely electronic representations.

Characteristics: Digital wallets, online banking, and electronic payment systems falls under this category.

The rise of digital currencies is transforming the nature of transactions.

8.     Legal Tender: Legal tender is currency that must be accepted for transactions and debts as recognized by law

Characteristics: Not all forms of money are necessarily legal tender.

Governments typically define what constitutes legal tender in a particular jurisdiction.

These categories illustrate the diverse forms and functions of money in different economic systems.

The evolution of money continues with technological advancements and changes in financial landscape. The coexistence of various types of money reflects the dynamic nature of modern economics.

 

What is money? What are the Characteristics of Money?

 Money is anything that serves as a medium of exchange. A medium of exchange is anything that is widely accepted as a means of payment. Money is treated as a medium of exchange that is centralized, generally accepted, recognized and facilitates transactions of goods and services, is known as money.

·        Money is a medium of exchange for various goods and services in an economy.

·        The money system varies with the governments and countries.

·        Different countries have different currencies

·        The central authority is responsible for monitoring the monetary system

·        There are many forms of money, and cryptocurrencies is the newest addition to the forms of money and can be internationally exchanged.

Characteristics of Money:

Fungible currency: A currency must be fungible, which means that the units used as a currency must be equal in quality and shall be interchangeable. A non-fungible currency form of currency is not considered eligible for transactions.

Durable: A good currency is durable enough to be used more than just one time. It should not be perishable. A perishable good or article should not be used as a currency because it cannot be used multiple times and also cannot be stored for further transactions. Therefore, to conserve the future oriented use-value of the money, a currency must be durable.

Easily recognizable: The use of the money must be ascertained of its authenticity. In other words, the currency must be universally recognized. An unrecognized currency or money leads to disagreement with the exchange terms.  A recognized currency ensures trust in the money system as well as its acceptance.

Stability: A currency must be stable in terms of value. In simple terms, money should have a constant or increasing value. Money cannot be unstable whose value keeps drastically changing. An unstable currency can give room to the risk of a sudden drop in value which can hamper the acceptance and authenticity of the money system.

Portable: A currency must be portable and can be conveniently transported from one place to another. The money must be divided into various quantities making its use better. Money if not portable can lead to an exceeded cost of transportation of the currency itself. Therefore, money should be able to be divided into further smaller units to facilitate smooth transactions of various quantities of goods. Secondly, it should be easily transferable and portable.

Mention the auction procedures of Treasury Bills and Bonds in Bangladesh

 In Bangladesh, the government issues Treasury Bills (T-Bills) and Bangladesh Government Treasury Bonds (BGTB) through auctions conducted by the Bangladesh Bank (BB). Here’s an overview of the auction procedures, eligibility, and sale procedures for these financial instruments.

Eligibility:

1.     Residents:

·        Individuals and institutions resident in Bangladesh, including banks, non-bank financial institutions, insurance companies, corporate bodies, and authorities managing provident funds and pension funds, are eligible to purchase BGTBs.

   2. Non-Residents:

·        Individuals and institutions not resident in Bangladesh can also purchase BGTBs, provided the following conditions are met:

·        The purchase is made using funds from a non-resident foreign currency account with a bank in Bangladesh in the purchaser’s name

·        BGTBs purchased by non-residents cannot be resold to residents in Bangladesh within one year of purchase. However, resale to other non-residents is allowed if the above conditions are fulfilled.

Sale Procedure in Primary Issues:

1.     Auction Calendar:

·        Primary issues of BGTBs are sold by the BB’s through auctions, as per the auction calendar announced before each financial year and specific auction notices announced one week before each auction.

2.     Bidding Process:

·        Banks and financial institutions maintaining current accounts with the BB for Cash Reserve Requirement (CRR) fulfillment, including Primary Dealers (PDs) designated for secondary trading, ay submit bids on their behalf and for other eligible purchasers.

·        Bid must be submitted in the form BGTB-1 for face value amounts in multiples of taka 1.00 lac

·        Bidding banks/financial institutions must ensure sufficient balance in their current accounts with the BB to cover the full purchase price and any premium

3.     Submission and opening Bids:

·        Separate bids must be submitted for BGTBs of different maturities.

·        Bids in sealed covers are received up to 10.00 am on the auction date at the Public Debt Office at the BB Motijhel Office

·        The Bids are opened at 11.00 am on the same day, listed in ascending order of yields (in form BGTB-2) and placed before the Auction Committee

4.     Announcement and Issuance:

·        Auction results are announced by 3.00 pm on the auction day.

·        BGTBs are issued against the accepted bids on the following day by debiting the current accounts of the bidders with the BB for the purchase price, with advice in form BGTB-3.

5.     Registration and Settlement:

·        BGTBs are issued as registered stocks in uncertificated form, with no paper scrip

·        Transactions are processed as book-based clearing and settlement through SGL (Subsidiary General Ledger) Accounts, representing ownership of securities. Transfers are completed by debiting and crediting the relevant accounts.

Sale Procedure in Secondary Trading

1.     Secondary Market Trading:

·        BTGBs purchased in primary issues through auctions can be freely traded subsequently.

·        Primary Dealers (PDs) facilitate such secondary purchases and sale by quoting two-way prices. Transfers involved in these sales are booked in the SGL accounts with the BB Motijhel office upon application in Form BGTB-5 along with a transfer declaration in form BGTB-6

2.     Transfers within and between Accounts:

·        Transfers between own and IPS (Investor portfolio Securities) account, or between Ips accounts of the same bank/financial institution involving no payment settlement through the current account with the BB, are booked immediately upon receipt of duly filled application, declaration form, and transfer fee.

·        Transfer fees received are credited to account of BB Motijheel Office.

3.     Reporting Requirements:

·        PDs report their secondary market trading in BGTBs to BB Motijheel daily in form BGTB-7, separately for each issue, from the date of the first auction.

·        Other banks and financial institutions report their total holdings on a weekly basis using the same form

The auction procedures for Treasury Bills and Bonds in Bangladesh involve a structured process to ensure transparency and efficiency in the issuance and trading of these government securities. The primary and secondary market operations are governed by specific rules and forms, facilitating participation from both resident and non-resident investors. The Bangladesh Bank oversees the entire process, ensuring compliance and smooth operation in line with the stipulated guidelines.

Describe the sources of funds of a banking sector

 The banking sector obtains funds from various sources to carry out its operations and provide financial services. Here are some of the key sources of funds for the banking sector:

1.     Deposits: The primary and most significant source of funds for banks is customer deposits. Bank accept deposits from individuals, businesses and other entities. The deposits can be in the form of current accounts, savings accounts, fixed deposits, and other types of deposit accounts. Depositors entrust their money to the bank, which in turn uses these funds of lending and other activities while providing depositors with interest payments.

2.     Borrowing: Banks may borrow funds from other financial institutions, such as other bank or central bank, to meet short-term liquidity needs or to manage their reserve requirements. Borrowings can occur through interbank lending, repurchase agreements (repos), or borrowing facilities provided by the central bank. These borrowed funds help banks maintain sufficient liquidity and meet their financial obligations.

3.     Equity Capital: Banks raise funds by issuing shares to investors in exchange for equity capital. This capital represents the ownership stake of the shareholders in the bank. Banks can issue shares through initial public by central bank. These borrowed funds help banks maintain sufficient liquidity and meet their financial obligations.

4.     Retained Earnings: Banks generate profits through their operations, and a portion of these profits is retained within the bank. Retained earnings are accumulated over time and form a significant source of internal funds for banks. These funds can be reinvested into the bank’s operations, expansion, or used to strengthen the capital base.

5.     Debt Issuance: Banks can raise funds by issuing debt securities to investors. These debt instruments, such as bonds or debentures, are typically offered in the capital markets and carry fixed or floating interest rates. Investors purchase these debt securities, providing banks with funds while earning interest on their investments. Debt issuance allows banks to diversify their funding sources and manage their long-term financing shortage of funds.

6.     International Markets: Banks can raise funds from international markets through foreign currency borrowing or by issuing international bonds. Large banks with global operations and strong credit ratings can tap into international capital market to raise funds at favorable terms. This source of funding provides banks with additional liquidity and diversification.

7.     Central Bank Facilities: Banks can access funds from the central bank through various facilities. Central banks provide lending facilities, such as discount windows or standing lending facilities, to address short-term liquidity needs. These facilities help banks maintain their reserve requirements and manage temporary shortage of funds.

It’s important to note that the specific mix of funding sources can vary depending on the type and size of the bank, its business model, regulatory requirements, and market conditions. Banks aim to maintain a diversified funding base to mitigate risks and ensure a stable supply of funds to support their lending and other activities.

Describe the types of government transactions

 Government accounting is a handling of governments’ financial affairs. Government accounts prepare financial statements, budgets and provide accurate information pertaining to financial practices.

Basically, this account shows the activities of the government, likely to affect the rest of the economy. Unlike most private sector organizations, governmental entities must be responsible for to a number of different groups and organizations, including elected officials, other units of government, investors, creditors, and citizens that are focused on monitoring their activities. All forms of monitoring include collecting and interpreting data, and this oversight function is often performed through information provided in governmental reports.

Govt. transactions are summarized into five groups, revenue, grants, expenditure, net lending and financing.

 

·        Revenue includes all non-repayable receipts, required and unrequited, other than grants from other governments and international intuitions. Revenues can be divided into current and capital; the latter includes only receipts from the sale of capital assets. Current revenue embraces all tax revenue and current non-tax revenue. Taxes are compulsory, unrequited, non-repayable contributions exacted for public purposes.

·        Grants are defined as unrequited, non-repayable, non-compulsory receipts from other governments or international institutions.

·        Expenditure consists of all non-repayable payments by government, whether requited or unrequited and whether for current purposes. Only requited payments contribute directly to production, consumption and capital formation, while unrequited expenditures or transfers redistribute the effective demand among the different sectors of the economy.

·        Financing is equal to the balance of revenue, grants expenditure and net lending. It covers all transactions involving the government’s holding or currency and deposits, government liabilities and any financial assets held by the government for the purpose of financial management rather than public policy.

 

What is balance of payment account? Write a brief note on BOP account

 The balance of payment accounts is the set of accounts that keeps record of the economy’s transactions with the rest of the world. Every economy’s balance of payments must be organized in conformity with the International Monetary Fund Balance of Payment Manual.

The balance of payments has two parts:

1. The Current account (CA) that records current transactions, it has three parts:

·        Balance of goods and services which records exports and imports of goods and services.

·        Balance of primary incomes which records not only labor income, but also investment income on holding of assets like dividends on shares, and interest on bonds or loans.

·        Balance of current transfers which includes workers remittances, international aid, payments to and from the EU budget.

 

The Capital Account (KA): Records capital transactions (capital transfers, direct investment, portfolio investment and it covers transactions in financial assets and liabilities)

What are the major objectives of macroeconomics? Write a brief definition of each of these objectives. Explain carefully why each of these objectives is important

 What are the major objectives of macroeconomics? Write a brief definition of each of these objectives. Explain carefully why each of these objectives is important.

Macroeconomics studies the behavior and performance of an economy as a whole, focusing on aggregate changes such as unemployment, growth rate, GDP, and inflation. Governments and corporations use macroeconomic models to formulate economic policies and strategies. The primary objectives of macroeconomic policy are:

1.     Full Employment:

·  Definition: Achieving a situation where all available labor resources are being used efficiently, minimizing unemployment.

·  Importance: Reduces involuntary idleness of labor, increasing aggregate unemployment output and economic productivity. Became a key focus after the Great Depression.

     2. Price Stability:

·  Definition: Maintaining a stable price level over time, avoiding large fluctuations in inflation.

·  Importance: Prevents economic instability and promotions steady economic growth. Ensures predictability for consumers and businesses.

      3. Economic Growth:

·        Definition: Increase the output of goods and services in an economy over time.

·        Importance: Enhances the standard of living and quality of life. Driven by labor force growth, capital formation, and technological progress. Must balance with price stability.

      4. Balance of Payments Equilibrium and Exchange Rate Stability:

·  Definition: Achieving a stable and balanced flow of goods, services, and assets internationally.

·  Importance: Ensure stable international monetary reserves and healthy economic performance. Important for maintaining foreign exchange reserves and avoiding deficits.

      5. Social Objectives:

· Definition: Promoting social welfare through fair and equitable income distribution and economic freedom.

· Importance: Ensures social justice and allows individuals to make economic decisions freely, contributing to overall societal well-being.

Implementing these objectives helps governments and policymakers create a stable, growing and equitable economy, addressing both economic and social needs.