Basics of Banking

By D. Othniel Forte

The Liberian Banking System is arguably the best positioned in the West African sub region. Unlike its neighbors with not much growth prospects, the system has numerous opportunities for growth. The financial system remains vastly undersaturated due to the many years of conflict. It is just ripe for investments. This is partly why major players from all over the region are rushing to set up shop in Liberia.
This book takes a simple approach in explaining the fundamental principles of banking and finance. It gives them a complete local touch with practical examples right from within the system. It views the entire system from a bottom up approach. It discusses issues as viewed by the smallest to the major players in the system. It covers the regulators, the regulated, the unregulated and addresses ways to reconcile the whole system.
This book is one of the first written in decades that focuses completely on the Liberian Financial System.
The author is a local expert who not only understands banking and finance, but also the Liberian Financial System clearly.

• Language: English
• Publisher: D. Othniel Forte
• Release date: Mar 11, 2014
• ISBN: 9781497778986

D. Othniel Forte

The author is an educator, folklorist, writer and social commentator. He has written extensively on Liberia and other social issues. His work experiences and years of travel have added an extra dimension to his works. He is passionate for his native land and preserving its history, cultures, and traditions. His education covers several disciplines and he actively promotes the New Liberia concept of a mental revolution. He is the founder of the Liberia GiveBack Project and he heads the newly establish Liberian think tank Everything Liberia http://othnieldf.wix.com/everythingliberia) He currently resides in Asia with his family where he works as an educator and continues to dedicate his time to writing.

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AUTHOR’S NOTE

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The Liberian Banking System is arguably the best positioned in the West African sub region. Unlike its neighbors with not much growth prospects, the system has numerous opportunities for growth. The financial system remains vastly under saturated due to the many years of conflict. It is just ripe for investments. This is partly why major players from all over the region are rushing to set up shop in Liberia.

Sadly, the Central Bank is not taking full advantage of the situation. However, all is not lost, there is still time to get hold of the system and shape it for Liberia to gain her financial dominance on the continent and the region once more. With the proper motivation and responsible leadership, Liberia can overcome years of economic decline.

This book takes a simple approach in explaining the fundamental principles of banking and finance. It gives them a complete local touch with practical examples right from within the system. It views the entire system from a bottom up approach. It discusses issues as viewed by the smallest to the major players in the system. It covers the regulators, the regulated and the unregulated and addresses ways to reconcile the whole system.

This book is one of the first written in decades that focuses completely on the Liberian financial system. The author is a local who not only understands banking and finance, but the Liberian financial system clearly.

Although this is an introductory text, several chapters can be taught as a stand-alone sections. The entire textbook can be used as course resource for students and practitioners in the financial system to grasp a full understanding of the system

I can’t close without mentioning the many people who helped me in concluding this book. I am most grateful for your efforts and this is for you. lastly, I wish to thank the cab and bus drivers, the wheel barrows boys, the cold water sellers, the DK sellers, the bread and candles sellers, the ‘waiter market’ people, shoe-shine boys, the Cold Bowl Oldmas, the shop owners, the Value Boys, the video and entertainment centers,  the scratch card sellers and the money changers, you are the real drivers of our economy. You make it work.

And lastly, to the Market Women of Liberia, the backbone of our economy. Your tireless efforts in keeping our economic wheels turning are not unnoticed, we say thank you plenty

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Chapter One

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Money: Its Origins and Importance

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In our modern society, money is the most liquid of all assets. It cuts across all borders, systems and peoples. It is arguably the foremost institution that modern society revolves around for livelihood and all other forms of activities. Thus, it is most common to all financial systems around the world.

The benefits, costs and forms of money may be as multiple as there are human beings and it may range from the complex to medium and then the very basic. However, every society depend on the institution of money for its survival and this is a trend that is most likely to continue. The most certain thing is that the types, shapes and value of it will change with time; but it is here to stay.

Importance of Money

Every individual has multiple values they attach to money. Everybody uses it for the provision of their basic needs in life and we all use it to acquire our insatiable multiple wants. Thus, any attempt to exhaust the importance of money is a futile venture. However, it is better to list some of the more common importance of money. Some of these are:

  It facilitates transactions of all kinds

  It facilitates exchange (local and foreign)

  Enables the production of goods and services

  It provides opportunities of various kinds

  It runs the economy

  It drives the economy (growth/decline)

  It creates economic wealth

  It is the major driver of all production

One of the most recognized importance of money is its purchasing power. This capacity of money to purchase just about anything, makes it most attractive and draws people to it. Now that we have seen some of the importance of money, it is in order to lend some definitions to the term itself.

Sources of Money

Money does not have a single origin. In many different societies, people found a need for money. It developed over time and in many ways and also in many forms. Eventually, it took up its current form, which is undergoing a change as well.

According to Glyn Davies

"Money originated very largely from non-economic causes: from tribute as well as from trade, from blood-money and bride-money as well as from barter, from ceremonial and religious rites as well as from commerce, from ostentatious ornamentation as well as from acting as the common drudge between economic men."**

Whatever the case may be, money surely has multiple sources and its origins are difficult to trace. Yet we can deduce some of its sources using hindsight alongside what we now know about money. For example, some of the best known sources are:

Tax/Duties Imposed

Feudal lords and masters demanded from their subjects some form of payment for the protection they gave them. This was a main source of money.

Religious Ceremonies-

In some places, tradition often determined that special items be used for religious purposes. These traditions specified, for example in the case of cattle, the color (white, spotless, red etc.), the size (full grown), the sex (male) etc. and many more. Over time, these things soon held special value to its people.

**Taken from the Preface of Davies, Glyn. A history of money from ancient times to the present day, 3rd ed. Cardiff: University of Wales Press, 2002. 720 pages. Paperback: ISBN 0 7083 1717 0. Hardback: ISBN 0 7083 1773 1.

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Bridal Ceremonies

In other places, the custom often required that specific items be paid as dowry for a bride by the bride’s or groom’s family depending on the culture.

Barter Trade

For economic reasons, financial exchanges had to be conducted using standards agreed upon by both parties. Over time, people perfected these methods thus avoiding unfair trade.

Laws/Statutes

Normally in the primitive society, those that violated the laws were required to pay some form of appeasement or compensation to the victims. All parties agreed upon the value of this appeasement. This was to ensure and maintain the peace within the community.

What is money?

Because of the complex nature and many forms of money, it is not easy to carry a single meaning. However, for the purpose of this textbook, the concept of money will include any of the following:

Money is the stock of assets readily used for undertaking financial transactions.

Money is anything that is generally accepted as/in payment for goods and services.

Money is something a seller will accept in exchange for a good, product or service.

Money is anything commonly used in settling debts/credits and to make payments.

Money is a legal tender, the official currency issued by a government or Central Bank.

Money is the most liquid asset (in the modern society)

Often, a common error many people make is to equate money to income or wealth. These are completely different things.

Income – is one’s cumulative earnings over a particular period, usually annually.

Wages – are earnings over a specific period of time, usually weekly/biweekly.

Money in general is a stock commonly accepted as payment.

Wealth is one’s accumulated assets at a particular point in time.

Money and wealth are stocks at a specific time. They are static in terms of calculation. Income on the other hand, is more like a flow. It is concerned with a period of time and is not as static (in terms of calculation) as money and wealth.

For example, Emmanuel could inherit millions of dollars in cash or Abel could win millions in the National Lottery. Both of these individuals can quit their jobs and live off their money. Both of them are wealthy and have a lot of money but no income.

Harriet on the other hand, could own 3.5 million dollars in diamond while Rebazar has four million dollars in gold. Both are wealthy but have no money. Nathaniel may have real estate and land valued at five million. He is wealthy but has no money. On the other hand, Adele could earn annually $480,000 and blows it all up as she receives each paycheck. She has a high income but no wealth.

Since our society places such high value on money, it would be logical to consider how one gets hold of it or in other cases loses it. For whenever one acquires money, it is safe to assume that most likely another has lost it. There are many ways to possess money. Some are legal and others are illegal.

However, some common ways to acquire money are:

Gifts- when one receives a gift, they have been transferred a value without reciprocity. That is to say the giver does not necessarily expect anything in return.

Transfer- under transfer there are two major ways by which it may occur.

Voluntary- with Voluntary Transfer, there is an expressed agreement of reciprocity. The parties involved set a value of exchange that they consider reasonable and fair for said transaction(s).

Involuntary- this occurs mostly when one party loses money to another by some means of coercion, force or intimidation. For example, it is involuntary when theft, robbery or armed robbery occurs. Alternatively, it could happen when corruption, bribery or extortion happens. It is also present when one pays taxes or some other forms of duties.

The Beginnings of Money

The Barter System

Long ago before the modern society could develop what we know as money, there existed a system of trade commonly referred to by economists as Barter. In Bartering, people traded goods, products or services directly with each other. There was no money involved and mostly people produced goods/products for self-consumption or on a small scale. There were no industrial productions. They had to actually look for another trader who wanted what they had and had an item that they considered equally fair before a transaction could occur. This concept economists commonly call the double coincidence of wants.

For example, if one had rice and wanted oil, one had to find someone who had oil and wanted rice in exchange. Then both of them had to agree on the quantity of rice and oil that was fair value before an exchange could go on. This system was not only awkward but it was burdensome as well.

It also had many disadvantages for those wanting to exchange perishable goods/products. They had to trade their goods as early as possible or else it would spoil. This would mean that those with non-perishable goods got the upper hand in trade at times. However, society evolved to the point of riding itself of the Barter System but not before facing so many problems. Some of the disadvantages of bartering included:

a)  Lack of Common Measure of Value/Weight – traders encountered many problems assigning values to goods/produces. Since there were no standard measure, the system often cheated one party. It based its pricing or the exchange rate on the level of intensity each good/product demanded. And this could vary every time.

b)  The Lack of Specialization – Barter discouraged specialization in that, no one wanted to be stuck with goods that people may not need or want. People instead preferred to produce many different kinds of goods/products in small quantities to increase their chances of trade. The more options, the better one’s chances were to sell on any given day.

c)  The Need for Double Coincidence of Wants – for example, trader A had to search for another trader (Trader B) who possessed the goods/services that s/he wanted. On top of that, trader B had to want trader A’s item. Then both parties had to agree on a desire quantity or amount before trading could occur.

d)  The Difficulty in Storing or Preserving Goods – since trading occurred mostly in perishable goods, traders faced the problem of storage or preservation. This was an additional cost which made trading all the more difficult.

e)  The Problem of Deferred Payment – since the parties often made payments in perishable items, debt collectors found it hard to lend credit. It was just too uncertain when and in what quantity/condition the debt would be repaid.

f)  The Problem of Dividing Goods- it was too difficult to divide goods into smaller units. One party most likely lost in the process.

The Functions of Money

Money has many functions and it seems