Lecture No.

Introduction to
Commercial Banking
What is a Bank ?
Origin of the word Bank
There are various views about the origin
of the word bank.
One view is that it is derived from an
Italian word banque which means a bench.
The other point of view is that it has
originated from the German word banc
which means a joint stock firm.
As regards the growth of modern
commercial bank, it can be traced to
as early as 600 BC.
Crowther in his famous book An
Outline Of Money has traced the
history of modern commercial
banking.
According to him, the present day banker has three
ANCESTORS
Merchants

Goldsmith
Money Lenders
 The Merchants
The earliest stage in the growth of banking can be traced to
the working of merchants.

These merchants were traders in commodities and those

activities were carried on by them from one place to
another.

The traders faced many difficulties to carry metallic

money with themselves for payment.

The traders with high reputation began to issue receipts

which were accepted as titles of money
The Goldsmiths
The second stage in the growth of banking is normally
traced to earlier goldsmiths.

These goldsmiths received gold and silver for safe

custody and issue receipts for the metallic money kept
with them.

In this way these receipts became a medium of

exchange and a mean of payment.
 Money Lenders
The third stage in the development of banking arose
when the goldsmiths became the money lenders.

The goldsmiths kept a small proportion of the total

deposits for meeting the demands of customers for
cash and the rest they could easily lend.

The modern commercial banking system actually

developed in the nineteenth century.
 The first central bank was formed in GENEVA in
1578.
Bank of England was established in 1694.
The modern commercial banking system actually
developed in the Nineteenth Century.
with the passage of time the scope of commercial
banks have greatly increased. They now deal with
large number of matters such as obtaining funds,
advancing loan to businesses, farmers, households
etc
What is a Bank ?
A Bank is an institution which deals with
money.
Commercial banks receives deposits and
advances loans to earn maximum profits.

A bank collects money from those who have it

spare or who are saving it out of their incomes
and advances it to those who requires it.
Crowther
 Definition of a Bank
Oxford Dictionary defines a bank as
"an establishment for custody of money, which it pays out
on customer's order

Commercial bank accepts deposits from individuals, firms

and companies at a lower rate of interest and gives it at
higher rate of interest to those who need them.
The difference between the terms at which
it borrows and those at which it lends
forms the source of its profit.
Definition of Bank according to Afg banking law

Bank Article 1 (1.2)

Means a person engaging in the business of receiving
money deposits or other repayable funds from the
public for the purpose of making credits or
investments for his own account.
Characteristics / Features of a Bank
1. Dealing in Money
Bank is a financial institution which deals with other people's money
i.e. money given by depositors
2. Individual / Firm / Company
A bank may be a person, firm or a company. A banking company means
a company which is in the business of banking
3. Acceptance of Deposit
A bank accepts money from the people in the form of deposits which
are usually repayable on demand or after the expiry of a fixed period. It
gives safety to the deposits of its customers
Characteristics / Features of a Bank
4. Giving Advances

A bank lends out money in the form of loans to those who

require it for different purposes.
5. Payment and Withdrawal

A bank provides easy payment and withdrawal facility to its

customers in the form of cheques and drafts, It also brings bank
money in circulation. This money is in the form of cheques,
drafts, etc.
6. Agency and Utility Services

A bank provides various banking facilities to its customers. They

include general utility services and agency services
Characteristics / Features of a Bank
7. Profit and Service Orientation

A bank is a profit seeking institution having service oriented approach.

8. Ever increasing Functions

Banking is an evolutionary concept. There is continuous expansion and

diversification as regards the functions, services and activities of a
bank.
9. Connecting Link

A bank acts as a connecting link between borrowers and lenders of

money. Banks collect money from those who have surplus money and
give the same to those who are in need of money.
Characteristics / Features of a Bank
10. Banking Business

A bank's main activity should be to do business of

banking which should not be subsidiary to any other
business, like production of goods, or selling of goods
11. Name Identity

A bank should always add the word "bank" to its name

to enable people to know that it is a bank and that it is
dealing in money