5. Money and Banking. NBP – The Central Bank in Poland

5.1 Money and Banking System

Money may be defined as a “... medium of exchange that is widely accepted in payment for goods and services and to settle debts...”.[1] People may accept different things in such settlements and this is why not only silver or gold but also cowrie shells, beaver skins or even tulips functioned as money in the past.

Before the invention of money, barter transactions were the norm, i.e. direct exchanges of goods for other goods.[2] Barter is sometimes still used in international trade but it is very inefficient. The reason for its inefficiency is that it requires a double coincidence of needs and offers. Thus a person who offers wheat and needs cotton must find a person who needs wheat and offers cotton. Even then, the problem of how to determine the amounts of these commodities to be exchanged on an equivalent basis remains.

The use of money solves these problems because goods and services may be exchanged for money and money, in turn, may be easily exchanged for other goods and services. Moreover, money is a measure used to calculate, or express, the value of the items sold or purchased.

One may say that the basic functions of money are:[3]

·         A medium of exchange – people are willing to accept it in exchange for goods and services and money has a claim on goods and services.

·         A measure of value – money is a common standard against which goods and services are valued. This makes it possible to compare the value of different goods and services.

·         A store of value – money is a suitable way to amass wealth because it is durable.

·         A standard of deferred payment – the amount of future payments (credits) may be stated in terms of money.

These functions may be performed because of the following features of money:[4]

·         Stability – value should not change rapidly over a short period of time. One has to remember that inflation is a major factor that may deprive money of this feature and thus limit its functions.

·         Transferability – goods and services are exchanged for money and vice versa in a simple way without legal procedures being required.

·         Durability – money has to service many transactions without wearing out. Even if it wears out, e.g. banknotes, it can be replaced with new ones without any loss.

·         Divisibility – units of money must range from small to large denominations and thus permit the precise valuation of goods and services.

·         Portability – money must be carried easily by its holders.

·         Recognisability – to be acceptable without any reservations, the units of money must follow the same standards in terms of size, weight, shape and content.

·         Difficult to be counterfeited – the use of special paper, watermarks, metallic threads, holograms and other checks contributes to the users’ confidence; money must be well protected against counterfeiters.

5.2 Basic Functions and Services of a Bank[5]

Banking is about money and the essence of banking is to take deposits and to lend money (or make advances) to borrowers. Interest on loans is the major source of a bank’s profit. Speaking more precisely, a bank is an institution which:[6]

·      borrows money from the depositors (the general public), i.e. offers a place to keep their funds, and lends a considerable part of the depositors' funds to creditors;

·      safeguards the funds and provides money transfer facilities.

Because of rapid changes and the degree of sophistication and specialization of the banking industry today, making a full list of services offered by banks is impossible. The major services offered by a retail bank include:

1.    Current account services:

Current accounts offer no, or very little, interest and they make it possible to pay money into and out of the customer’s account as often as the customer wishes to do so. Current accounts provide the following money transfer facilities:

·      Cheques – instructions given by a customer to the bank to pay some of their money in cash or to transfer a sum of money to some other account.

·      Standing orders – orders given to the bank to pay money, on a given day of
the month, to a given person or institution. This form is suitable for making regular payments, e.g. rent, utility bills, hire-purchase instalments etc.

·      Direct debiting – (following the customer’s agreement) the firm to whom he or she owes money may require payment instead of the customer ordering payment.

2.    Overdrafts and loans:

·      An overdraft is a short-term loan, a facility which enables the customer, subject to an agreement with the bank, to have a debit balance in the account. The overdraft agreement between the customer and the bank specifies the period of repayment and the interest rate, which is usually quite high.

·      A loan requires more formal procedures than an overdraft. It is a debt drawn by the borrower from the lender (a bank). The borrower initially receives an amount of money from the lender. This money, the principal, has to be repaid in agreed instalments together with agreed interest at regular intervals. Before a loan is granted the bank checks the credit worthiness of the borrower, the purpose of the loan and demands collateral as security for the loan.

·      A banker’s draft is a draft which the bank draws on itself, e.g. a traveller’s cheque.

3.    Deposit and savings accounts are designed for deposits which are not currently needed. They are interest bearing but the withdrawal of money is fixed for a date in the future or requires prior notice, e.g. 7 days.

4.    Other Services

·      Automated teller machines (ATMs) also called cash dispensers – operated by using a plastic card and available on a 24-hour-a-day basis. They are linked to the bank’s computers in an “on-line” system which makes it possible for customers to check the account balance and withdraw money.

·      Cards, commonly called credit cards or plastic money – used as a form of payment, or more of a credit, for the purchase of goods and services in retail trade.

·      Foreign exchange services – which include securing and dealing in foreign exchange for exporters and importers and issuing travellers’ cheques in various currencies.

·      Safe custody and safety deposit boxes – offered by banks in the form locked boxes in safe custody in their vaults. Theft is unlikely and banks usually do not accept liability for loss. The related insurance is inexpensive thanks to the security the banks offer.

·      Discounting bills of exchange, i.e. buying them for less than the face value, which is a major source of funds for businesses.

5.3 The National Bank of Poland[7]

The Polish banking system is supervised by the National Bank of Poland, the central bank in the Republic of Poland, which is responsible for issuing the national currency; for the implementation, development and control of monetary and credit policy; and for maintaining the state’s financial security and the stability of the financial system. In recent years, in particular after Poland’s accession to the European Union, significant progress has been made aimed at bringing the central bank legislation in line with EU standards. In the next few years Poland’s entry into the Euro zone will be an important objective to be achieved by the NBP.

The National Bank of Poland is governed by the President of the NBP, the Monetary Policy Council and the Management of the NBP. The President of the central bank is the chairperson of the Monetary Policy Council which includes nine other members. The Council determines monetary policy, sets the level of basic interest rates and establishes the rules of open-market operations. The Management Board’s responsibility is to implement the decisions of the Council referring to the NBP plan of activities.

The main activities conducted by the NBP:

·      monetary policy aimed at maintaining stable prices by defining the inflation target and adjusting the NBP interest rates to achieve this target,

·      issuance of national currency – the NBP is the only institution entitled to introduce Polish banknotes and coins into circulation and to regulate the amount of money in circulation within Poland,

·      banking supervision, i.e. the NBP regulates and supervises the operations of other banks with a view to maintaining the stability of the entire banking sector,

·      development of payment system – the NBP introduces regulations with regard to monetary settlements and controls the payment system to ensure the efficient and secure functioning of monetary payments between natural persons and business entities,

·      management of official reserves which the Bank invests on international financial markets, mostly in securities issued by governments and international financing institutions, or deposits the reserves with banks,

·      services to the State Treasury, i.e. banking services are provided to the central government, e.g. operations of the current account of the central government and its entities, tax offices and state special-purpose funds,

·      education and information – the NBP supports the economic development of Poland through educational projects directed towards young people from secondary schools and universities and promotes entrepreneurship.