ASPECTS OF FINANCIAL BANKS STUDY NOTES
INTRODUCTION TO BANKING
History of bank
Money is very important and necessary to satisfy human wants. Man has been needy in every era
due to which the collection and supply (receipts and payments) of money has been an essential
part of human life. Different commodities have been used as money in different ages, like, stones,
metals, animals, different eatables and minerals. The concept of money, its sources and uses have
been passing through from the revolutionary stages along with the evolution of human culture.
Even a good number of people directly started dealing in money e.g. merchants, gold smiths, and
money lenders etc. the concept of loan, interest, written documents i.e. cheque a bill of exchange
came into time light only because of them
Origin of the word “BANK”
Opinion differs regarding the origin of the word “BANK”. According to some authorities, the
word “BANK’ is derived from the Italian word “BANCO”, “BANCUS”. Which mean that “a bench
upon which Italian money changers used to sit with their cons to transact business”.
The German experts says about the word “BANK” is originally derived form the word “BACK”
which means a join stock firm or fund. This word was Italianized into “Banco” when Germans
were masters of great part of Italy.
Generally it is said that “A financial institution which deals in money and credit. It borrows and
lends money and credit. It borrows money and lends money and in this way acts as financial
intermediary between the lender and borrower”
Kinds of Banks:-
(a) On the basis of Functions
(b) On the basis of Ownership
(c) On the basis of Registration
(d) On the basis of Domicile
Functional Classification:-
Commercial Banks:-
The most popular kind of banks is the commercial bank receives surplus money from the public
and lends to others who needs funds. The bank collects cheques, Bill of exchange etc for
customers .Its transfers money from one place to another. The purpose of a commercial bank is to
earn profit. These banks play a vital role in economic development.
Central Bank:-
Central bank is the most important bank of any country. Almost all countries of the world now
have central bank. The central bank is the leader of all other banks. It does not compete for profit.
It has a right to note issue. It controls the operations of other banks for monetary and economic
stability in country. The central bank represents the Govt in International conferences.
Industrial Banks:-
The industrial bank is very important for the development of any country. To provide medium
and long-term finance to industry is the distinguishing Features of these banks. Industrial banks
generally provide finance for fixed capital requirement.
Agricultural Banks:-
Agricultural countries have exports consist of Agro-based products. So well organized agriculture
sector is necessary for the development of a country. Agricultural banks provide loan for this
purpose.
Saving Bank:-
PREPARED BY MR ANTONY AMBIA Page 1
,The banks are established for encouraging and collecting savings of people. Saving banks are not
banks in the real sense of term. They only provide saving facility. These banks usually invest their
funds in Govt securities. The well-Known Post Office savings Banks is an institution of this type.
Commercial banks are also providing the service of saving banks.
Investment Banks:-
The bank is opened to buy and sell shares and other securities. It also provides loans for purchase
of shares and debenture etc. It keeps new companies by under writing the share, bonds & other
securities.
Merchant Bank:-
The bank provides services like acceptance of bills of exchange, corporate finance, Leasing, hire-
purchase and insurance broking. It is a whole sale bank and accepts large sums for fixed term from
individual, companies and financial institutions.
Consortium Banks:-
Consortium bank is owned by other banks. The bank is formed to meet the financial requirements
of large companies for long period of time. The bank receives the funds from the parent Bank. It
can also arrange syndicate loans.
International energy Bank, British Middle East Bank, Orion Bank are the examples of consortium
Banks.
Labour Bank:-
The Bank is opened by trade union of labourers. The purpose of this bank is to manage worker
funds like pension funds, Provident fund etc in a better way. The Labourers also keep their saving
in it. The bank provides loans to the concerns which are under the control of trade union. E.g.
Union Bank, Saving Bank of Chicago, State Bank of Kansas city.
School Bank:-
The banks provide banking facilities to the students in schools. The boxes or bags are supplied to
the students who keep their saving in boxes. Accounts are opened in the name of students. The
bank officers go to the school after regular interval and collect the amount of their saving. In
U.S.A Beloit saving Bank started working school bank in 1882.
Mortage Bank :-
These banks provide loans to people against moveable and immovable property. HBFC is doing
the working of Mortage Bank.
Cooperative Bank:-
These banks are set up to provide credit facilities to farmers and small producers. The bank is
opened by persons of similar occupations living in same areas for providing banking facilities. The
Co-Operative banks are registered under the Co-Operative societies Act can be registered with
registrar of Co-Operative societies.
On the Basis Of Ownership:-
Public sector Bank:-
Such banks are owned by government and works under the direct control of the government. The
chief executive of such banks is appointed by federal government. NBP are examples of public
sector banks, First woman Bank.
Private Sector Bank:-
These banks are under the direct ownership of the private organization of Co-Operative Societies.
The banks are controlled by the individuals or Pvt Organization, MCB, ABL and KASB Bank is
the examples.
On The Basis Of Registration:-
Scheduled Bank:-
PREPARED BY MR ANTONY AMBIA Page 2
,These are the banks which are registered in the list of central bank. They are bound to follow the
instruction and policies of central bank.
Non Scheduled Banks:-
These are the banks which are not registered in list and policies, Instruction of central Bank.
On The Basis Of Domicile:-
Domestic Bank:-
The banks which are registered and incorporated with in the country are called domestic bank.
These banks provide financial assistance domestically.
Foreign Bank:-
The bank which have their origin and head offices in foreign country are called foreign bank.
Foreign banks are the branches of the banks incorporated abroad. The standard chartered Bank
Ltd, National and Grind lays Bank Ltdare examples of foreign banks.
COMMERCIAL BANK
A commercial bank is public limited company it is set up under companies’ ordinance. The bank
receives deposits from general public. Different accounts are opened to collect money. The bank
keeps some money to honour cheques of customers. A large part of such money is provided to
people as loans. The bank is important for government, businessman and general public.
Commercial bank plays very important role in economic development of the country it is often
called the HEART of financial system of an economy.
Functions of commercial banks
Primary Functions
1. Accepting deposits
Bank accept deposits form those who have extra money out of their income in their hands, but
they can’t use it in a profitable way so banks give them opportunity to deposit their money and
enjoy profit.
a. Current Account
In this account the depositor can deposit and withdraw money at any time. Normally traders,
businessmen, are interested to open this account bank pays no interest on this accounts. A
cheque book is given to the account holder to with draw his money.
b. Profit & Loss sharing OR saving account
This account is suitable for those people who have small level of savings. In this account a
nominal interest is paid to customer cheque book is given to account holder.
c. Fixed OR term deposits account
In this account a specified amount is deposited in the bank for particular period of time. The
longer the duration the higher would be the interest. In this account, a receipt is given to
customer, called fixed deposit receipt (FDR).
2. Advance loans
The bank gives loans in order to earn profit. In this way it accepts deposits at low rate of interest
and advances loan at high rate of interest. The difference becomes profits of the bank. Advances
are given in the following types.
a. Over Draft
This is a shot period financing facility. In this facility the bank sanctions that the customer
can withdraw his money over and above the balance lying in the bank. This facility is
provided to current account holders.
b. Discounting Bills of Exchange
Its mean, making payment before the maturity of the bill the payment made the bank before
the date of maturity is the loan to the bill holder.
PREPARED BY MR ANTONY AMBIA Page 3
, c. Cash credit
In this loan facility the bank sanctions a particular amount. The facility is provided against
security.
d. Time loans
Short term loan in which the time period is less than one year.
Medium term loan for period of 1 to 3 or 5 years
Long term loan for period of more than 5 years and the entire loan are given against
proper security.
Secondary functions
1. Transfer of money
The banks transfer money form place to place by means of draft collection of cheques
telephonic transfer and direct debt. The banks purchase bills of exchange to help their
customer for collection of money.
2. Issue of credit money
The banks issue various types of near money the cheques bank draft credit car, are main
instrument which is valid as medium of exchange to settle their obligations.
3. Investment of funds
The banks can invest funds in stocks shares and bounds. As per law commercial banks at
least 25% of their deposits in securities.
4. Financing foreign trade
The bank performs duty of financing foreign trade. The respites and payment on accounts of
exports and imports is possible through bank.
5. Foreign exchange dealing
The bank deal in foreign exchange they buy and sell currencies of other countries. The
commercial banks are dealer of foreign exchange market.
6. Status report
The commercial bank act as referee for supply of information about its customer, relating to
financial position of party concerned.
Agency Functions
1. Collection of cheque
A commercial bank acts as agent to the customer to collect and make payment on the
cheques. The cheques may be local or out station.
2. Collection of income
Banks collect pension, dividend, rent and interest of their customers. A credit voucher is sent
to customer for information.
3. Payment of expenses
The bank makes payment of insurance premium trade subscription, school fee and similar
other expenses.
4. Act as trustee
The bank can act as trust to mange trust property as per will of property owner. The order of
court is obtained to act as trustee. (Takes care affairs of its client)
5. Tax return
The bank act as agents of customers, those are bound to pay tax to government.
6. Safe custody
The bank accepts valuables and other papers for safe keeping. A nominal fee is charged from
customer.
PREPARED BY MR ANTONY AMBIA Page 4
INTRODUCTION TO BANKING
History of bank
Money is very important and necessary to satisfy human wants. Man has been needy in every era
due to which the collection and supply (receipts and payments) of money has been an essential
part of human life. Different commodities have been used as money in different ages, like, stones,
metals, animals, different eatables and minerals. The concept of money, its sources and uses have
been passing through from the revolutionary stages along with the evolution of human culture.
Even a good number of people directly started dealing in money e.g. merchants, gold smiths, and
money lenders etc. the concept of loan, interest, written documents i.e. cheque a bill of exchange
came into time light only because of them
Origin of the word “BANK”
Opinion differs regarding the origin of the word “BANK”. According to some authorities, the
word “BANK’ is derived from the Italian word “BANCO”, “BANCUS”. Which mean that “a bench
upon which Italian money changers used to sit with their cons to transact business”.
The German experts says about the word “BANK” is originally derived form the word “BACK”
which means a join stock firm or fund. This word was Italianized into “Banco” when Germans
were masters of great part of Italy.
Generally it is said that “A financial institution which deals in money and credit. It borrows and
lends money and credit. It borrows money and lends money and in this way acts as financial
intermediary between the lender and borrower”
Kinds of Banks:-
(a) On the basis of Functions
(b) On the basis of Ownership
(c) On the basis of Registration
(d) On the basis of Domicile
Functional Classification:-
Commercial Banks:-
The most popular kind of banks is the commercial bank receives surplus money from the public
and lends to others who needs funds. The bank collects cheques, Bill of exchange etc for
customers .Its transfers money from one place to another. The purpose of a commercial bank is to
earn profit. These banks play a vital role in economic development.
Central Bank:-
Central bank is the most important bank of any country. Almost all countries of the world now
have central bank. The central bank is the leader of all other banks. It does not compete for profit.
It has a right to note issue. It controls the operations of other banks for monetary and economic
stability in country. The central bank represents the Govt in International conferences.
Industrial Banks:-
The industrial bank is very important for the development of any country. To provide medium
and long-term finance to industry is the distinguishing Features of these banks. Industrial banks
generally provide finance for fixed capital requirement.
Agricultural Banks:-
Agricultural countries have exports consist of Agro-based products. So well organized agriculture
sector is necessary for the development of a country. Agricultural banks provide loan for this
purpose.
Saving Bank:-
PREPARED BY MR ANTONY AMBIA Page 1
,The banks are established for encouraging and collecting savings of people. Saving banks are not
banks in the real sense of term. They only provide saving facility. These banks usually invest their
funds in Govt securities. The well-Known Post Office savings Banks is an institution of this type.
Commercial banks are also providing the service of saving banks.
Investment Banks:-
The bank is opened to buy and sell shares and other securities. It also provides loans for purchase
of shares and debenture etc. It keeps new companies by under writing the share, bonds & other
securities.
Merchant Bank:-
The bank provides services like acceptance of bills of exchange, corporate finance, Leasing, hire-
purchase and insurance broking. It is a whole sale bank and accepts large sums for fixed term from
individual, companies and financial institutions.
Consortium Banks:-
Consortium bank is owned by other banks. The bank is formed to meet the financial requirements
of large companies for long period of time. The bank receives the funds from the parent Bank. It
can also arrange syndicate loans.
International energy Bank, British Middle East Bank, Orion Bank are the examples of consortium
Banks.
Labour Bank:-
The Bank is opened by trade union of labourers. The purpose of this bank is to manage worker
funds like pension funds, Provident fund etc in a better way. The Labourers also keep their saving
in it. The bank provides loans to the concerns which are under the control of trade union. E.g.
Union Bank, Saving Bank of Chicago, State Bank of Kansas city.
School Bank:-
The banks provide banking facilities to the students in schools. The boxes or bags are supplied to
the students who keep their saving in boxes. Accounts are opened in the name of students. The
bank officers go to the school after regular interval and collect the amount of their saving. In
U.S.A Beloit saving Bank started working school bank in 1882.
Mortage Bank :-
These banks provide loans to people against moveable and immovable property. HBFC is doing
the working of Mortage Bank.
Cooperative Bank:-
These banks are set up to provide credit facilities to farmers and small producers. The bank is
opened by persons of similar occupations living in same areas for providing banking facilities. The
Co-Operative banks are registered under the Co-Operative societies Act can be registered with
registrar of Co-Operative societies.
On the Basis Of Ownership:-
Public sector Bank:-
Such banks are owned by government and works under the direct control of the government. The
chief executive of such banks is appointed by federal government. NBP are examples of public
sector banks, First woman Bank.
Private Sector Bank:-
These banks are under the direct ownership of the private organization of Co-Operative Societies.
The banks are controlled by the individuals or Pvt Organization, MCB, ABL and KASB Bank is
the examples.
On The Basis Of Registration:-
Scheduled Bank:-
PREPARED BY MR ANTONY AMBIA Page 2
,These are the banks which are registered in the list of central bank. They are bound to follow the
instruction and policies of central bank.
Non Scheduled Banks:-
These are the banks which are not registered in list and policies, Instruction of central Bank.
On The Basis Of Domicile:-
Domestic Bank:-
The banks which are registered and incorporated with in the country are called domestic bank.
These banks provide financial assistance domestically.
Foreign Bank:-
The bank which have their origin and head offices in foreign country are called foreign bank.
Foreign banks are the branches of the banks incorporated abroad. The standard chartered Bank
Ltd, National and Grind lays Bank Ltdare examples of foreign banks.
COMMERCIAL BANK
A commercial bank is public limited company it is set up under companies’ ordinance. The bank
receives deposits from general public. Different accounts are opened to collect money. The bank
keeps some money to honour cheques of customers. A large part of such money is provided to
people as loans. The bank is important for government, businessman and general public.
Commercial bank plays very important role in economic development of the country it is often
called the HEART of financial system of an economy.
Functions of commercial banks
Primary Functions
1. Accepting deposits
Bank accept deposits form those who have extra money out of their income in their hands, but
they can’t use it in a profitable way so banks give them opportunity to deposit their money and
enjoy profit.
a. Current Account
In this account the depositor can deposit and withdraw money at any time. Normally traders,
businessmen, are interested to open this account bank pays no interest on this accounts. A
cheque book is given to the account holder to with draw his money.
b. Profit & Loss sharing OR saving account
This account is suitable for those people who have small level of savings. In this account a
nominal interest is paid to customer cheque book is given to account holder.
c. Fixed OR term deposits account
In this account a specified amount is deposited in the bank for particular period of time. The
longer the duration the higher would be the interest. In this account, a receipt is given to
customer, called fixed deposit receipt (FDR).
2. Advance loans
The bank gives loans in order to earn profit. In this way it accepts deposits at low rate of interest
and advances loan at high rate of interest. The difference becomes profits of the bank. Advances
are given in the following types.
a. Over Draft
This is a shot period financing facility. In this facility the bank sanctions that the customer
can withdraw his money over and above the balance lying in the bank. This facility is
provided to current account holders.
b. Discounting Bills of Exchange
Its mean, making payment before the maturity of the bill the payment made the bank before
the date of maturity is the loan to the bill holder.
PREPARED BY MR ANTONY AMBIA Page 3
, c. Cash credit
In this loan facility the bank sanctions a particular amount. The facility is provided against
security.
d. Time loans
Short term loan in which the time period is less than one year.
Medium term loan for period of 1 to 3 or 5 years
Long term loan for period of more than 5 years and the entire loan are given against
proper security.
Secondary functions
1. Transfer of money
The banks transfer money form place to place by means of draft collection of cheques
telephonic transfer and direct debt. The banks purchase bills of exchange to help their
customer for collection of money.
2. Issue of credit money
The banks issue various types of near money the cheques bank draft credit car, are main
instrument which is valid as medium of exchange to settle their obligations.
3. Investment of funds
The banks can invest funds in stocks shares and bounds. As per law commercial banks at
least 25% of their deposits in securities.
4. Financing foreign trade
The bank performs duty of financing foreign trade. The respites and payment on accounts of
exports and imports is possible through bank.
5. Foreign exchange dealing
The bank deal in foreign exchange they buy and sell currencies of other countries. The
commercial banks are dealer of foreign exchange market.
6. Status report
The commercial bank act as referee for supply of information about its customer, relating to
financial position of party concerned.
Agency Functions
1. Collection of cheque
A commercial bank acts as agent to the customer to collect and make payment on the
cheques. The cheques may be local or out station.
2. Collection of income
Banks collect pension, dividend, rent and interest of their customers. A credit voucher is sent
to customer for information.
3. Payment of expenses
The bank makes payment of insurance premium trade subscription, school fee and similar
other expenses.
4. Act as trustee
The bank can act as trust to mange trust property as per will of property owner. The order of
court is obtained to act as trustee. (Takes care affairs of its client)
5. Tax return
The bank act as agents of customers, those are bound to pay tax to government.
6. Safe custody
The bank accepts valuables and other papers for safe keeping. A nominal fee is charged from
customer.
PREPARED BY MR ANTONY AMBIA Page 4
