ARMY PUBLIC COLLEGE OF MANAGEMENT AND

SCIENCES

GROUP PROJECT OF
MONEY AND BANKING

BY
SYED SALMAN ABBAS

MUHAMMAD UMAR
FARRUKH IMTIAZ

TOHEED AKRAM
GHANI YOUNAS

ON DEFINING
NEGOTIABLE INSTRUMENTS & LETTER OF CREDIT (L.O.C), IT’S
NEED ROLLS AND PROCESSES
 DEDICATION

We dedicate our Work to our parents who give us hope and opportunities to face the
hurdles of life with their assistance; we also dedicate our work to our Teacher who
makes us realize to perform our best in life to make an example for our followers
 ACKNOWLEDGEMENT

We are deeply thankful to our Teacher, Sir Faisal Siddique. Who gave us an
opportunity to explore our knowledge by experience the actual Money and banking
environment closely.

We also would like to give our especial thanks to our Parents who help us a lot in
every field of our life.
 TABLE OF CONTENTS

Main page............................................................................................................1
Dedication............................................................................................................2
Acknowledgement................................................................................................3
Table of contents.................................................................................................4
Negotiable Instruments........................................................................................5
Letter of Credit.....................................................................................................8
Teacher’s Comments....................................................................................…...12
 NEGOTIABLE INSTRUMENTS
Negotiable instruments are written orders or unconditional promises to pay a
fixed sum of money on demand or at a certain time.

Bills of exchange, checks, drafts, and certificates of deposit are all examples of
negotiable instruments. Negotiable instruments may be transferred from one person to another,
who is known as a holder in due course. Upon transfer, also called negotiation of the
instrument, the holder in due course obtains full legal title to the instrument. Negotiable
instruments may be transferred by delivery or by endorsement and delivery.

Promissory Notes:

One type of negotiable instrument, called a promissory note, involves only two
parties, the maker of the note and the payee, or the party to whom the note is payable.
With a promissory note, the maker promises to pay a certain amount to the payee.

Bills of Exchange:

Another type of negotiable instrument, called a bill of exchange, involves three

parties. The party who drafts the bill of exchange is known as the drawer. The party
who is called on to make payment is known as the drawee, and the party to whom
payment is to be made is known as the payee.

Cheque:

A check is an example of a bill of exchange, where the individual or business

writing the check is the drawer, the bank is the drawee, and the person or business to
whom the check is made out is the payee.

Drawer & Drawee

The maker of a bill of exchange or cheque is called the "drawer"; the person
thereby directed to pay is called the drawee. Drawee in case of need, When the bill or
in any endorsement thereon the name of any person is given in addition to the drawee
to be resorted to in case of need, such person is called a drawee in case of need.

Acceptor & Payee:

Acceptor: After the drawee of a bill has signed his assent upon the bill, or, if there are
more parts thereof than one upon one of such parts and delivered the same or given
notice of such signing to the holder or to some person on his behalf, he is called The
acceptor.
Payee: The person named in the instrument to whom or to whose order the money is
by the instrument directed to be paid is called the payee.

Negotiation:

When a promissory note, bill of exchange or cheque is transferred to any

person, so as to constitute the person the holder thereof, the instrument is said to be
negotiated.

Example:

To understand the meaning of negotiable instruments let us take a few examples

of day-to-day business transactions.

Suppose Hassan a book publisher has sold books to Ali for Rs 10,000/- on three
months credit. To be sure that Ali will pay the money after three months, Hassan may
write an order addressed to Ali that he is to pay after three months, for value of goods
received by him, Rs.10,000/- to Hassan or anyone holding the order and presenting it
before him (Ali) for payment. This written document has to be signed by Ali to show his
acceptance of the order. Now, Hassan can hold the document with him for three
months and on the due date can collect the money from Ali. He can also use it for
meeting different business transactions.

For instance, after a month, if required, he can borrow money from Sunil for a
period of two months and pass on this document to Sunil. He has to write on the back
of the document an instruction to Ali to pay money to Sunil, and sign it. Now Sunil
becomes the owner of this document and he can claim money from Ali on the due date.
Sunil, if required, can further pass on the document to Ghani after instructing and
signing on the back of the document. This passing on process may continue further till
the final payment is made.

In the above example, Ali who has bought books worth Rs. 10,000/- can also
give an undertaking stating that after three month he will pay the amount to Hasan.
Now Hasan can retain that document with himself till the end of three months or pass it
on to others for meeting certain business obligation (discussed above) before the expiry
of that three months time period.

You must have heard about a cheque. What is it? It is a document issued to a
bank that entitles the person whose name it bears to claim the amount mentioned in the
cheque. If he wants, he can transfer it in favour of another person. For example, if
Haroon issues a cheque worth Rs. 5,000/ - in favour of Bidhan, then taimoor can claim
Rs. 5,000/- from the bank, or he can transfer it to Raza to meet any business obligation,
like paying back a loan that he might have taken from Raza. Once he does it, Raza
gets a right to Rs. 5,000/- and he can transfer it to muhammad if required. Such
transfers may continue till the payment is finally made to somebody.
Understanding of an Example :

In the above examples, we find that there are certain documents used for
payment in business transactions and are transferred freely from one person to
another. Such documents are called Negotiable Instruments. Thus, we can say
negotiable instrument is a transferable document, where negotiable means transferable
and instrument means document. To elaborate it further, an instrument, as mentioned
here, is a document used as a means for making some payment and it is negotiable
i.e., its ownership can be easily transferred. Thus, negotiable instruments are
documents meant for making payments, the ownership of which can be transferred
from one person to another many times before the final payment is made.

Validity of Negotiable Instrument:

To be valid a negotiable instrument must meet four requirements. First, it must

be in writing and signed by the maker or drawee. Second, it must contain an
unconditional promise (promissory note) or order (bill of exchange) to pay a certain sum
of money and no other promise except as authorized by the Uniform Commercial Code
(UCC). Third, it must be payable on demand or at a definite time. Finally, it must be
payable either to order or to bearer.

Endorsement:

When the maker or holder of a negotiable instrument signs the same, otherwise
than as such for the purpose of negotiation on the back or face thereof or on a slip of
paper annexed thereto, or so signs for the same purpose a stamped paper intended to
be completed as a negotiable instrument, he is said to endorse the same, and is called
the endorser.

Explanation:

Negotiable instruments may be endorsed in various ways, and some negotiable

instruments do not require any endorsement. If a negotiable instrument is a bearer
instrument, then it may be negotiated by simply delivering it from one person to another
with no endorsement required. Such negotiable instruments typically have a blank
endorsement consisting of a person's name only. If the negotiable instrument is an
order instrument, then the payee must first endorse it and deliver it before negotiation is
complete. For example, if the instrument says, "Pay to the order of Jane Smith," then it
is an order instrument and Jane Smith must endorse it and then deliver it to the payer
or drawee.

Endorsements such as "Pay to the order of Jane Smith" are known as special
endorsements and have the effect of making the instrument an order instrument rather
than a bearer instrument. Restrictive endorsements ("Pay to Jane Smith only") and
qualified endorsements ("Pay without recourse to the order of Jane Smith") also have
the effect of requiring the payee to endorse the negotiable instrument. Qualified
endorsements also affect the nature of implied warranties associated with
endorsement.

LETTER OF CREDIT (L.O.C)

Letter of Credit:

A Kind of document that provides guarantee to a lender that the borrower would
pay back the borrowed amount and if the borrower fails to do so, the guarantor will pay
that. This is becoming an important mode of transaction for a number of sector

A letter of credit can be termed as a specific document that is issued in certain

situations by banks or other lending institutions. The nature of this letter can be termed
as a request letter. This letter is provided by the financial institutions to the potential
borrowers. Through this letter, the borrower gets the chance to draw an exchange bill
that is definitely accepted.

Elements of a Letter of Credit:

• A payment undertaking given by a bank (issuing bank)
• On behalf of a buyer (applicant)
• To pay a seller (beneficiary) for a given amount of money
• On presentation of specified documents representing the supply of goods
• Within specified time limits
• Documents must conform to terms and conditions set out in the letter of credit
• Documents to be presented at a specified place

Role of the financial Institution in offering Letter of Credit

The letter of credit that is issued by the financial institutions is a special type of
document where the lending institution plays the role of a guarantor for some other
person.

According to this letter of credit, a financial institution requests a person to

provide a definite amount to a particular person. This amount is treated as a debt. So,
the role of the bank or the financial organization here is similar to a guarantor. There
are certain individuals who also offer this type of letters but basically it is related to the
banks. Whenever any individual issues letter of credit, it becomes essential for the
involved parties to handle the risk factors properly

The letter of credit is also important because through this letter, the bank or the
financial institution that issues the letter comes under certain obligation. Because of this
letter, instead of the borrower, the letter issuing body comes under the obligation of
making the payment if the borrower defaults for any reason.
Uses of Letter of Credit:

There are a number of uses of a letter of credit. These can be used as a mode of
payment in the transactions. There are a number of exporters who receive payment
through these modes. The letter of credit is becoming a crucial part of the land
development processes where it ensures growth of the public facilities. On the other
hand, the letter of credit is becoming very important for the international trade and
commerce. It provides an easy transaction system for the businesses where customer
and the supplier belong to different nations.

Charges for Providing Letter of Credit:

The bank or the financial institution that provides the letter of credit is always
exposed to a huge amount of financial risk. Because of this, a certain amount is
charged by the letter of credit providers. The applicant is bound to pay this amount to
the issuer of this letter. At the same time, the applicant has the right to ask for the same
amount from the beneficiary.
Needs of Letter of Credit:

The main purpose of letter of credit is to facilitate international trade. it is

because of this that the exporter and importer can come along because the bank
serves as a major guarantor thus facilitating the whole trading process and the chances
of default and risk is low. Moreover it is because of this letter of credit that the exporter
gets prompt payment for his goods as he can negotiate with nay negotiating bank and
get his payment and on the other hand the importer remains satisfied that the exporter
cannot breech the contract because he has a strong guarantor which allows the trust of
the exporter in the business as well. Thus both are beneficial in the end and ultimately
the purpose of a letter of credit is accomplished that it facilitates the trade between the
two parties.

9 Steps in the Letter of Credit Process:

• Buyer and seller agree to terms including means of transport, period of credit
offered (if any), and latest date of shipment acceptable.
• Buyer applies to bank for issue of letter of credit. Bank will evaluate buyer's
credit standing, and may require cash cover and/or reduction of other lending
limits.
• Issuing bank issues LC, sending it to the Advising bank by airmail or electronic
means such as telex or SWIFT.
• Advising bank establishes authenticity of the letter of credit using signature
books or test codes, then informs seller (beneficiary).
• Seller should now check that LC matches commercial agreement and that all its
terms and conditions can be satisfied.
• Seller ships the goods, then assembles the documents called for in the LC
(invoice, transport document, etc.).
 • The Advising bank checks the documents against the LC. If the documents are
compliant, the bank pays the seller and forwards the documents to the Issuing
bank.
• The Issuing bank now checks the documents itself. If they are in order, it
reimburses the seller's bank immediately.
• The Issuing bank debits the buyer and releases the documents (including
transport document), so the buyer can claim the goods from the carrier.

Tips for Exporters

• Communicate with your customers in detail before they apply for letters of credit.
• Consider whether a confirmed letter of credit is needed.
• Ask for a copy of the application to be fax to you, so you can check for terms or
conditions that may cause you problems in compliance.
• Upon first advice of the letter of credit, check that all its terms and conditions can
be complied with within the prescribed time limits.
• Many presentations of documents run into problems with time-limits. You must
be aware of at least three time constraints - the expiration date of the credit, the
latest shipping date and the maximum time allowed between dispatch and
presentation.
• If the letter of credit calls for documents supplied by third parties, make
reasonable allowance for the time this may take to complete.
• After dispatch of the goods, check all the documents both against the terms of
the credit and against each other for internal consistency.
Summary:
The use of the letters of credit as a tool to reduce risk has grown substantially
over the past decade. Letters of credit accomplish their purpose by substituting the
credit of the bank for that of the customer, for the purpose of facilitating trade.
The credit professional should be familiar with two types of letters of credit:
commercial and standby. Commercial letters of credit are used primarily to facilitate
foreign trade. The commercial letter of credit is the primary payment mechanism for a
transaction.
The standby letter of credit serves a different function. The standby letter of
credit serves as a secondary payment mechanism. The bank will issue the credit on
behalf of a customer to provide assurances of his ability to perform under the terms of a
contract.
Upon receipt of the letter of credit, the credit professional should review all items
carefully to insure that what is expected of the seller is fully understood and that he can
comply with all the terms and conditions. When compliance is in question, the buyer
should be requested to amend the credit.
 TEACHER’S COMMENTS

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

___________________________________________________________

__________