3.1 Money and Banking

2026 📋 Syllabus Objectives

By the end of this topic, you should be able to:

  • 3.1.1 Money — Describe and explain the forms, functions, and characteristics of money.
  • 3.1.2 Banking — Explain the role and importance of central banks and commercial banks for the government, producers, and consumers.

PART 1: MONEY

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🔹 What is Money?

Money is anything that is widely accepted as a way to pay for goods and services. In simple terms, it is what you use to buy things.

Before money existed, people used the barter system — they swapped goods directly with each other. For example, a farmer might trade one cow for a bag of rice.

However, bartering had a major problem called the double coincidence of wants. This means that for a trade to happen, both people had to want exactly what the other person had. For example:

Farhan has meat and wants rice. He can only trade if he finds someone who has rice AND wants meat. This was very difficult and time-consuming!

Money solved this problem completely. Instead of swapping goods, people could simply use money as a middle tool — sell your goods for money, then use that money to buy whatever you need.

🔹 The Forms of Money

Money does not exist in just one form. It comes in several types:

  • Coins and banknotes (cash) — The physical money you carry in your wallet or pocket. Used for everyday small purchases.
  • Bank accounts (bank deposits) — Money stored in a bank. You can access it using a debit card, cheque, or online transfer. This is the most widely used form of money today.
  • Electronic money — Digital payments made through apps, mobile banking, or online platforms.
  • Near money — Assets (things you own that have value) that are not cash but can be quickly turned into cash, such as savings accounts.

💡 Important note: Bank accounts are not legal tender. Legal tender means a form of payment that the law says must be accepted to settle a debt. Coins and banknotes are legal tender, but bank deposits are not — a shop can technically refuse to accept a cheque.

🔹 The Functions of Money

For money to work properly in an economy, it must carry out four important jobs, called its functions.

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