What is bank?

There are various views about the origin of the word

‘bank’. One view is that it is derived from an Italian word
‘banque’ which means a ‘bench’.
In the explanation of this view they are saying that in
past in Italy the money exchanger were sitting on
benches and doing there businesses.
Today banks are dealing in money so the work of today
banks and work of those money exchangers is the same,
as both are dealing in money that’s why they are saying
that the word bank has derived from an Italian word
‘banque’ which means a ‘bench’.
The other point of view is that it has originated
from the German word ‘banc’ which means a ‘joint
stock firm’.
In the explanation of this view they are saying
that today banks are working as a joint stock firm
that’s why the word bank has been originated
from the German word ‘banc’ which means a ‘joint
stock firm’.
As regards the growth of modern commercial
bank, it can be traced to as early as 600 BC.
Crowther in his famous book “An outline of
money” has traced the history of modern
commercial banking. According to him the
present day banker has three ancestors.
1. The merchants
2. The goldsmiths
3. The money lenders
1. The merchants:
The earliest 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 traders to carry metallic money with
themselves for payment.
The traders with high reputation begin to issue receipts
which were accepted as title of money.
These receipts or letters of transfer also called hundi in
indo sub continents were the first mode of payments.
The merchant banking thus form the earliest stage in the
evolution of modern banking
2. The Goldsmiths:
The second stage in the growth of banking is normally
traced to the earlier goldsmith.
These goldsmiths also called “seths” in India used to
receive gold and silver for safe custody.
The goldsmiths begin to issue receipts for the metallic
money (gold and silver) kept with them.
These receipts became payable to the bearer on
demand.
In this way the goldsmith note became a medium of
exchange and a mean of payment.
The goldsmith thus can rightly be termed as the
forerunners of the modern bank notes.
3. The money lenders:
The third stage in the development of banking arose when
goldsmiths became money lenders.
By experience the goldsmith (who were called money lenders)
came to know that they could keep a small proportion of the
total deposits for meeting the demands of customers for cash
and the rest the could easily lend.
They allow the depositors to draw over and above the money
actually standing to their credit (they allow overdraft facility).
When every money lender/goldsmith issued receipts and many
of them allowed overdraft facilities there were then too much
confusion in the banking system.
The money lenders/goldsmiths in order to earn more profits
could not keep adequate reserves for meeting the demands of
the customers for cash.
The failure on the part of the money
lenders/goldsmiths to return money caused wide
spread distress among the people.
In order to create confidence among the people,
steps were taken to regulate the banking
organization.
A conference was held in Nuremberg in 1548. It was
decided that a bank should be set up by the state
which should regulate the banking organization and
techniques.
The 1ˢᵗ central bank was formed in Geneva in 1578.
Bank of England was established in 1694.
The modern commercial banking system actually
developed in nineteenth century.
With the passage of time the scope of the
commercial banks have greatly increased. They
now deal with large number of matters such as
obtaining funds, advancing loans to the
businesses, farmers, households, making
investments in stocks, discounting bill of
exchange etc.
The commercial banks are now multi service
organizations and play a very important role in
the financial markets and economic
development of a country.
Bank of Venice was the first bank to start
commercial banking operations in 1157.
Modern banking system began with the
opening of Bank of England in 1694.
Bank of Hindustan was the first bank to be
established in India in 1770.
Bank is a financial institution that collects society’s surplus cash
and gives a part of that as loan to investors for earning profit.
So bank is an intermediary institutions that makes relationship
between the owner of surplus savings and the investor of deficit
capital.
Banks earn profit by receiving interest from the borrowers who
want to take short term and long term loan and making
relatively lower interest payments to the depositors for
providing their funds used by bank.
By honoring the demand of time banks are using various types
of credit products like cheque, credit card etc.
Bank is an institution that is registered by central
bank and mainly perform the following activities-
Receives current deposit and give the withdrawal facilities
to clients through cheque.
Receives term deposits and pay interest on it.
Discontinuing notes, approving loans, and invest in
government and other credit instruments.
Collect cheque, draft and note etc.
Issue draft and cheque.
Notification of depositor’s cheque.
Act as an trustee in accordance with government
permission. ----- by Dictionary of Banking and Finance.
A commercial bank is a trader of substitute currencies
such as cheque, currency and bill of exchange.------by
New Encyclopedia Britannica
A bank provides service activity and acts as
intermediary between creditor and lender. In a
broader sense, it is said that bank is the heart of
complex financial structure.
- American Institute of Bankers
A bank is the institutions for the keeping, lending and
exchanging of money.
- Prof. Chambers
According to the AR Khan,
A business institution that receives surplus funds of
individual, trading or non trading institution,
government or private institution as deposit and supply
money with assurance of repayment against security in
exchange of profit or interest to trading or non trading
organization, government or non government
institution who has deficit fund and demand for money
and so facilitate the process, create various credit
instruments and give facility withdrawals of deposit as
and when needed.
Banking is the business of a banker, the
keeping or management of a bank.
Banking means the accepting, for the purpose
of lending or investment, of deposits or
money from the public, repayable on demand
or otherwise, and withdrawnable by cheque,
draft or otherwise.
Collection of deposit
Payment of money
Issuing note
Creation of medium of exchange
Payment of loan
Discounting of bill
Transfer of money
Control of credit
Formation of capital
Maintenance of valuable assets
Profitable investment
Maintenance of fund of govt. and other
institutions
Assistance to govt.
Transaction of foreign currency
Assistance in business
Financial solvency
Safety
Confidence
Banking service
Maintenance of secrecy
Economy
Efficiency of Management
Number of branches
Location of a Bank
Rate of interest or profit
Knowledge of foreign exchange
Scheduling of bank
Class of bank
Publicity
Collection of savings
Loan payment
Principle of solvency
Principle of proper investment
Principle of safety
Principle of honesty
Principle of confidence
Principle of liquidity
Principle of efficiency
Principle of economy
Principle of service
Principle of loan payment
Principle of situation
Principle of secrecy
Principle of specialization
Principle of publicity
Principle of goodwill
Capital formation
Creation of medium of exchange
Help in home trade
Help in foreign trade
Increase of investment
Industrial development
Agricultural development
Credit Control
Creation of credit
Increase of gross production
Employment
Increase of Govt. revenue
Handling of foreign exchange
Developing living status
Implementation of economic policies of
government
Infrastructure development
Remittance of fund
Spared of banking habit
Rural development
Entrepreneurship development
Any person carrying on the business of
banking is a banker.
Banker includes a body of persons whether
incorporated or not, who carry on business
of banking.
A banker is dealer in debts-his own and of
other people.
General education and knowledge
Specialized knowledge of banking
Knowledge of management
Experience
Developed mentality
Eagerness of serving
Communication skill
Physical and mental abilities
Sharp intelligence
Power to motivate
Honesty and sincerity
Innovative power
Timeliness
Pleasant personality
In the prevailing world commercial bank
management system are more or less
similar in principles.
Dissimilarities exist in the scope of
commercial banking activities in different
countries.
We can divide the major commercial
banking systems in different countries in
the following groups.
Anglo- American Banking System:
This system prevalent in most of the countries in world along
with Bangladesh.
There are differences between commercial banking and
investment banking.
Commercial bank can not operate investment bank activities.
This system does not allow the transactions of shares and
securities for different accounts of the clients.
The relationship between commercial banks and corporate
houses will be creditor and client relationship not the owner
relationship.
German Universal banking system:
Prevail only in Germany
There is no difference between commercial bank and
investment bank.
Commercial bank can operate any type of activity. It can buy
up to 40% shares of corporate firms and participate in the
ownership of the firm.
Commercial bank can monitor firms in two ways- as creditor
or as owner/ director.
Commercial bank can participate in determining financial
policy along with investment.
It is called universal banking systems or relationship banking.
Japanese Main Banking system
There are differences between investment banking and
commercial banking but commercial banks have no
restrictions to participate in the ownership of corporate
firms.
The bank can buy 5% of shares of the firms and monitor
as creditor or as director.
Banks influence the formulation of fiscal policy and take
management responsibility.
A firm’s main bank can give highest loan (10-20%) to
that company and became principal share holder.
Indian Lead Banking System
Developed in India by the end of 1960
Every lead banks perform extra responsibilities
rather than performing commercial bank’s
activities.
This systems divides the country’s geographical
area in different segment and only one leader bank
is selected for each area. Commercial banks in that
area are operating according to advice and
guidelines of that lead bank.
Financial systems evolve through time, passing
through three phases-
Phase 1: This phase is bank oriented where most
external finance is raised through the bank
loans which in turn is funded through savings.
Banks are the most important financial
intermediaries in the financial systems. Interest
income is main source of revenue of banks.
Phase 2: This phase is market oriented. Households
and institutional investors begin to hold more
securities and equity. Non banking financial
institutions offer near bank products such as money
market accounts.
Phase 3: In this phase, trading, underwriting,
advising and asset management activities become
more important for banks than traditional core
banking functions.
Some important factors are now considered
in banking sector in new era-
Performance of banks measured by banks
profitability
The growth of bank’s assets
Bank’s Foreign assets
Employee costs
Share price performance.