The Bank of Khyber (Internship report) Chapter-2

CHAPTER 2

                   HISTORY & BACKGROUND OF BANK

 DEFINITION OF BANK

Collins English dictionary defines bank as “an institution offering certain financial services, such as the safe keeping of money, conversion of domestic into foreign currencies, lending of money at interest”. 1

According to Gilbert, “Bank is a dealer in capital or more peculiarly in money. He is an intermediate party between lenders and borrowers”2

The definition laid down in the banking companies act 1962 s “bankers means a person, transacting the business of accepting for the purpose offending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheques, drafts or orders or otherwise and includes any post office saving “bank”

Where as banking company means any company, which transacts the business of banking in Pakistan.

In end the bank is an institution which deals in money its draw surplus money form the people who are not using it at the time and lend to those who are a position to use it for productive purposes.

 Evolution of Banking.

There are various views about the origin of the world banking. It has not so for been decided as to how the word ‘bank’ originated some authors opines that this word is derived from the words “Bancus” or Banques, which means a bench. The other point of view is that it has originated from German word “back” which means a Joint Stock firm, later on, when the Germans occupied major part of Italy, the word ‘back’ was Italianated in ‘Bank’ According to Growther the present day banker has three ancestors, the merchants, the gold smiths and money lenders.

FUNCTIONS OF BANK:

According to section 7 of the BCO, 1962, the banks in Pakistan are authorized to engage in any one or more of the following forms of business, namely:

The borrowing, raising or taking up of money;

The lending or advancing of money either upon or without security;

The drawing, making, accepting, discounting, buying, selling, collecting and                                           dealing in bills of exchange, promissory notes, drafts, bills of lading warrants, debentures (musharika and mudaraba certificates);

The granting and issuing of letters of credit, travelers’ cheque and circular notes;

The buying and selling of foreign exchange including foreign bank notes;

The acquiring, holding, issuing on commission, underwriting and dealing in stock fund, share debenture stock, bonds, obligations, securities;

The receiving of all kinds of bonds, scripts or valuables on deposit or for safe custody or otherwise, the providing of safe deposit vaults, the collecting and transmitting of money and securities.

Acting as agents for any government or local authority or any other person or persons;

Acting as “Mudaraba company” under the provisions of the Mudaraba Companies Ordinance 1980;

Contracting for public and private loans and negotiating and issuing the same;

The effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public and private, government, municipal, or other loans or of shares, stock, debentures or debenture stock

of any company, corporation or association and the lending of money for the purpose of any such issue;

Carrying on and transacting every kind of guarantee and indemnity business;

2.4 Banking in Pakistan.⁴

When Pakistan came into being 14^th August 1947, being a newly born country, it was very difficult for  to run its own banking system immediately. Therefore in accordance with the provision of Indian independence act of 1947, an expert committee was appointed to study the issue. The committee recommended that the Reserve bank of India should continue to function in Pakistan until 30^thseptember 1948, so that the problems of time and demand liability, coinage, and currencies exchange act.Be settled between India and Pakistan. It was also stipulated than Pakistan would take over the management of public debt and exchange control from reserve bank of India on 1^st April, 1948, and that Indian notes would continue to be legal tender in Pakistan till 30^th September, 1948. Following the announcement of independence plan in June 1947, the Hindus residing in the territories now comprising Pakistan started transferring their assets to India. Moreover the banks including those having their restarted offices in Pakistan transferred them to India in order to bring a collapse of the new State. By 30^th June 1948, the number of offices of scheduled banks in Pakistan declined from 487 to only 195.

There were 19 non-Indian foreign banks with the status of small branch offices with were engaged solely in export of corps from Pakistan, while there were only 2 Pakistani institutions Habib bank and the Australasia Bank. The panic of uncertain future shook the confidence of the people. The Government, therefore, promulgated the banking companies ordinance, 1947, to safeguard the interests of both the bankers and the customers.

In order to make necessary arrangements for the assumption of control an export committee was appointed to recommend necessary steps, including the required legislation to establish a central bank for Pakistan. The Governor-General of Pakistan, Quaid-I-Azam Mohammad Ali Jinnah, inaugurated the state bank of Pakistan on July 1,1948. The first important task which the state bank of Pakistan had to attend to was the issue to currency notes and withdrawal of Reserve bank of India note with over printing there of Government of Pakistan, which had been in circulation in Pakistan so far.

Being the central bank of the country, the state bank addressed itself with the equally urgent task of creating a notional banking system. in order to attain this goal it provided every help and encouragement to Habib bank to expand its network of branches and also recommended to Government to establishment of a new bank, which could serve an agent of the sate bank. As a result the national bank of Pakistan came into being in 1949; and by 1952 it became strong enough to take over the agency function form the imperial bank of India.

In order to develop send banking and weeding out weed institutions, the banking companies (control) act was promulgated in 1949, empowering the state bank to control the operation of banking companies in Pakistan, including preparation of the required trained manpower. Further the state bank restricted the opening of now branches by foreign banks in port towns or in big cities from where trade was being carried out with foreign countries, while pakisyani banks were allowed to open as many as possible within the country.

Pakistan entered into a phase of planned economic development in 1956; and naturally further expansion in the banking and credit facilities was essential. Though there had been a remarkable expansion in the number of offices of Pakistani banks since independence, it has remained heavily concentrated in large cities. Therefore the state bank had to accord priority to the establishment of branches in the interior of the county.

Another very significant event in the development of banking in Pakistan was the appointment of the credit enquiry commission in 1959 to examine the scope and working of the institutions providing credit facilities to agriculture, trade, commerce, and industry, and recommend measures of further improvements. More Pakistani scheduled banks continued to be established, which included the commerce bank limited and the standard bank limited. By June 1965, the number of scheduled banks stood at 36; the deposits increased to Rs.688.28 crores, while credit expansion by the banks to the private sector rose to Rs.575.87 crores due to keen demand under the impact of ecomics growth and better scope for private enterprises.        

The separation of East Pakistan in 1971 and it’s repercussions in the from of economic depression; demonetizations of currency in 1972; and the rampant world-wide inflation have caused a lot of difficulties to the banking system in Pakistan. Yet the growth of banking in Pakistan since 1948 has indeed been phenomenal. The network of not only Pakistani but also the foreign banks covers a very large segment of popuation in very nook and corner of the country. They mobilize the savings and other funds from public in general and finance various sector of economy from this pool. More than 7000 branches of these banks have mobilized more than Rs.887 billion in deposits and provided finance to various sectors amounting to more than Rs.548 billion by June 1997.

Besides this growth, specialized credit and financial institutions have also developed over the years, and cater to the needs of specific sectors. National investment trust; peoples finance corporation; equity participation fund; and national development finance corporation; baner’s equity Ltd., small business finance corporation etc. are contributing their due share in the country’s economic life.

In the hope that banking would enter a new era of further development and progress, Pakistani commercial banks were nationalized in Pakistan since January 1, 1974, but it has now been realized that this step proved to be counter productive, hence reversal has been initiated since January 1991. Besides disinvestments and privatization of nationalized commercial banks, establishment of commercial and other banks in private sector is being encouraged. Consequently a large number of commercial and other banks have come into operation since 1991.

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