Evolution of banking Evolution of banking It has

Evolution of banking

Evolution of banking • It has not so far been decided as to how the word ‘Bank’ originated. • Some authors are of the opinion that this word is derived from the words ‘Bancus’ or ‘Banque’ which means a bench. • This origin is contributed to the fact that the Jews transacted the business of money exchange on benches in the market place.

• Other authorities hold the opinion that the word bank is derived from the German word ‘Bauk’ which means ‘joint stock fund’. • Later on, when the Germans occupied major part of Italy, the word ‘Bauk’ was Italianized into ‘Bank’.

Early growth in banking • Banking is as old as human society. • Around 3400 BC they were Sumerians who carried on some activities which are considered as banking activities. • Later Babylonians further enlarged these activities. They contributed in the areas of credit, specifically in agriculture credit. • They used temples as banks. • In the following era Greeks also carried banking activities.

• Greeks also used temples for banking activities where people not only deposited their money and valuables for safety and security, but also borrowed money from there. • Business of exchanging money and making remittances between various cities were also carried out under the Greek system.

• Then Romans regulated the conduct of private banks. • Utmost confidence of the people was created in them because the banking business was mostly done by individuals. • Fall of Roman empire had adverse effects on banking and financial activities. • Then European countries took over and they established cities of Venice, Florence and Genoa as center of trades and commerce.

Modern banking • Banking in its modern form and structure started in Britain. • Lombardy merchants came to England in the fourteenth century and settled in the parts of the city of London now called Lombard street. • They dealt with not only keeping the money in safe custody from general public but also changed money for travellers or merchants.

• They also developed important banking facility of documentary credits. • Then this business was taken over by Goldsmiths. • Since these goldsmiths required strong safes for the purpose of their own business, they introduced necessary facilities of safe keeping of valuables and cash of their customers.

• These goldsmiths issued receipts or notes to their depositors in respect of the cash or articles left with them. • These were called Goldsmiths notes and carried an undertaking to return the money and articles to the depositors or bearers on demand. • Over a period of time these goldsmiths discovered that large sums of money were left in their custody for longer periods: therefore they started the use of this cash to advance loans to other persons for a fixed period and at high interest rates.

• They also encouraged cash deposits by their customers by offering them a part of their profits earned on the money.

History of Banking industry in Pakistan • At the time of independence there were 487 offices of scheduled banks in the territories now comprising Pakistan. • In accordance with the Indian Independence Act of 1947, an expert committee recommended that the Reserve Bank of India should continue to function in Pakistan until 30 th September 1948. 11

History of Banking industry in Pakistan • It was also decided that Indian notes would continue to be legal tender in Pakistan till 30 th September, 1948. • After the announcement of independence plan in June 1947, the hindus residing in the territories now comprising Pakistan started transferring their assets to India. • The Banks having there registered offices in Pakistan transferred them to India. 12

History of Banking industry in Pakistan • By 30 th June 1948 the number of scheduled banks in Pakistan declined from 487 to only 195. • 19 non indian foreign banks with a status of small branch offices and engaged only in export of agricultural crops. • Only 2 Pakistani institutions i-e Habib Bank and the Australasia Bank. 13

History of Banking industry in Pakistan • Decided to advance the date from 30 th September 1948 to 30 th June 1948 upto which the Reserve Bank of India could serve as the monetary authority in Pakistan. • Quaid-i-Azam Muhammad Ali Jinnah inaugurated the State Bank of Pakistan on 1 st July 1948. • First pakistani notes were issued in October 1948 in the denomination of Rs 5, 10 and 100. 14

History of Banking industry in Pakistan • State Bank provided every help and encouragement to Habib Bank to expand its network of branches. • Recommended government to establish a new bank which could serve as an agent of the State Bank. • As a result National Bank came into being in 1949. • Industrial development finance corporation was set up. • Agricultural development bank was set up. • Muslim Commercial Bank was registered in 1956. • Pakistan industrial credit and investment corporation. • Commerce Bank Limited and Standard Bank Limited. • By June 1965, the number of scheduled banks stood at 36. 15

Nationalization of Banks • Nationalization act 1974. • Mergers were there. – Habib(overseas)Bank and Standard Bank merged with HBL. – Bank of Bahawalpur, Eastern Merchantile Bank & Eastern Bank Corporation merged with NBP – The commerce and Union Bank were merged with UBL – Premiere Bank merged with MCB. – Australasia Bank was given new name of ABL. 16

Problems of Nationalization • Bureaucratic attitude – Government owned banks – Cant be done – Come tomorrow – Bring the following documents – Slow way doing things – Unnecessary intervention of trade unions. – Rewards not linked with performance • Lending on political basis • Enlarged role of governments. 17

Financial sector reforms • Reforms process begin in 1990 • 1997 reform process got momentum. • Amendments in Banks Nationalization act 1974. empowered the federal govt. to sell all or part of share capital of NCB’S. • New banking companies in private sector. • Ten new banks were permitted to commence their business. • Golden shake hand scheme was introduced by the banks • Prudential regulations came into existence. • CIB and computerization of all record. • Onsite and offsite inspection by SBP. 18

Present scenario of Banking industry • • Healthy competition Improved management and control Excellent provision of services to general pubic Increased profitability of Banks. Decrease in non performing loans Implementation of latest technology. Rewards linked with performance. 19