Cmp-lecture6-business_forms of Business organization .ppt
- 1. Forms of Business Organization Forms of Business Organization Joint Stock Companies and Joint Stock Companies and Banks Banks Dr. Attaullah Shah Dr. Attaullah Shah
- 2. Legal Forms of Business Sole Proprietorships Partnerships Corporations General Partnership Limited Partnership Master Limited Partnership Regular Corporation Subchapter S Corporation (S-Corporation)
- 3. Sole Proprietorships Sole Proprietorships Business owned (and usually operated) Business owned (and usually operated) by one person by one person Simplest form of business ownership Simplest form of business ownership Most popular form of business Most popular form of business organization – 72.2% of all organization – 72.2% of all Most common in: Most common in: – Retailing Retailing – Service Service – Agriculture Agriculture
- 4. Sole Proprietorship -- Advantages Sole Proprietorship -- Advantages Ease of Startup Ease of Startup – Little legal documentation Little legal documentation – No co-owners to consult No co-owners to consult Least expensive to start Least expensive to start Pride of Ownership Pride of Ownership Retention of profits Retention of profits Flexibility Flexibility No Business Income Tax No Business Income Tax
- 5. Sole Proprietorship -- Sole Proprietorship -- Disadvantages Disadvantages Unlimited Liability Unlimited Liability Limited Life – Business ends when owner Limited Life – Business ends when owner leaves the business leaves the business Limited Access to Start-up Capital Limited Access to Start-up Capital Limited Access to Credit Limited Access to Credit Limited Management Expertise Limited Management Expertise Difficulty in Hiring Employees Difficulty in Hiring Employees Proprietor not considered an employee Proprietor not considered an employee
- 6. Partnerships Partnerships Two or more owners Two or more owners Least numerous form – 7.7% of all Least numerous form – 7.7% of all businesses businesses Partnership Agreement Partnership Agreement – Specifies rights and obligations of partners Specifies rights and obligations of partners – If written, called the If written, called the Articles of Partnership Articles of Partnership ( (Articles of Co-partnership Articles of Co-partnership) )
- 7. Partnership -- Advantages Partnership -- Advantages Greater Access to Capital Greater Access to Capital Greater Access to Credit Greater Access to Credit Retention of Profits Retention of Profits More Management Expertise More Management Expertise No Business Income Tax No Business Income Tax
- 8. Partnership -- Disadvantages Partnership -- Disadvantages Shared Profits Shared Profits Unlimited Liability for “General Partners” Unlimited Liability for “General Partners” Each partner has “Agency” power Each partner has “Agency” power Limited Life Limited Life – Business ends when any partner withdraws Business ends when any partner withdraws Management Disagreements Management Disagreements Frozen Investment Frozen Investment
- 9. Types of Partners Types of Partners General Partner General Partner – Unlimited Liability Unlimited Liability – Assumes Management Role Assumes Management Role Limited Partner Limited Partner – Liability limited to Investment Liability limited to Investment – May not take active managerial role May not take active managerial role Every partnership must have at least one Every partnership must have at least one general partner general partner
- 10. Types of Partners Types of Partners General Partnership General Partnership – All partners are general partners All partners are general partners Limited Partnership Limited Partnership – One or more limited partners One or more limited partners Master Limited Partnership Master Limited Partnership – Owned & managed like a corporation Owned & managed like a corporation – Taxed like a partnership Taxed like a partnership – Shares may be sold Shares may be sold
- 11. Corporations Corporations Generally larger than other forms (Except for S- Generally larger than other forms (Except for S- Corporation) Corporation) – 20.1% of all U.S. Businesses 20.1% of all U.S. Businesses – Account for 87.1% of all U.S. Business Income Account for 87.1% of all U.S. Business Income Considered a separate legal entity Considered a separate legal entity – Owners called “Stockholders” or Shareholders” Owners called “Stockholders” or Shareholders” Ownership evidenced by “Stock Certificate” Ownership evidenced by “Stock Certificate” Governed by “Board of Directors” Governed by “Board of Directors”
- 12. Corporations -- Advantages Corporations -- Advantages Limited Liability Limited Liability Ease of Ownership Transfer Ease of Ownership Transfer Unlimited Life Unlimited Life Greater Access to Capital Greater Access to Capital Specialized Management Expertise Specialized Management Expertise
- 13. Corporations -- Disadvantages Corporations -- Disadvantages More difficult & costly to form More difficult & costly to form – Requires a “Corporate Charter” Requires a “Corporate Charter” Subject to greater governmental scrutiny Subject to greater governmental scrutiny Diluted earnings Diluted earnings Double taxation Double taxation
- 14. Corporations vs. Corporations vs. Sole Proprietorships Sole Proprietorships SP SP Corp Corp Income Income $1,000,000 $1,000,000 $1,000,000 $1,000,000 Expenses Expenses 500,000 500,000 500,000 500,000 EBT EBT $500,000 $500,000 $500,000 $500,000 (Assume Business Tax Rate = 50%) (Assume Business Tax Rate = 50%) Business Tax Business Tax 0 0 250,000 250,000 Net Profit Net Profit $500,000 $500,000 $250,000 $250,000 (Assume a 30% Personal Tax Rate) (Assume a 30% Personal Tax Rate) Personal Tax Personal Tax 150,000 150,000 75,000 75,000 $ to Owners $350,000 $175,000 $ to Owners $350,000 $175,000
- 15. Corporate Charter Corporate Charter Legal Permission to Operate as a Legal Permission to Operate as a Corporation Corporation Issued by state Issued by state May not conduct business as a May not conduct business as a corporation without a charter corporation without a charter
- 16. Contents of a Corporate Charter Contents of a Corporate Charter Company Name & Address Company Name & Address Names & addresses of Incorporators Names & addresses of Incorporators Purpose of the Corporation Purpose of the Corporation Maximum amount of stock & Classes of Maximum amount of stock & Classes of Stock to be issued Stock to be issued Rights & Privileges of stockholders Rights & Privileges of stockholders Length of time the corporation is to exist Length of time the corporation is to exist
- 17. Stockholder Rights Stockholder Rights Common Stock Common Stock – Votes in corporate matters Votes in corporate matters – One vote per share owned One vote per share owned Preferred Stock Preferred Stock – No voting rights No voting rights – Dividend claims are paid 1 Dividend claims are paid 1st st Dividend Dividend – Distribution of earnings to the stockholders of Distribution of earnings to the stockholders of a corporation a corporation
- 18. Owners/ Stockholders/ Shareholders Chief Executive Officer (CEO) Board of Directors President Senior Vice President Vice President Finance Vice President Production Vice President Marketing Vice President Human Resources Organizational Chart Organizational Chart
- 19. Types of Corporations Types of Corporations Government-Owned Corporation Government-Owned Corporation – “ “Public Corporation” Public Corporation” – Owned & operated by government Owned & operated by government – Post al Corporation, NASA, FIDIC,SNGPL Post al Corporation, NASA, FIDIC,SNGPL Quasi-Government Corporation Quasi-Government Corporation – “ “Quasi-Public Corporation” Quasi-Public Corporation” – Privately owned, government controlled monopoly Privately owned, government controlled monopoly – Public utilities, Fannie Mae, Freddie Mac, Sallie Mae Public utilities, Fannie Mae, Freddie Mac, Sallie Mae Private Corporation Private Corporation – Owned by individuals or other companies Owned by individuals or other companies
- 20. Types of Corporations Types of Corporations Not-For-Profit Corporation Not-For-Profit Corporation – Organized to provide a social, educational, religious, Organized to provide a social, educational, religious, or other service or other service – Habitat for Humanity, Red Cross Habitat for Humanity, Red Cross For-Profit Corporation For-Profit Corporation Closed Corporation Closed Corporation – Stock owned by relatively few people Stock owned by relatively few people – Stock not sold to general public Stock not sold to general public Open Corporation Open Corporation – Stock is bought and sold on security exchanges Stock is bought and sold on security exchanges – Can be purchased by any individual Can be purchased by any individual
- 21. Types of Corporations Types of Corporations S-Corporation (Subchapter-S Corporation) S-Corporation (Subchapter-S Corporation) – Corporate structure designed for small business Corporate structure designed for small business – Taxed as a partnership if there are 75 or fewer Taxed as a partnership if there are 75 or fewer stockholders stockholders – No non-resident alien stockholders No non-resident alien stockholders – Only one class of stock Only one class of stock Limited-Liability Company (LLC) Limited-Liability Company (LLC) – Combines the benefits of a corporation & partnership Combines the benefits of a corporation & partnership – Not limited to 75 stockholders Not limited to 75 stockholders
- 22. Mergers & Acquisitions Mergers & Acquisitions Hostile takeover Hostile takeover Types of mergers Types of mergers – Horizontal: Similar products / services Horizontal: Similar products / services – Vertical: Different but related firms Vertical: Different but related firms – Conglomerate: Completely different Conglomerate: Completely different industries industries Merger Trends Merger Trends – Divestiture Divestiture – Leveraged Buyout (LBO) Leveraged Buyout (LBO)
- 23. Franchising Franchising Franchise Franchise – License to operate an individually owned License to operate an individually owned business as though it were part of a chain of business as though it were part of a chain of outlets or stores outlets or stores – The business itself The business itself Franchising Franchising – Actual granting of a franchise Actual granting of a franchise
- 24. Franchising Franchising Franchisor Franchisor – Supplies a known & advertised business name Supplies a known & advertised business name – Supplies management skills Supplies management skills – Supplies training & materials Supplies training & materials – Supplies method of doing business Supplies method of doing business Franchisee: Franchisee: – Supplies labor & capital Supplies labor & capital – Operates the franchised business Operates the franchised business – Agrees to abide by the franchise agreement Agrees to abide by the franchise agreement
- 25. Franchising Advantages Franchising Advantages Franchisor Franchisor – Fast, Selective Distribution Fast, Selective Distribution – Motivated Franchisee Motivated Franchisee Franchisee Franchisee – Opportunity to start a business Opportunity to start a business – Business Experience of others Business Experience of others – Nationally recognized name Nationally recognized name – National promotional campaigns National promotional campaigns
- 26. Franchising Disadvantages Franchising Disadvantages Mainly from Franchisee’s Viewpoint: Mainly from Franchisee’s Viewpoint: – Franchisor’s contract can dictate every aspect Franchisor’s contract can dictate every aspect of the business of the business – Pay for security Pay for security – Long hours Long hours – Competition from same company Competition from same company
- 27. Joint Stock Company: Joint Stock Company: The limitations of sole-proprietorship and partnership forms of The limitations of sole-proprietorship and partnership forms of ownership gave birth to joint stock company form of organisation. ownership gave birth to joint stock company form of organisation. Two important limitations of earlier form of organisation were Two important limitations of earlier form of organisation were inadequacy of funds and unlimited liability. inadequacy of funds and unlimited liability. The earlier form of organisation could not meet the increasing The earlier form of organisation could not meet the increasing demand for funds of organisation. The other limitation which demand for funds of organisation. The other limitation which hampered the growth of business was the unlimited liability of hampered the growth of business was the unlimited liability of owners. owners. Joint stock company was first started in ITALY in THIRTEENTH Joint stock company was first started in ITALY in THIRTEENTH century. century. During 17 During 17th th and 18 and 18th th centuries, joint stock companies were centuries, joint stock companies were formed in ENGLAND under ROYAL CHARTER or ACTS OF formed in ENGLAND under ROYAL CHARTER or ACTS OF PARLIAMENT. PARLIAMENT. DEFINITION:- DEFINITION:- A company is ‘’ a voluntary association of many individuals for A company is ‘’ a voluntary association of many individuals for profit having limited liability and contribute money or money’s profit having limited liability and contribute money or money’s worth to a common stock. worth to a common stock.
- 28. Characteristics of Joint Stock Co. Characteristics of Joint Stock Co. ASSOCIATION OF PERSONS:- ASSOCIATION OF PERSONS:- A company is an association of persons joining hands with a common A company is an association of persons joining hands with a common motive. A private limited company must have at least two persons and motive. A private limited company must have at least two persons and public limited company must have at least seven members to get it public limited company must have at least seven members to get it registered. Furthermore, the number of shareholders should not exceed 50 registered. Furthermore, the number of shareholders should not exceed 50 in private companies but there is no maximum limit in a public limited in private companies but there is no maximum limit in a public limited company. company. INDEPENDENT LEGAL ENTITY:- INDEPENDENT LEGAL ENTITY:- The company is created under law. It has separate legal entity apart from The company is created under law. It has separate legal entity apart from its members. A company acts independently of its members. The company its members. A company acts independently of its members. The company is not bound by the acts of its members. The company can sue and be is not bound by the acts of its members. The company can sue and be sued in its own name. sued in its own name. LIMITED LIABILITY:- The liability of its shareholders is limited to the value LIMITED LIABILITY:- The liability of its shareholders is limited to the value of shares they have purchased. In case the company incurrs huge of shares they have purchased. In case the company incurrs huge liabilities, the shareholders can only be called upon to pay the unpaid liabilities, the shareholders can only be called upon to pay the unpaid balance on their shares. balance on their shares.
- 29. COMMON SEAL:- COMMON SEAL:- A company being an artificial person cannot put its A company being an artificial person cannot put its signatures. The law requires every company to have a signatures. The law requires every company to have a seal and get its name engraved on it. The seal of the seal and get its name engraved on it. The seal of the company is affixed on all important documents and company is affixed on all important documents and contracts as a token of signature. contracts as a token of signature. TRANSFERABILITY OF SHARES:- TRANSFERABILITY OF SHARES:- The shares of the company can be transferred by its The shares of the company can be transferred by its members. Under ARTICLES OF ASSOCIATION, the members. Under ARTICLES OF ASSOCIATION, the company can put certain restrictions on the transfer of company can put certain restrictions on the transfer of shares but it cannot altogether stop it. shares but it cannot altogether stop it.
- 30. SEPARATION OF OWNERSHIP AND MANAGEMENT:- SEPARATION OF OWNERSHIP AND MANAGEMENT:- The shareholders of a company are widely scattered. A The shareholders of a company are widely scattered. A shareholder may like to invest money but may not be shareholder may like to invest money but may not be interested in its management. The companies are managed interested in its management. The companies are managed by the board of directors. by the board of directors. PERPETUAL EXISTENCE:- The company has a permanent PERPETUAL EXISTENCE:- The company has a permanent existence. The shareholders may come or may go but the existence. The shareholders may come or may go but the company will go on forever. The continuity of the company is company will go on forever. The continuity of the company is not affected by death, lunacy or insolvency of its not affected by death, lunacy or insolvency of its shareholders. shareholders. CORPORATE FINANCE:- A joint stock company, generally, CORPORATE FINANCE:- A joint stock company, generally, raises large amounts of funds. The is divided into small raises large amounts of funds. The is divided into small shares of domination. A large number of persons purchase shares of domination. A large number of persons purchase shares and contribute to the capital of the company. shares and contribute to the capital of the company.
- 31. CENTRALISED AND DELEGATED MANAGEMENT:- CENTRALISED AND DELEGATED MANAGEMENT:- A joint stock company is an autonomous and self A joint stock company is an autonomous and self governed body. The shareholders being large in number governed body. The shareholders being large in number cannot look after the day-to-day activities of the company. cannot look after the day-to-day activities of the company. They elect board of directors in general body meeting for They elect board of directors in general body meeting for managing the company. All policies of the company are managing the company. All policies of the company are decided by a majority vote. All decisions are taken in a decided by a majority vote. All decisions are taken in a democratic way. democratic way. PUBLICATION OF ACCOUNTS:- PUBLICATION OF ACCOUNTS:- A joint stock company is required to file annual statements A joint stock company is required to file annual statements with the registrar of companies at the end of a financial with the registrar of companies at the end of a financial year. They are available for inspection in the office. year. They are available for inspection in the office.
- 32. Kinds of Companies: Kinds of Companies: ACCORDING TO INCORPORATION ACCORDING TO INCORPORATION The companies may be divided into three categories according to The companies may be divided into three categories according to incorporation. incorporation. CHARTERED COMPANIES:- CHARTERED COMPANIES:- These type of companies are incorporated These type of companies are incorporated under ROYAL CHARTER by the king or HEAD OF THE STATE. under ROYAL CHARTER by the king or HEAD OF THE STATE. Under the charter, certain exclusive rights and privileges are granted Under the charter, certain exclusive rights and privileges are granted to the company for undertaking certain commercial activities. If the to the company for undertaking certain commercial activities. If the company violates the rules, the head of the state can close such company violates the rules, the head of the state can close such companies. companies. STATUTORY COMPANIES:- STATUTORY COMPANIES:- These companies are formed under special These companies are formed under special act of parliament or of a state legislature. These companies may or act of parliament or of a state legislature. These companies may or may not use the word ‘limited’. The EXAMPLES of such companies may not use the word ‘limited’. The EXAMPLES of such companies are State Bank of Pakistan THE INDUSTRIAL FINANCE are State Bank of Pakistan THE INDUSTRIAL FINANCE CORPORATION OF Pakistan, STATE TRADING CORPORATION CORPORATION OF Pakistan, STATE TRADING CORPORATION OF Pakistan, etc. OF Pakistan, etc. REGISTERED COMPANIES:- REGISTERED COMPANIES:- These are the companies formed and registered These are the companies formed and registered under the provisions of the companies act. Most of the companies in under the provisions of the companies act. Most of the companies in Pakistan are registered under the COMPANIES ACT 1956. these Pakistan are registered under the COMPANIES ACT 1956. these companies may be limited by shares, limited by guarantee or unlimited companies may be limited by shares, limited by guarantee or unlimited companies. companies.
- 33. ACCORDING TO LIABILITY= ACCORDING TO LIABILITY= According to liability, the companies may be classified into three categories. According to liability, the companies may be classified into three categories. 1. 1. COMPANIES LIMITED BY SHARES:- COMPANIES LIMITED BY SHARES:- The companies limited by shares have The companies limited by shares have a share capital. The capital is divided into shares. The shareholders are not a share capital. The capital is divided into shares. The shareholders are not liable to pay anything more than the value of shares held by them, whatever liable to pay anything more than the value of shares held by them, whatever be the liabilities of the company. be the liabilities of the company. 2. 2. COMPANIES LIMITED BY GUARANTEE:- COMPANIES LIMITED BY GUARANTEE:- These companies are also formed These companies are also formed under the companies act with a stipulation in the memorandum clause that under the companies act with a stipulation in the memorandum clause that members are guaranteed to pay a certain amount of money in case of its members are guaranteed to pay a certain amount of money in case of its winding up. The amount which members undertake to pay is called the winding up. The amount which members undertake to pay is called the guarantee money. guarantee money. 3. 3. UNLIMITED COMPANIES:- UNLIMITED COMPANIES:- The companies registered without limiting the The companies registered without limiting the liability of members to the value of shares are called unlimited companies. All liability of members to the value of shares are called unlimited companies. All members are liable to meet the liabilities of the company to an unlimited members are liable to meet the liabilities of the company to an unlimited extent. extent.
- 34. ACCORDING TO TRANSFERABILITY OF SHARES:- ACCORDING TO TRANSFERABILITY OF SHARES:- 1. 1. PRIVATE COMPANY:- PRIVATE COMPANY:- A private company can be formed with the A private company can be formed with the association of at least two members but the maximum number of association of at least two members but the maximum number of shareholders cannot exceed fifty. A private company restricts by its articles, shareholders cannot exceed fifty. A private company restricts by its articles, a) the right of members to transfer its shares, b) limits the number of its a) the right of members to transfer its shares, b) limits the number of its members to fifty, and c) prohibits any invitation to the public to subscribe to members to fifty, and c) prohibits any invitation to the public to subscribe to is shares and debentures. is shares and debentures. EXEMPTIONS AND PRIVILEGES OF PRIVATE COMPANY EXEMPTIONS AND PRIVILEGES OF PRIVATE COMPANY A. A. A private company can be started with just two members whereas a public A private company can be started with just two members whereas a public company requires at least seven members.A private company is not company requires at least seven members.A private company is not required to file a prospectus or a statement in lieu of prospectus with the required to file a prospectus or a statement in lieu of prospectus with the registrar of companies. registrar of companies. B. B. There is no restriction of minimum subscription as in the case of public There is no restriction of minimum subscription as in the case of public company. It can directly allot the shares. It can work with just two directors. company. It can directly allot the shares. It can work with just two directors. A private company is not required to hold a statutory meeting and filing a A private company is not required to hold a statutory meeting and filing a statutory report. statutory report. 2. 2. PUBLIC COMPANIES:- PUBLIC COMPANIES:- Public company means that public at large is Public company means that public at large is interested in those companies. A minimum of seven members are required interested in those companies. A minimum of seven members are required to constitute a public company and to get it registered. There is no to constitute a public company and to get it registered. There is no restriction on the maximum number of members. Public companies are restriction on the maximum number of members. Public companies are required to issue a prospectus for inviting people to purchase their shares. required to issue a prospectus for inviting people to purchase their shares. A public company can start work only after getting ’CERTIFICATE OF A public company can start work only after getting ’CERTIFICATE OF COMMENCEMENT’ from the ‘REGISTRAR OF COMPANIES’. The COMMENCEMENT’ from the ‘REGISTRAR OF COMPANIES’. The shareholders are free to sell their shares in the market. shareholders are free to sell their shares in the market.
- 35. MERITS OF JOINT STOCK COMPANY MERITS OF JOINT STOCK COMPANY 1. 1. ACCUMULATION OF LARGE RESOURCES: - ACCUMULATION OF LARGE RESOURCES: - a company can collect a company can collect large sum of money from large number of share holder. need for more large sum of money from large number of share holder. need for more fund arise, the number of shareholder can be increased . fund arise, the number of shareholder can be increased . 2. 2. LIMITED LIABILITY:- LIMITED LIABILITY:-The liability of members in a company is limited to The liability of members in a company is limited to the nominal value the shares the nominal value the shares 3. 3. CONTINUITY IN EXISTENCE:- CONTINUITY IN EXISTENCE:-The member of a company may go on The member of a company may go on changing from time changing from time to time but that does not affect the continuity of a company. The death or to time but that does not affect the continuity of a company. The death or insolvency of members does not in any way affect the corporate insolvency of members does not in any way affect the corporate existence of company. existence of company. 4. 4. EFFICIENT MANAGEMENT: - EFFICIENT MANAGEMENT: - In the company form of organization, In the company form of organization, ownership is separate ownership is separate from management its enables the company to point expert and qualified from management its enables the company to point expert and qualified person for managing various business function. person for managing various business function. 5. 5. ECONOMIES OF LARGE SCALE PRODUCTION:- ECONOMIES OF LARGE SCALE PRODUCTION:-The availability of The availability of large resources, the large resources, the company can organize production on a big scale .The increase in scale company can organize production on a big scale .The increase in scale and size of business bill result in economics in production, purchase , and size of business bill result in economics in production, purchase , marketing and management , etc.
- 36. 6. TRANSFERABILITY OF SHARES:- A share holder can dispose of his share at any time when the market condition are favorable or he is in need of money, the facility of transferring shares encourages many person to invest. 7.DIFFUSED RISK: - In company form of organization, the number of contributors is large; so risk is shared by a large number of persons. 8. DEMOCRATIC SET – UP: - Every individual has an opportunity to become a shareholder. Secondly, the board of directors is elected by the members. So members have a say indicating the policies of the company. The Company form of organization is democratic from ownership and management side. 9. SOCIAL BENEFITS: - The company form of organization mobilizes scattered saving of the community. These saving can be better used for productive purposes. Large – scale production enjoy a number of economics enabling low cost of production
- 37. DEMERITS OF JOINT STOCK COMPANY DEMERITS OF JOINT STOCK COMPANY 1.DIFFICULTY IN FORMATION 1.DIFFICULTY IN FORMATION:- There is no. of stages is involved in :- There is no. of stages is involved in company promotion. It is both expensive and risky. company promotion. It is both expensive and risky. 2.SEPARATION OF OWNERSHIP AND MANAGEMENT:- 2.SEPARATION OF OWNERSHIP AND MANAGEMENT:-. .The ownership The ownership and management of a public company is in different hands . The management and management of a public company is in different hands . The management may indulge in speculative business activities. may indulge in speculative business activities. 3.EVILS OF FACTORY SYSTEM:- 3.EVILS OF FACTORY SYSTEM:- The stock company are attribute the evils The stock company are attribute the evils of factory system like insanitation ,air pollution ,congestion of cities. of factory system like insanitation ,air pollution ,congestion of cities. 4.SPECULATION IN SHARES:- 4.SPECULATION IN SHARES:- The joint stock company facilitate The joint stock company facilitate speculation in the shares at stock exchanges. speculation in the shares at stock exchanges. 5.FRADULENT MANAGEMENT:- 5.FRADULENT MANAGEMENT:- The promoters and director may indulge in The promoters and director may indulge in fraudulent practices due to not invested much in the company. fraudulent practices due to not invested much in the company. 6.LACK OF SECRECY:- 6.LACK OF SECRECY:- Every thing is discussed in the meeting of board of Every thing is discussed in the meeting of board of directors directors 7.DELAY IN DECISION MAKING:- 7.DELAY IN DECISION MAKING:- There is no single individual can make a There is no single individual can make a policy decision. policy decision.
- 38. Types of Banks Types of Banks On the basis of ownership On the basis of ownership On the basis of domicile On the basis of domicile On the basis of Function On the basis of Function
- 39. Types of Bank on the basis of Types of Bank on the basis of Ownership Ownership The banks are classified on the basis of The banks are classified on the basis of ownership into two categories. ownership into two categories. 1. Public sector banks 1. Public sector banks 2. Private sector banks 2. Private sector banks
- 40. Types of Bank on the basis of Types of Bank on the basis of Ownership Ownership 1. Public sector banks: 1. Public sector banks: The banks owned and controlled by the The banks owned and controlled by the Government are called Public sector bank. Government are called Public sector bank. e.g national Bank of Pakistan e.g national Bank of Pakistan 2. Private sector banks: 2. Private sector banks: The banks owned by corporations are called The banks owned by corporations are called private sector banks. e.g Habib Bank, Bank private sector banks. e.g Habib Bank, Bank Alfalah etc. Alfalah etc.
- 41. Classification of banks on the basis Classification of banks on the basis of domicile of domicile The banks are divided on the basis of The banks are divided on the basis of domicile into two categories. domicile into two categories. 1. Domestic banks 1. Domestic banks 2. Foreign banks 2. Foreign banks
- 42. Classification of banks on the basis Classification of banks on the basis of domicile of domicile 1. Domestic banks. 1. Domestic banks. The banks registered and incorporated The banks registered and incorporated within the country are called domestic within the country are called domestic banks. e.g. Bank of Punjab, MCB Bank etc banks. e.g. Bank of Punjab, MCB Bank etc 2. Foreign Banks 2. Foreign Banks The banks which have their origin and head The banks which have their origin and head offices in the foreign countries are called foreign offices in the foreign countries are called foreign banks. e.g. Citi bank, Standard Charted Bank etc banks. e.g. Citi bank, Standard Charted Bank etc
- 43. Classification of Banks on the basis of Function Classification of Banks on the basis of Function 1. 1. Central Bank: Central Bank: 2. 2. Commercial Banks: Commercial Banks: 3. 3. Exchange Banks: Exchange Banks: 4. 4. Saving Banks: Saving Banks: 5. 5. Agriculture Banks: Agriculture Banks: 6. 6. Industrial Banks: Industrial Banks: 7. 7. Co-operative Bank Co-operative Bank 8. 8. Mortgage Bank Mortgage Bank 9. 9. Investment Bank Investment Bank 10. 10. Merchant Bank Merchant Bank 11. 11. Consortium Bank Consortium Bank 12. 12. Export-Import Bank Export-Import Bank 13. 13. School Bank School Bank 14. 14. Labour Bank Labour Bank
- 44. Classification of Banks on the basis Classification of Banks on the basis of Function of Function 1. Central Bank: 1. Central Bank: Central Bank is the bank of banks. Every civilized country now has its Central Bank is the bank of banks. Every civilized country now has its own central bank. own central bank. The primary function of the central bank is to regulate the flow of money The primary function of the central bank is to regulate the flow of money and credit in order to promote efficiency, stability and growth in the and credit in order to promote efficiency, stability and growth in the country. country. In Pakistan “State Bank of Pakistan” is the central bank (in England it is In Pakistan “State Bank of Pakistan” is the central bank (in England it is “Bank of England” and in America it is “The Federal Reserve System”). “Bank of England” and in America it is “The Federal Reserve System”). Functions of central bank are; Functions of central bank are; – Sole right of note issue Sole right of note issue – Banker, agent and advisor to the government Banker, agent and advisor to the government – Banker to commercial banks Banker to commercial banks – Controller of credit Controller of credit – Clearing agent Clearing agent – Lender of last resort Lender of last resort – Custodian of foreign exchange reserves Custodian of foreign exchange reserves – Development Role Development Role – Other Functions Other Functions
- 45. Classification of Banks on the basis Classification of Banks on the basis of Function of Function 2.Commercial Banks: 2.Commercial Banks: Commercial banks are those banks which are engaged in Commercial banks are those banks which are engaged in performing the routine duties of banking business. performing the routine duties of banking business. They collect surplus money and make loans and advances in the They collect surplus money and make loans and advances in the form of overdrafts, cash credit and discounting bills of exchange. form of overdrafts, cash credit and discounting bills of exchange. They also provide special financial services and agency services. They also provide special financial services and agency services. Commercial banks in short are considered the life blood of the Commercial banks in short are considered the life blood of the economic society. economic society. Functions of commercial banks are; Functions of commercial banks are; – Basic Functions Basic Functions – Secondary Functions Secondary Functions
- 46. Classification of Banks on the basis Classification of Banks on the basis of Function of Function 3. Exchange Banks: 3. Exchange Banks: Exchange banks are mainly deal with international trade. These Exchange banks are mainly deal with international trade. These banks takes the responsibility of settlement of foreign exchange banks takes the responsibility of settlement of foreign exchange and arrange the foreign businesses. and arrange the foreign businesses. In Pakistan commercial banks have been allowed to do the In Pakistan commercial banks have been allowed to do the business of Exchange Bank. business of Exchange Bank. American Express bank, Rupali bank, bank of Oman are some American Express bank, Rupali bank, bank of Oman are some examples of exchange banks. examples of exchange banks. There functions are; There functions are; – Currency exchange Currency exchange – Providing information for international business Providing information for international business – Providing finance for international business Providing finance for international business – Bank drafts and Bill of exchange Bank drafts and Bill of exchange – Letter of credit Letter of credit
- 47. Classification of Banks on the basis Classification of Banks on the basis of Function of Function 4. Saving Banks: 4. Saving Banks: Saving banks are those banks which collect and keep the small Saving banks are those banks which collect and keep the small savings of the public. They are called thrift promoting institutions. savings of the public. They are called thrift promoting institutions. The Saving banks invest the funds in the safest government The Saving banks invest the funds in the safest government securities and offer reasonable rate of profit on saving accounts. securities and offer reasonable rate of profit on saving accounts. Students, government employees and household women are Students, government employees and household women are usually opening such accounts. usually opening such accounts. A prior notice to bank is necessary for withdrawal of huge amount A prior notice to bank is necessary for withdrawal of huge amount (More than Afs 15000) (More than Afs 15000) National Saving bank in England and Post office saving bank in National Saving bank in England and Post office saving bank in Pakistan are examples of saving banks. Pakistan are examples of saving banks. There Functions are; There Functions are; – Accepting deposits of people for saving Accepting deposits of people for saving – Investing the money of people in safe means of investment Investing the money of people in safe means of investment
- 48. Classification of Banks on the basis Classification of Banks on the basis of Function of Function 5. Agriculture Banks: 5. Agriculture Banks: The bank is responsible for the development of agriculture sector of The bank is responsible for the development of agriculture sector of the country. the country. Agriculture banks are set up to provide financial assistance to the Agriculture banks are set up to provide financial assistance to the agriculturists and agro-based industries. agriculturists and agro-based industries. Agricultural Development bank of Pakistan, Agricultural Mortgage Agricultural Development bank of Pakistan, Agricultural Mortgage Corporation in England and Federal Land Bank of USA Corporation in England and Federal Land Bank of USA There functions are; There functions are; – Providing long term advances for buying tractors etc Providing long term advances for buying tractors etc – Short term loan for purchasing seeds and fertilizers Short term loan for purchasing seeds and fertilizers – Introducing modern techniques in farming Introducing modern techniques in farming – Making awareness in farmers by seminars Making awareness in farmers by seminars – Medium term loans for construction of tube Medium term loans for construction of tube wells wells
- 49. Classification of Banks on the basis Classification of Banks on the basis of Function of Function 6. Industrial Development Banks: 6. Industrial Development Banks: The Industrial banks provide medium and long term credit to the The Industrial banks provide medium and long term credit to the industries. The growth of industries depends on these banks. industries. The growth of industries depends on these banks. There functions are: There functions are: – Granting loans to set up new companies Granting loans to set up new companies – Long term loans for machinery and construction of building Long term loans for machinery and construction of building – Loans for modernization and replacement of business units Loans for modernization and replacement of business units – Short term loan for purchase of raw material and payment of daily Short term loan for purchase of raw material and payment of daily expenses. expenses.
- 50. Assignment: Assignment: Compare and contrast the various forms of Compare and contrast the various forms of business forms in terms of their advantages and business forms in terms of their advantages and disadvantages. ( Group-1) disadvantages. ( Group-1) Explain the role of Joint Stock Companies in the Explain the role of Joint Stock Companies in the capital formation. Describe five major joint stock capital formation. Describe five major joint stock companies of Pakistan. (Gp-2) companies of Pakistan. (Gp-2) Describe the role of State Bank in the monetary Describe the role of State Bank in the monetary control of Pakistan economy.(Gp-3) control of Pakistan economy.(Gp-3)