Bank

• “ An Organization with principle operation to accumulate the

temporarily idle money from general public for advancing it to others
for spending or investment.” (Professor Kent)
• “ A banker is dealer in capital or more properly dealer in money. He
is an intermediate party between borrower and lender by borrowing
from one party and lending it to others”. (Gilbert)
 Introduction
• Evolution of Banking
• It has not so far been decided as how the
world “Bank” originated. Some authors opine
that this derived from the words “Bancus” or
“Banque” which means a bench.
• Other authorities hold the opinion that the word
“Bank” is derived from the German word
“Bank” which means “Joint Stock Fund”. Later
on, when the Germans occupied major part of
Italy, the word “back” was Italianized into
“Bank”.
 Early Growth
• Banking in fact is as primitive as human society realized
the importance of money as medium of exchange, the
necessity of a controlling or regulating agency or
institution was naturally felt.
• Banking in its form and structure started in Britain when
many of the Lombardy Merchants came into England in
the fourteenth century and settled in the parts in of the
city of London now called Lombard Street. They were so
resourceful that even the kings had to depend on them
for loans despite the fact that the Church was firmly
against usury. They dealt with not only to keeping the
money in safe custody but also changed money for the
travelers or merchants engaged in foreign trade.
 Continued….
• The business of changing money was so lucrative that King
Edward-III of Great Britain established the office of Royal Exchanger
for changing foreign money at a profit for the benefit of the Crown.
• The discovery of the America brought riches to Britain and gave
tremendous boost to foreign trade. The merchants now began to
hold part their riches in cash. These transaction, however, received
a big set back in 1640, when King Charles-I seized Stg:130,000 and
bullion left for safe custody with the city merchants at the Royal
Mint.
• This shook the confidence of the merchants in the Royal Exchanger
and the Royal mint.
• Consequently this business was taken over by the gold smiths who,
up to that time, were dealing only in gold and silver. Since these
goldsmiths required strong safes for the purpose of their own
business , they introduced necessary facilities of safe-keeping of the
valuables and cash of the customers
 What is Bank
• Bank can be identified by the functions (service or
roles) they perform in the economy.
• A financial intermediary accepting deposits and
granting loans, offers the widest menu of services of
any financial institution.
• The problem is that not only are the functions of the
banks changing but the functions of their principal
competitors are also changing as well. Indeed, many
FIs –including leading security dealers, brokerage
firms, mutual funds, and insurance companies are
trying to be the similar as possible to banks in the
services they offer.
 Non-bank Banks
• Depository Institutions, offering checking
accounts or commercial loans but not
Both.
• Example: National saving centers in
Pakistan,
• Example: DFIs in Pakistan
 The Key Non-bank Competitors
Bankers
• Insurance Companies and Pension Plans, providing customers with long
–term savings plan, risk protection and credit.
• Mutual Funds, supplying professional cash management and investing
services for longer-term savers.
• Credit Unions and other Thrift Institutions, offering customer credit,
payments, and saving deposit services often fully comparable to what
banks offer.
• Real Estate Developers and Mortgage Companies. Supplying Building
and construction expertise and construction financing to their customers.
• Security Brokers and Dealers, providing investment and savings
planning, executing security purchases and sales, and providing credit
cards to their customers.
• Check-Cashing Firms, small loan vendors, Finance Companies,
supplying customers with access to ready cash (liquidity) and short to
medium term loans for everything from daily household and operating
expenses to the purchase of appliances and equipments.
• Bankers feel the impact of their fiercest non-bank competitors from all
sides.
 Modern Banking
• The business of changing money was so lucrative that King
Edward-III of Great Britain established the office of Royal Exchanger
for changing foreign money at a profit for the benefit of the Crown.
• The discovery of the America brought riches to Britain and gave
tremendous boost to foreign trade. The merchants now began to
hold part their riches in cash. These transaction, however, received
a big set back in 1640, when King Charles-I seized Stg:130,000 and
bullion left for safe custody with the city merchants at the Royal
Mint.
• This shook the confidence of the merchants in the Royal Exchanger
and the Royal mint.
• Consequently this business was taken over by the gold smiths who,
up to that time, were dealing only in gold and silver. Since these
goldsmiths required strong safes for the purpose of their own
business , they introduced necessary facilities of safe-keeping of the
valuables and cash of the customers.
 Continued….
• Over period of time the goldsmiths discovered that large sums of money were left
in their custody for a longer periods. Therefore, they started the use of this cash to
advance loans to other persons for a fixed period of time and considerable high
interest rate. Further more they encouraged cash depositors by offering them a
part of profits earned on that money. Thus began the “issue” and “deposit” banking
of modern times. Some of the enterprising goldsmiths issued “Check Books” for
the attraction of their customers, thus another important step in the evolution of
banking was taken.
• In 1672, however, British Banking faced a great crises when Charles-II became
defaulter. Therefore, a number of Goldsmiths formed themselves into a
corporation in 1695, known as Bank Of England. This Bank lent Stg:1.2 Million at
8% interest to William III, who in return, allowed no of privileges to the Bank:
• Right to issue Notes Payable to bearer on demand up to the amount of the
loan.
• This was known as “Fiduciary” issue not covered by the Gold. This new Bank
became close competitor to the comparatively smaller private Banks run by the
London Goldsmiths.
• In 1700, the Bank of England was not only issuing the Notes but also conducting
accounts for customers.
• There was a monopoly of Bank Of England of issuing Bank Notes.
 Continued..
• Goldsmith were doing their business successfully out side of
London and issuing Notes as evidence.
• The same process developed in London and in many instances the
business of Banking overshadows the original occupation and
became the main one.
• This was affecting the position of the Bank of England. Therefore an
act passed in 1708, the privilege to issue Notes in England was
withdrawn from Joint Stock Banks and confound to the private
banks with not more than six partners. This compelled the private
bankers in London to develop the Business of accepting money on
deposits repayable by checks.
• Bagehot Says in his Book ‘Lombard Street’ , Up to 1813 the main
profit of Banks was derived from the circulation of Notes and for
many years after that , deposits were treated as very minor
matters”.
 Scope of Banking
• This restriction paved the way for deposit Bank and check currency proved to be very suitable.
• The reduction in stamp duty on the personnel checks in 1853 gave further imputes for check
currency, they have became very popular with the customer.
• In 1854, the Joint Stock Companies Act opened an era of corporations and the Limited Liability
Act 1855, restricted the liability of the stockholders of a limited company to the amount of the
successfully paid- up value of the shares held by them.
• In the succeeding years Joint Stock Banks become very common either by absorptions of private
banks or amalgamation amongst Joint Stock Banks themselves. Thus in 1918 came into being
eleven clearing Banks of today.
• The effect of this historical development of banking in England has been fairly wide:
1. The emergence of a small no of Large Banks with wide net work of branches.
2. Increase in the popularity of Bank-Accounts and large scale use of Checks.
• The development gave the sense of security but the amalgamations gave the feeler of Financial
monopoly.
• Therefore in 1918 Treasury and the Board Of Trade set up a committee to look after the
amalgamation or absorption process.
• The committee suggested prior approval should be obtained before any amalgamation and it
was approved. Resultantly, very small no of Banks were absorbed by the larger banks.
• In 1955, the British Bank came into hire-purchase Business and made a departure from
traditional banking.
 Types of Banks
• Primarily the function of a Bank is to gather the idol (savings) money to lend to earn profits,
return and dividends. However, due to the variety of resources of money and the diversity in
the lending and investment operations Banks have placed in various categories.
• Commercial Banks:
1. Accepting deposits from the general public which are payable on demand upon written orders
of the depositors.
2. Commercial Bank Maintain checking accounts for the constituents.
3. Providing short term loans.
• Merchant Banks:
1. Mainly financing the domestic and international trade in United Kingdom. During eighteenth
and early nineteenth centuries the trade between countries was financed by the Bills of
Exchange by well reputed merchant houses.
2. Since trade finance activities are also carried out by the commercial Banks with other
activities, the term Merchant Banks has gradually faded out.
• Saving Banks:
1. To inculcate the habit of savings in the people.
2. Depositor has to present in person for a certain withdrawal and for this purpose he has to
present Pass book or some sort of similar documents (Certificate of deposit).
3. Central Bank:
SBP
4. Specialized Institution: Exchange Banks / Industrial / Agricultural Banks / Mortgage
bank, Cooperative banks, Schedule & Non-Schedule Banks.
 Types of Banks
• Mortgage Banks:
1. Mainly deal in loans for or construction of real estate against the security of
mortgages.
2. Quite a few such banks are operating in developed part of the world.
3. Saving and Loans associations and farm-loan associations are some of the well
known forms of mortgage banks.
• Consumer Banks:
1. These banks provide finance for purchasing consumption goods for the use of the
borrowers.
2. Consumer Finance companies, sale finance companies and credit unions are
some of the popular form of consumer banks.
• Investment Banks:
1. To assist business houses and the governmental bodies to raise money through
the sale of stocks and bonds for usually long term purposes. These Banks perform
the usual functions of raising deposits of idle money from the public and finance
the business houses and other bodies.
 Types of Banks
• Development Banks:
• These Banks have been established to provide long term development finance to the trade,
commerce and industry. They are generally Government owned Banks, established under a
promulgated law. ZTBL and IDBP are the well known examples.
• Cooperative Banks:
• These Banks established and registered as a cooperative venture to provide banking facilities
to the members of the cooperative. In Pakistan, the Federal Bank of Cooperatives is well
known such Bank.
• EXIMP Banks:
• These are the Banks which provide finance for promotion of imports and exports to the trade,
commerce, and industry. These Banks are contributing greatly towards the expansion of
international trade of developed countries, where they function mainly in private sector.
• Central Banks:
• Central Banks occupy unique position in the banking structure of a country because they have
been entrusted with the responsibility of controlling the money supply, interest rates and
financial market of the market of the country for the purpose of the economic development.
State Bank Of Pakistan, Bank Of England and Federal Reserve Bank of USA are well known
central Banks.
 Development of Banking in
America
• First Bank was organized in 1782.
• There was no central Bank up to 1940.
• In Colonial Period, the development of Banking in America was linked with exigencies of
financing a new and developing country.
• There was a lack of confidence of the public on the banking system.
• The earliest Banks were generally are the state monopolies.
• The first significant development was made in 1720 when the British Parliament passed the
Bubble Act to restrict the incorporation of Banks in order to protect the monopoly of the Bank of
England.
• However, after the independence, the Federal Government took proper interest, and in 1791
authorized the establishment of a Bank with an authorized capital of Ten Million Dollars, out of
which one-fifth was subscribed by the Government.
• The number of Banks started increasing and by 1794, eighteen banks were chartered in the
United States.
• However, poor management practices, bank failures were also quite common but this compelled
the public to rise against the monopolistic privilege allowed to only a few Banks.
• In 1838, Free Bank Act was Passed which allowed the opening of a Bank by any Group of people
who could deposit United State Bonds or Real estate Bonds or Mortgages with the state
Comptroller.
• In 1860 the number of Banks grew to 562.
 Continued…
• After world war, the National Bank Act was passed by the Congress in 1863, which required
each new national bank to deposit United State Bond and in turn the National Bank issued the
National Bank Notes equal to 90% of the Par or Market Value of the deposit bond whichever was
lower.
• This provide strength to the notes issued by the national bank as compare to the notes issued by
the State Bank Notes issued prior to civil war.
• The reserve requirement imposed by the Congress created crises of deposits which in turn
created the problem of availability of money for loans and other facilities.
• Use of checks had become very popular in cities but the farmers were still working on cash.
• In 1900, congress passed the Currency Act, the this resulted in further increase in the number of
national banks.
• In 1913, the Federal Reserve Act was passed, and it reduced the requirement of the reserve for
the banks if they want to formed themselves into commercial banking.
• Commercial Banks came with substantial funds to expand credits.
• World war I was having very little effect on the American Banking due to heavy taxes, direct or
indirect control on production of commodities and development of a more productive economic
system.
• However, some small state banks did fail during first world war.
• The Banking Act in 1935, laid the foundation for the modern Federal Reserve System by
establishing the Federal Open Market Committee charged with controlling open Market
Operations and buying and selling of Government securities.
• In 1939, 14,531 commercial banks were working satisfactorily in united states.
 Continued…
• In 1940 to 1945, the bank deposits increased by twofold while the Government securities held
by the Banks increased almost to four times.
• The post war period gave some recession but in 1962 the regained their pace.
• The American Banking System in USA has a unique feature of its own as it is based on “Dual
Banking”. This system gives the right to both the state and the Federal Government to charter,
supervision and examination of commercial Banks. According to this system, the banks are
classified into Unit, Branch and holing companies.
1. Unit Banking:
• Limited to its business in single bank location. Their no were very large due to their ability to
meet customer demand of banking services promptly and efficiently.
2. Branch Banking:
• Which has number of Branches and having main office both are controlled by the Board Of
Directors. The affairs of the branches are directed by the Branch Managers in accordance of
the policies and procedures defined by the head offices.
3. Holding Company:
• Or Group Banking relates to Banks which hold a controlling stock in a group of banks.
• The system permits the holding companies to integrate in a single system, national banks
which are the members of Federal Reserve system and state bank which are not the
members.
• The number of such banks is declining as a result of liberalization of branch banking laws,
suspensions, mergers and sale of controlling interests in banking subsidiaries over the year.
• A bank has to registered or has to obtain a licence from the appropriate agency.