CHAPTER 2
2.1 Evolution of banking
The word bank is derived from Latin word Bancus or Banque, which means a bench. The explanation of this origin is attributed to the fact that the Jews in Lombardy transected the business of money exchange on benches in the market place. When the business failed, the people destroy the bench.
Incidentally the word bankrupt is said to have been evolved from this practice.
The opponents of this opinion argue that if it was so , then how is it that the Italian money changers were never called Banchierei in the middle ages
Other authorities hold the opinion that Bank is derived from German word Back which mean joint stock fund. Later on, when the German occupied major part of Italy, the Back was italicized into Bank.
2.2 Development of modern Banking:
Despite the classical origin, banking in its modern form and structure started in Britain when many of the Lambordary merchants came to England in the fourteen century and settled in the part of the 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 keeping the money in safe custody but also changed money far the travelers .or merchants engaged in foreign
trade.
The business .of changing money was so lucrative that king Edward III established the .office .of Royal Exchanger far changing foreign money at a profit far the benefit .of the crown.
The discovery of America brought riches to England and gave a tremendous boost to , foreign trade. The merchants now began to hold part .of their riches in cash. These
transactions, however, received a big setback in 1640, when king Charles I seized 130,000 Pounds and bullion left far safe custody with the city merchants at the Royal Mint.
This shook the confidence .of the merchants in the Royal Exchanger and Royal Mint. Consequently this business was taken aver by the gold smiths, who, up to that time, were dealing .only in gold and silver. Since these gold smiths required strong safes far the purpose .of their awn business, they introduce necessary facilities .of safe keeping<af4he valuables and the cash of their customers. These goldsmiths issued receipts .or note to their depositors in respect .of the cash .or articles left with them. These were called gold smith notes, and carried an undertaking to return the money and articles to depositors. or bearers an demand. There were a considerable number .of such notes an circulation among various classes .of merchants and thus they can be aptly called Bank Notes in their earliest farm.
Over a period of time, these goldsmiths: discovered that large sums of money were left in their custody for long periods: Therefore they started the use .of this cash to advance loans to other persons far a fixed period .of time and at considerably at a higher rate .of interest. Moreover they further encourage cash deposits by their customers by .offering them a part .of their profit earned an the money. Thus began the issue and deposit banking .of modern times. Same .of the enterprise goldsmiths issued checkbooksfor the attraction of their customers; and thus another important step in the evolution of
banking was taken.
In 1672, however, English banking faced a great crisis when Charles II borrowed huge sum of money from the goldsmith bankers formed themselves into a Corporation-in 1695, known as the Bank of England. This bank lent 1,200,000 pounds at 8%interest to William III, who in return, allowed a number of privileges to the bank, specially the right to issue Notes payable to bearer on demand unto the amount of this loan. This was known as , fiduciary issue, not covered by gold. This new bank became a very serious competitor to the comparatively smaller private banks run by the London goldsmiths.
By the year 1700, the Bank of England was not only issuing Notes but also conducting accounts for customers. Being a joint stock bank by charter, its directors were conducting the business like that of limited companies. The Bank of England was the only joint stock company, which was given the monopoly of issuing the Bank Notes.
n 1708 the privilege to issue Notes in England was withdrawn from joint stock banks and confined to the private banks with not more then 6 partners.
To 1813 or there about in England, 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.
2.3 Types of banks:
The important categories of banks are as follows
· Commercial banks
· Merchant banks
· Saving banks
· Mortgage banks
· Consumer banks
· Investment banks
· Central banks
2.4 Classification Of Banks:
The banks are classified into various types on the basis of their activities, ownership, domicile etc. The main types of banks in Pakistan are as under:
(A) Classification on the basis of functions:
(1) Central bank: - Every country of the world has its own central bank. The primary function of the central bank is to regulate the flow of money and credit in order to promote efficiency, stability and growth in the country. In Pakistan State Bank is the country central bank.
(2) Commercial bank: - Commercial Banks are those banks, which are engaged in performing the routine duties of banking business. They collect surplus money from the people. They make loans and advances in the form of overdrafts, cash credits, discounting bills of exchange. Commercial banks also manufacture credit money. They also provide agency services and general utility services. In short, banks are considered the lifeblood of the economic society. In Pakistan National Bank of Pakistan, United Bank Limited, Habib Bank Limited etc. are performing the functions of commercial banks.
(3) Exchange Banks: - Exchange banks mainly deal with international trade. These banks take the responsibility of settlement of foreign exchange and arrange the foreign business. In Pakistan, all the nationalized commercial banks have been allowed to do the business of exchange banks.
(4) Saving Banks: - Saving banks are those banks which collect and keep the small savings of the public. They are called thrift promoting institutions. The saving banks invest the funds in the safest government securities. Post offices and saving centers perform the business of saving banks in Pakistan.
(5) Agricultural Banks: - Agricultural banks are set up to provide financial assistance to the agriculturists. The agricultural banks provide short-term credit to the farmers for the purchase of seeds, fertilizer etc. They also make medium term advances for buying tractors and introducing modern techniques in farming. In Pakistan, Agricultural
Development Bank of Pakistan, which now becomes a new named Zarai Taraqiati Bank of Pakistan, was setup in 1982 for meeting the financial requirement of agriculture.
(6) Industrial Banks: - The industrial banks mainly provide, medium and long term
credit to the industries. Since the industrial banks have long-term deposits, they are in positions to permit long-term investment in industries. In Pakistan, the industrial Development Bank (lDBP) was set up in 1961. The other institutions engaged in providing financial assistance to industries are PICIC, NDFC, ICP, etc.
(B) Classification on the basis of ownership,:
(7) The banks are also classified, on the basis of ownership, into three categories i.e., (a) public sector banks (b) private sector banks, (c) cooperative banks.
(a) Public sector banks: - They are owned and controlled by the government
such as National Bank s etc.
(b) these.
Private sector banks: - corporations such as MCB, ABL, CITY Bank etc own
(c) Cooperative banks: - cooperative banks are established mainly to provide
short and medium term loans for rural development in general. In Pakistan, these banks are set up under the cooperative society Act of 1925 in the country. The federal Bank for cooperative was set up in 1976 in Pakistan.
2.5 Commercial banks operating in Pakistan:
Ø National Bank of Pakistan
Ø Habib Bank Limited
Ø United Bank Limited
Ø Muslim commercial Bank Limited _ Commerce Bank Limited
Ø Standard Bank
Ø Australasia Bank Limited
Ø Bank of Bahawalpur Limited
Ø Premier Bank limited
Ø Pak Bank Limited
Ø Bank of Khyber
Ø Punjab provincial cooperative bank _ Allied Bank Limited
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