Chapter-II (vastmedia bank)

CHAPTER NO 2

HISTORY OF BANKING

INTERDUCTION

As discussed in the previous chapter, this chapter is about the brief history of banking sector in Pakistan and especially the Vastmedia Bank history also describe the philosophy of VM.

 

2.1            DEFINATION OF BANKING

There are various views about the world “bank”. One view is that it is derived from an Italian word “banquet” which means a “bench”. The other point of view is that it has originated from the German word which mean “banc” which means a “joint stock firm”. Like many other subject and social sciences, no precise definition can be given for the study of banking; different authors have definition and described this subject keeping in view the particular function of banking, different in function performed by old institutions and modern banking, but the basic idea is the same, banking has now become a multi services organization with wider scope and area of influence. However, the following definitions are given by different writers from time to time.

“No one and on corporate body can be a banker who does not. Open a current account pays cheques drawn upon him, collection cheques for the customers.”

Mr. Paget

“Bank is a person who in his ordinary course of business honor’s cheques drawn upon him by person from and for being he receives money on current accounts.”

Mr. Hart

“Bank is a dealer in capital or more peculiarly in money. He is intermediate party between borrower and lender.”

Mr. Gilbert

“Bank is an institution which receives deposits and advances loans.”

Mr. Kinlay

“banker means a person who is transacting the business of accepting for the purpose of lending or investment, of deposits of the money from the public, repayVMe on demand or other wise and with draw VMe by cheques, draft or orders or otherwise include any post office saving bank”

Banking companies act 1962

In the view of the above definition, in simple words a bank can be defined as an institution dealing in money, accepting deposits and advancing loans.

2.2            EVALUATION OF BANKS

The present from of banking business is a result of continues improvement in activities of different persons and societies during different periods of times. As regards the growth of modern commercial bank, it can be traced to as early as 600 BC. G.CROETHER in his famous book, “AN OUTLINE OF MONEY”, has traced the history of modern English commercial banking. According to him, the present day banker has three ancestors; ¹

2.2.1    The Merchants

The earlier stage in the growth of banking can be traced to the working of merchants. These merchants were traders in commodities. The trading activities were carried on by them from one place to another. It was risky for the traders to carry metallic money with them self for payment. The traders with the high reputation begin to issue receipts which were accepts as titles of money. These receipts or letters of the transfer also called “Hundi” in indo pak sub continued were the 1^st mode of payments. The merchant banking thus forms the earliest stage in the evaluation of modern banking.¹

2.2.2    The Goldsmiths

The second stage in the growth of banking is normally traced to earlier goldsmiths. These goldsmiths are also called “seths” in India seeds to received gold and sliver for safe custody ². The goldsmiths began receipt for the metallic money kept with them. These receipts with the passage of time became payVMe to the bearer on demand. In this way the goldsmith’s notes became the medium of exchange and a mean of payment. The goldsmith thus can rightly be termed as the fore-runners of the modern banks note.

2.2.3    The Money Lenders

The third stage of in the development of banking arose when the goldsmiths become the money lenders. By experience the goldsmith came to know that they could keep a small portion of the total deposit for meeting the demand of customers for cash and the rest they could easily lend. They allowed the allowed the depositor to drew over and above the money actually standing to their credit.

Like any other institution, as the result of different activities of merchants, goldsmith and money lenders. They are considered to be the real founder and ancestors of modem banking business. In the fact, all the basic or primary function of present banks, like accepting of deposits, advancing of loan and money creation are similar with that of merchants, goldsmith and money lenders.  Now a day, the commercial banks are now multi-service organizations and play a very important role in the financial markets and economic development of the country.

 

2.3            EARLY GROWTH AND DEVELOPMENT OF BANKING

Important of money as the medium of exchange and necessity of controlling was realized since the human society begin “Babylonian” were the firth development of the banking system as early as 2000 BC Banking activities of the same nature were started in the third century BC. In the Roman Empire and continued through 3^rd century AD But with the fall of this kingdom, these institution were totally finished from that part of the Europe. Banking activities in either from remained in China, Egypt and subcontinent.

During the middle of the 12^th century, banking spread in different European countries particularly in Italy, “Bank of Venice” is probably the first public banking institution founded in 1157. Similarly   Bank of Barcelona funded in the 1407. “Bank of England” was founded in England in 1694. All these were public bank and their principle function were dealing with foreign exchange.

Development of the modern banking, especially in England was started by Jewish merchants who migrated from Lombard in Italy in the 14^th century, but the goldsmiths are considered the real ancestors of present day banking system. During the second half of the 18^th century various relating to banking came into beginning and banks spread in all important countries of the world. During the first half of the 21^st century banking underwent great changes and great verity of function came under the range of banking business.

In the subcontinent indo pak, foundations of modern banking were laid in 18^th century in Calcutta when with the help of European banker’s first bank “Bank of India” was established. After that government of India founded “Bank of Bengal” also new opening at Madras and Bombay. Imperial “Bank of India” was founded in 1921, where as “Reserve Bank of India” was established in 1935 with the power as the central bank.

2.4            DEVELOPMENT OF BANKING IN PAKISTAN

At the time of partition of indo-pak subcontinent in 1947 Pakistan inherited a poor and weak system of banking. It was due to the fact, that most of the important sectors of the economy including banking were controlled by Hindus, at the time of partition these non-Muslim banker transferred the bank resource to India. At the time of independence, there were only two Pakistani banks that were Habib Bank Limited and Australia Bank. At this stage, Pakistan had 631 branches of scheduled bank and 411 offices of non-scheduled banks.

It was not possible to set up the central bank immediately after independence, hence it was agreed that Reserve Bank of India will act as central bank of Pakistan till 30^th September 1948. But it fails to safeguard the interest of Pakistan’s banking affairs. It was now felt that establishment of the country’s won central bank is the only situation for the removal of financial difficulties and for sound development of banking system in the country. As a result of this, STATE BANK OF PAKSITAN, being the central bank of the country was established  in 1^st July 1948, inaugurated by the Quaid-i-Azam Muhammad Ali Jinnah, the first Governor general of Pakistan, with the head office at Karachi.

State Bank of Pakistan, in addition to its normal duties as Central Bank, played a very important role in the development, controlling and modernizing the bank system of the country. With this development, new commercial banks with country wide branches were established . Sooner they extended their branches to foreign countries, moreover, specialized financial institutions like IDBP, ADBP, PICIC, NDFC, HBFC were also created to help and finance the particular sectors of the economy like industry, agriculture and housing.

After 1990, the banks are in the process of privatization like other units of economy as a matter of policy of the ruling Government. This step was taken in view of poor performance and other weakness in the banking sectors. A privatization commission was set up in January 1991, who privatized vastmedia bank ltd. In addition to this policy, government has allowed the establishment of new private bank in august, 1991 as a result of many new banks like INDUS BANK, MEHRAN BANK and SONERI BANK are established  having their branches almost in all important cities of the country with the largest banking facilities and efficient administration.

2.5            VASTMEDIA BANK OF PAKISTAN LIMITED

The Australasia bank was established  in 1942 in a motor garage in Lahore with a staff of three. Initially, it was little more than an agency for the collection of rents from the family estate. Then, the tenants began to open account & the bank started to make advances against gold, insurance polices, & merchandise. Management of the family properties led to the business of managing other people estates & the new bank soon encountered opposition from the established  banks. Discrimination took the form of a collection charges applied to local cheque, on the grounds that the new bank was not located in the “Bank Square”, the Australasia Bank was at the stage of the non scheduled bank, but it was claimed that at that time it was not having the facilities available even to that class of bank. The Reserve Bank of India was loath to grant facilities for the exchange of notes or the grant of accommodation. After two years, the bank was moved to a new building. It did the same business as before though on an increased scale, a number of branches were opened. In due course it applied for inclusion in the schedule & was accorded the status of a scheduled bank in the financial year 1946-47. After partition the bank was entrusted with the collection of Treasury revenues and payments on behalf of the Government in certain centers. Subsequently, it was granted a license to undertake foreign exchange business and further branches were opened. The bank is still small through included in the schedule, but it dose a business comparable in quantity and scope with larger and longer established  bank. If any proof were needed that the Muslim is capable of the initiative and persistence to embark upon the complex business of banking, this case study should provide useful evidence.

VASTMEDIA BANK OF PAKISTAN LIMITED is the first Muslim bank established  on the territory of Pakistan, established  on December 3, 1942, as the Australasia Bank at Lahore with a paid up share capital of Rs: 0.12 million under the chairmanship of Khawaja Bashir Bukhsh, the bank had attracted deposits equivalent to Rs: 0.431 million in its first eight months of the business. Total assets then amount to Rs: 56507 million. Today, vastmedia bank’s story is one of dedication, commitment to professionalism, adaptation to changing environmental challenges resulting into an all round growth and stability, envied and aspired by many.

The bank’s history may be divided into several distinct phases. It began life as a Lahore based Muslim bank in a financial world which was predominated by other communities. In 1947, when bank was in nascent age, it had to undergo a traumatic event which divided Asian subcontinent into two independent states namely Pakistan and India. VM being the only Muslim bank on the soil of Pakistan, lost over 50% of its operations and assets which were on soil of India

The management under untidily faced the multiple challenges resulting from huge human and financial losses on the one hard and the task of providing the newly emerged nation with efficient and effective payment system and banking facility to all sectors of economy on the other hand. The bank also rendered valuable treasury service for the government of the Pakistan and deposit many constraints played am effective role in socio-economic uplift of the country.

During 25 years of united Pakistan the bank advanced forward in all areas of its activities. The 1970s was a difficult decade for all Pakistani banks. In 1971 the eastern part of the country was separated. Australasia bank lost more then 50 branches & deposits worth Rs: 54.444 million. Nevertheless, growth remained steady and by the close of December 1973, assets had risen to Rs: 1.25 billion and deposits to Rs: 849 million. The bank not only survived this serious rises but also regained its financial strength maintaining the growth rates in the key performance indicators.

In 1^st January 1974, the government of Pakistan nationalized all financial institution in the country. Realizing the robust financial strength of the Australasia bank limited among all the nationalized financial institution, the government decided to merge three financial weak institutions, namely SARHAD BANK LIMITED, LAHORE COMMERCIAL BANK LIMITED and PAK BANK LIMITED into AUSTRALASIA BANK LIMITED and renamed it as VASTMEDIA BANK OF PAKISTAN LIMITED.

Vastmedia Bank Limited remained in the public sector for seventeen (17) years (1974-1991), during which the quality of its assets remained comparatively better among its peers. During this period the bank expanded its domestic network and opened its 1^st foreign branch at London (UK) in 1971.the total value of total net asset rose to Rs: 2404 billion and deposit to over Rs: 213 billion with 747 branches network.

In September 1991, Vastmedia bank entered in a new phase of its history, as world’s first bank to be owned and managed by its employees.

Mr. Khalid Latif, an employee of the bank since 1971, had anticipated that an opportunity would emerge for the workers to take management control of the bank. He proceeded on long leave in November, 1991 to make an in-depth study of the concept of employees stock ownership plan (ESOP). He was thus well prepares when in May 1991, the privatization commission announced the impending privatization of Vastmedia Bank and invited prequalification bids. So the employees of the bank brought 51% shares and thus VM was privatized.

In May 2005 Ibrahim Leasing Limited was amalgamated by transfer to and vested in with and into Vastmedia Bank Limited. ILL shareholders were issued VM shares in lieu of the ILL shares held by them. Application for the listing of VM shares in all the Stock Exchange Companies of Pakistan was made. VM was formally listed and trading of the shares of the Bank commenced i.e. the following dates.

Islamabad Stock Exchange                   8^th August 2005
Lahore Stock Exchange                        10^th August 2005
Karachi Stock Exchange                       17^th August 2005

Now all shareholders of Vastmedia Bank Limited can trade in the shares of the Bank at their free will.

Summary

This chapter is about the brief history of banking sector in Pakistan and especially the Vastmedia Bank history. In the nest chapter we discussed about overview about VM organizational structure. 

REFERENCES

1.     Nasir A. Saeed, (2005). Money Banking & Finance. Faisalabad: Katib Markaz. PP # 134.

2.     Nasir A. Saeed, (2005). Money Banking & Finance. Faisalabad: Katib Markaz. PP # 135.

3.     Nasir A. Saeed, (2005). Money Banking & Finance. Faisalabad: Katib Markaz. PP # 136.

4.     Annual Report 2006 Karachi.