1. CH#4 Instruments of Credit By: M.Ihsan

2. Terms to know: 1. Definition of Credit 2. Instruments of Credit 3.Documentary/Negotiable Credit Instruments

3.  Definition of Credit:  The word ‘Credit’ is derived from the Latin word ‘Credo’ which means “I trust you”.  It is define as, “An exchange which is complete after the expiry of a certain period of time after payment”. i.e.  The promise usually based on the confidence and on the belief that the debtor whether a person, a business firm or a government unit will be able and willing to pay on demand or at some future time.  The creditor is to exchange present goods for the right to receive payments in the future.

4.  Instruments of Credit:  The main instruments of Credit are: 1. Pay roll credit:  Pay roll credit is also called oral agreement.  In development countries as well underdevelopment countries some credit is extended to individuals, friends, businesses associations without keeping any record.  The agreement to pay back the money is purely oral. 2.Book Credits or Open book accounts:  Open book account merely consists of entries on the books of business concerns.

5. Instruments of Credit (cont’d):  These entries appear as an account receivable on the books of lender and as an account payable on the books of the borrower. 3.Documentary Credit instruments:  Most of the credit is evidenced by a written contract.  Such instruments exhibit the existence and terms of debt, the identity of lender, the amount to be lend, the rate of interest, the time of maturity etc.  These are also represents Negotiable instruments (written document which entitles a person to receive a sum of money).

6. Instruments of Credit (cont’d):  The main negotiable instruments are: (1) Promissory Note (2) Bill of Exchange (3) Cheque 1)Promissory Note: It is a written promise by one person to another in which the maker (Payer) promises to pay on demand or at a fixed or determinable date in the future.

7. Instruments of Credit (cont’d):  Maker: He is the person who draws and signs the promissory note and promises to pay the amount.  Payee: He is the person to whom the amount of the promissory note is payable. Sixty days after for value received, I promise to pay, Mr. Qais or order the sum of Afs. Twenty thousand only. Specimen of a Promissory Note Afs. 20,000 Stamp Kabul June 1,2008 Mr. Qais Parwan-e-2, Kabul Fahim Ahmad signature Payee Maker

8. Instruments of Credit (cont’d):  Conditions for Promissory note: The following are the essential features of a promissory note:  There are two parties to a promissory note.  The promise to pay must be in written.  The promise to pay must be signed by the Maker or Payer.  The promise to must be unconditional.  The amount to be paid must be definite in terms of money.  The promissory note must be payable to a definite person.

9. Instruments of Credit (cont’d): 2)Bill of Exchange:  A bill of exchange is a peace of paper representing a promise by the buyers of goods on credit, to pay the seller at a specified time.  Parties to the bill: There are three parties involved to a bill of exchange. i.Drawer: The drawer is the person who draws the bill. He is the person who orders to pay a certain sum of money.

10. Instruments of Credit (cont’d): ii.Drawee: Drawee is the person on whom the bill is drawn. He is the person who is ordered to make the payment of the bill. iii.Payee: Payee is the person to whom the money is directed to be paid. He gets the payment of the bill.

11. Instruments of Credit (cont’d):  Bill of Exchange: Two months after date pay to a Financial Institute. Specimen of a Bill of Exchange Afs. 30,000 Kabul March 1,2009 To Mr. Amir Khan Parwan-e-2, Kabul Wahedullah signature Drawee Drawer Payee

12. Instruments of Credit (cont’d): 3.Cheque: A written order of a depositor upon a bank to pay to or to the order of a designated party or to bearer, a specified sum of money on demand.  The person who draws the ceque is called Drawer.  The bank on which the cheque is drawn is called Drawer.  The person to whom payment is to be made is called Payee.

13. Instruments of Credit (cont’d):  Cheque: CHEQUE 34634528 ABC Bank (pvt.) Ltd. Paroshgah Branch Kabul Date 30 May, 2008 Pay Shafiullah Sahak Afs. Ten Thousand Only Afs. 10,000 A/C No. 000268003 Signature *************************************** Account Number Amount in Words Code Number Amount in Figures Payee Drawee Counter work Cheque Number

14. CH#4 End of CH #4