Banking is the life-blood of commerce. Currency notes and coins cannot cope with ever-increasing demand for money arising from an increase in the number and size of business transactions.
Bank money, i.e., cheques and drafts, etc. settles all business transactions very cheaply and quickly. Modern economic development and prosperity is an outcome of banking. The original importance of "banking" was receiving of deposits of money on conditions that repayments would be made to orders or demands by the depositors or customers of the bank.
It is a firm or an institution which deals in credit. It accepts deposits from its clients and make loans and advances to them.
Origin of Banking
Banking is an ancient institution. It is said to have developed in Greece, Rome and India over 2500 years ago. The present-day banker shows traces of each of the ancestors.
Like the merchant, he still specializes in facing foreign trade by the issue of bills exchange. Like the money-lenders he still collects the saving of one set of people and lends it to provide a common medium of exchange by which people can make payments to each other quite easily.
What a Bank is?
M.L Tannan, the term bank itself is derived from the words banco, bancus or banque, meaning a bench. The early bankers, the Jews in Lombardy, transacted their business at benches in the market place. When a banker failed, his banco was broken up by the people, whence the word bankrupt.
Others say that the word bank is originally derived from the German word, back meaning a joint stock fund which became banco in Italy when the Germans were ruling over a large part of Italy. The origin of banking is traces in Europe from the Middle Ages.
Types of Banking
This is a age of specialization of functions. Banks are also specialized in their activities. According to the nature of functions, banks are divided into the following types of kinds
The Central Bank is at the head of the banking structure of a country. It controls monetary and banking activities of a country. The State Bank of Pakistan is the Central Bank of Pakistan.
Commercial Banks are those banks which deals in short-term credit. These banks accepts deposits from the public and make advances to their customers for short periods of time. The Habib Bank, The National Bank of Pakistan, The Muslim Commercial Bank, and the United Bank, etc. are examples of Pakistani commercial banks.
These bank finance the agriculturists. The Co-operative Credit Society Land Mortgage banks and Provisional Co-operative Banks provide credit to the farmers at cheap rate for carrying on their agricultural operations.
These banks provide long-term credit to industries, which require large amount of capital for purchasing land and buildings, machinery, tools and equipment, etc.
Exchange Banks or
Foreign Exchange Banks
These banks specialize in financing foreign trade of a country. Their main business consists in drawing, accepting, discounting, buying and selling foreign bills of exchange.
Commercial banks and Post office saving banks encourage people of small income to open saving bank accounts. A certain interest is allowed on the savings bank accounts to provide an incentive to the small depositors.
Land Mortgage Banks
These banks specialize in meeting the long term financial requirements of the agriculturists.
Various types of Bank Accounts
The raising funds by opening various types of banking accounts is the most important function of modern banking. The bank deposits generally take the following form:-
Fixed Deposit Account
The tern fixed deposits means the deposits which is payable after a certain period of time which may vary from three months to five years but generally one year. This type of deposit suits those persons who want safety of funds and some rate of interest thereon.
Fixed deposit carries a higher rate of interest than the saving banks account usually 11% -15% per anum. A fixed deposit account can be renewed again and again by a deposit account holder, if he so likes.
Saving Bank Deposit the account is generally opened by persons of fixed income and low margin of saving. In this account a deposit can be made any time, but the depositors can withdraw money on a certain time period.
Home Safe Accounts
This is a unique system of deposit. In this type of account, the bank supplies a saving box to the depositor to enable him to drop his small saving into it from time to time.
Current Deposit Account
The current account is now the most popular banking account. A current account holder can deposit or withdraw any amount at any time he likes. He also gets full cheques clearing facilities.
The Need For Reference
The Bank Manger will ask a person intending to open a current account to supply the name and addresses of two respectable persons willing to confirm his respectability. The majority of the new customers are introduced either by an existing customer of the bank or by their employers.
A bankers draft addressed by one bank to another or by one office to another of the same bank, is an order to pay a specified sum of the money to a named payee or to his order. A bankers draft is not a cheque.
A cash credits is an arrangement by which a banker allows his customer to borrow money up to a certain limit against either a bond of credit by one or more sureties or certain securities.
Where an advance is made in a lump sum, it is called a Loan. The whole amount of loan account is debited to the customers name and credited to his current account. Interest is charged on the whole amount loaned.
A balance sheet is a statement prepared to exhibit on the one hand, the liabilities of a company or person, and on the other hand, the assets or property available to meet the liabilities. A balance sheet should be so drawn up as to show a truthful statement of the financial position of the company.