Banking
* Introduction of Banking System
* Central Banking
* Bill of Exchange
* Banking in Pakistan
Q.1. Define Bank and explain that banking system of a country helps in
its economic development.
OR
Write short notes on, * Industrial Bank, * Agricultural Bank, *
Cooperative Bank, * Exchange Bank, * Mortgage Bank, * Savings Bank
Meaning of Bank
It is generally said that the word "BANK" has been originated in Italy.
In the middle of 12th century there was a great financial crisis in Italy
due to war. To meet the war expenses, the government of that period
imposed a forced subscribed loan on citizens of the country at the
interest of 5% per annum. Such loans were known as Compara, Mintuo
etc. The most common name was Monte. In Germany the word Monte
was named as Bank or Banke. According to some writers, the word Bank
has been derived from the word Banke.
It is also said that the word Bank has been derived from the word
Banco which means a banch. The Jews money lenders in Italy used to
transact their business sitting on banches at different market places.
When any of them used to feel to meet his obligations, his banco or
banch would be broken by the angry creditors. The word Bankrupt seems
to be originated from broken banco. Since, the banking system has been
originated from money lending business, it is rightly argued that the
word Bank has been originated from the world banco.
Today the word bank is used as a comprehensive term for a number
institutions carrying on certain kinds of financial business. In practice,
the work Bank means which borrows money from one class of people and
again lends money to another class of people for interest or profit.
Definition of Bank
Bank is defined in many ways by various authors in the books on
economics and commerce. It is very difficult to define a bank, because
a bank performs multifarious functions. Different kinds of bank having
different functions may be defined in different ways according to their
functions. The evolution of different type of banks, each specialization
in a particular field, gives emphasis on each and every kind of bank. A
general and comprehensive definition to cover all types of banking
institutions would be unscientific and probably impossible. Each type of
bank should have its own definition explaining its specialized functions.
Legislators have understood this difficulty and that is why the Bill of
Exchange Act 1882 (England) defines thus A bank includes a body of
persons, whether incorporated or not, who carry on the business of
banking.
From this definition it is clear to us that any institution which performs
the various banking functions may be termed as bank. But in practice it
is found that many banking functions vary from time to time and country
to country. It is not possible on the part of a single bank to perform all
the banking functions at the time. So there originated numbers of
specialized banks with the objective of performing one or more
functions. As for example, Central Bank, Commercial Bank, Industrial
Bank, Agricultural Bank, Co-operative Bank etc., are in the practical
field.
Dr. Herbert L. Hart has defined a Banker as A Banker is one who in
the ordinary courses of business honours cheques drawn upon him by
persons for whome he receives money on current account. According to
Sir John Paget No one and no body corporate and otherwise can be a
Banker who does not (i) take deposit accounts (ii) take current accounts
(iii) issue and pay cheques drawn upon himself (iv) collect cheques
crossed and uncrossed for his customers.
Hilton Banking Commission defines Bank or Banker in the following words:
Every person, firm or company using in the description or its title, Bank
or Banker or Banking and accepting deposits of money subject to
withdrawal by cheque, draft or order.
Banking Ordinance 1962 (Pakistan) defines Banking as Accepting for the
purpose of lending or investment of deposits of money from public,
repayable on demand or otherwise and withdrawal by cheque, draft,
order or otherwise. Vise Sec. 5(1) and 5(B) Banking Co's Ordinance,
1962.
In view of the above definitions, a simple and short definition can be
given as Bank is an institution which deals in money and credit.
According to this precise definition A bank accepts deposits of money in
savings and current accounts at lower rate of interest or profit and
gives on credit to needy persons and businessmen at a higher rate of
interest or profit. It also transfers money for the clients from one city
or country to another and also performs various other agency services
for earnings.
Importance of Banking
Bank play a significant role in the economic development. The overall
economic of a country is absolutely dependent on the efficient banking
system. Industrial, agricultural and commercial progress of a country is
not possible without a good banking system. The importance of banking
may be stated as follows:
1. Capital Formation
Economic development depends upon the division of economic resources
from consumption to capital formation. Capital grows out of savings.
Banks play the prime role in accumulating capital by collecting the
scatered savings of the people. Thus banks render a valuable service
towards the development of a country by encouraging the growth of
capital.
2. Inexpensive Media of Exchange
Modern Banking provides inexpensive media of exchange. Issuing of
currency notes is a great achievement of modern banking. In addition
the cheques issued on the banks are frequently used instead of money in
transacting business. Thus the cheques economise the use of currency
notes.
3. Development of Trade and Industry
Bank utilise their collected funds by advancing loans to commercial and
industrial undertakings. In respect of foreign trade also, banks render a
valuable service by issuing letter of credit etc.
4. Reservoirs of Funds
Banks acts as the reservoirs of money in the country. In times of
economic, crisis the bankers come forward to help the Government by
purchasing the Government securities or by advancing loans.
5. Transfer of Funds
Banks facilitate the transfer of funds from one place to another safely
and at a very cheap cost through bank drafts, mail transfers,
telegraphic transfer, travellers cheque etc.
6. Dealing in Foreign Exchange
Banks deal in foreign exchange by purchasing and selling foreign
currencies and by issuing letters of credit. Foreign remittances of funds
are possible only through banks.
7. Money Market Operations
The structure and ups and downs of money market in the country are
largely dependent on the bankers activities. Under the guidance of the
central bank all the banks in the country do their best for the sound
management of money market.
8. Service to Customers
Banks perform various agency services on behalf of their customers.
They collect or make payments of bills of exchange, dividend, insurance
premium etc, on behalf of their customers. They act as the trustees
ore executors of documents etc. They also extend financial advises to
their customers.
Functions of Modern Bank
The following is the list of functions or services rendered by a modern
bank:
1. Bank provides inexpensive media of exchange through its cheques etc.
2. Bank keeps deposits of public.
3. Bank finances trade and industry.
4. Bank keeps in capital formation by economic savings.
5. Bank acts as Reservoir of funds.
6. Bank deals in foreign exchange and finances foreign trade.
7. Central Bank issues notes and controls money supply.
8. Central Bank controls credites, exchange and the money market.
9. All the banks participate in the development of money market.
10. Bank facilitates the transfer of funds from one place to another.
11. Specialized banks helps in the development of agriculture and
industry.
12. Banks acts as the custodian of customers valuables.
13. Bank acts as underwriters for raising capital or loan by Government,
Public Bodies and Campanies.
14. Bank acts as trustees and Executor of will and documents on behalf
of their customers.
15. Bank acts as the correspondent and representative of its customers,
other banks and financial institutions.
16. The Bank collects and makes payments of Bills of Exchange on
behalf of its customers.
17. The bank makes payments and collects in respect of subscriptions,
insurance premiums, rents, salaries etc, and also receives pension
dividends and payment of utilities bills on behalf of their customers.
18. Bank advances loans and extend financial advices to its customers.
19. Bank Discounts Bills.
20. Bank purchases and sells stock exchange securities.
Qualities of Good Banking System
Every bank is a dealer in money and credit. It generally deals in with
others money and not with its own money. It takes deposits from the
public and again lends to its customers for the sake of interest or
profit.
Thus, the operation of banking business is very risky one. A bank must
have some qualities in operating its functions efficiently and
successfully. The qualities of good banking may be summarized as below"
1. Adequate Capital
A banker must have adequate amount of capital. A large scale operation
and execution of various functions of a modern bank require large
amount of capital at the initial stage. Thus, without sufficient capital no
large scale banking can flourish.
2. Good Reputation
Reputation is the most important factor in the progress of a bank. To
be successful, a bank must have ample reputation in the money market.
Reputation of a bank depends upon the qualifications of the directors
and on the efficiency of management and workers.
3. Liquidity.
Money which is dealt in by a bank is not its own, so a banker must
always keep himself ready to meet the claims of his depositors. He
should keep sufficient amount of cash reserve and should keep some
assets in such a way that these can be encashed at any moment. He
should not block his fund by advancing loans for long periods rather he
should always prefer short term credits.
4. Security and Safety
In respect of advancing loans safety should be the main guiding principle
for a bank. The loans advanced by the banker must be secured. The
persons to whom the advance is to be made, must be studied carefully
before the lending of money. According to R.S. Sayers, The good
banker is one who can distinguish the sound from the unsound borrower.
5. Economy
Economy in expenditure should be maintained for the proper operation of
banking business. A good banker will always try to maximise his profit at
a minimum cost.
6. Effective Publicity
A bank should adopt various scientific methods of advertisement for the
proper publicity of business.
7. Localization
Good locality of a bank is another quality. The bank should be located in
the business centre so that it can flourish its business successfully.
8. Speciality
To be successful, a bank should be specialized in any one or more fields
of banking. An agricultural bank always aim at financing the formers for
agricultural purposes. Industrial bank provides long terms credits to the
industries. The individual commercial banks are also specialized in
different fields of banking.
9. Good Show within the Office
The bank office should be well equiped with modern aminities proper
sitting arrangement should be made within the bank office for its
customers.
10. Good Personnel and Efficiency
The officers and the employees of the bank must be efficient in their
work. They should be well trained in different fields of banking.
Furthermore they should be well behaved and polite in the manner and
must possess pleasing personality.
Classification of Banks
The banks can be classified on the following three basis:
1. Structural Classification of banking.
2. Operational Classification of banks.
3. Functional Classification of banks.
1. Structural Classification
Banks can be classified on the basis of their structure or constitution.
According to structural classification, banking may be classified as (a)
Branch Banking (b) Unit Banking
(a) Branch Banking
Under branch banking system, banking business is carried on through a
network of branches in the same town or country under the guidance and
control of one single head office. These branches may also be located in
outside of the country. This system of banking was originated in the
United Kingdom. Now-a-days this system if followed by many countries
of the world including Pakistan.
(b) Unit Banking
Under unit banking system the banking operations are carried through a
single office without any branch. Remittances and foreign exchange etc,
are dealt through correspondence between banks of two places. The
U.S.A is the home of unit banking.
Advantages of Branch Banking
1. Large Scale Operation
Branch banking system enjoys all the advantages of large scale
operation. Proper division of labour is applied successfully and the
employees become specialized in different banking fields.
2. Economy of Reserves
Under this type of banking, the funds can easily be transferred from
one branch to another. So full economy in maintaining cash reserve can
be secured by a banking having number of branches.
3. Remittances of Funds
This system facilitates easy remittances of funds from one place to
another through its number of branches in different places.
4. Spreading Risk Geographically
The bank having many branches can spread its risk geographically or
territorially. In case of losses incurred by branch in an area can be
offset by profits of the branches of other areas.
5. Parity in the Rate of Interest
By making easy movement of funds from one place to another branch
banking system can maintain parity in the rate of interest in different
parts of the same country or of the world.
6. Wise Banking Policy
The bank can formulate a wise banking policy. As it has got a good
number of branches throughout the country. It can study money and
credit position correctly. Loans and advances are made on merits and
not on other consideration. Applications for large amount of loan are
passed on to the higher authorities in head office.
7. Investment of Idle Funds
Under branch banking system a branch can transfer its idle funds to
other branches where this can be invested on profitable terms.
8. Foreign Exchange
As it has got foreign branches it is easier to operate foreign exchange
for a branch banking.
9. Superior Management and Personnel Training
Branch banking system having large scale operations attracts superior
personnel and offers wide scope for the training of the personnel.
Disadvantages of Branch Banking
The critics of the branch banking mentioned the following disadvantages:
1. Loose Control and Management
Under branch banking system, it becomes very difficult for a single
head office to manage and control a number of branches much
effectively.
2. Red Tapism
Red-Tapism and delay is common due to lack of sufficient authority to
branch managers. They are also not allowed to stay for long in one
branch, so they do not have the chance of becoming familiar with local
needs.
3. Relationship Between Management and the Employees
Due to large number of branches the relationship between the employers
and employees is not close and cordial.
4. Late Decision
A branch banking a large organisation, can take neither quick decision
nor prompt action in case of emergencies.
5. Concentration of Financial Lesources
In branch banking system large financial resources are concentrated in
the hands of small number of authorities of bank.
Advantages of Unit Banking
1. Easy Management and Control
Under unit banking system, it becomes very easy for a single office to
manage and control efficiently.
2. Close Management and Workers Relationship
Under unit banking system, there prevails a close and cordial relationship
between employer and employees.
3. Quick Decision
The owners or the management of unit banks can take quick decision and
prompt action in times of emergencies.
4. Use of Local Resources
Local financial resources are used for local development.
5. Lesser Fraud and Irregularities
Due to the less scattered affairs of the bank, there are very little
possibilities of fraud and irregularities.
Disadvantages of Unit Banking
1. Limited Size of Operation
Unit bank business can not be operated on large scale because of its
limited area. Being the small organisation, division of labour can not be
applied.
2. No Economy of Reserves
Under unit banking, bank can not transfer its funds to any other
branch. So economy in cash reserve can not be secured under this
system.
3. Limited Financial Resources
A unit bank has limited financial resources so it is not able to provide
full and adequate banking facilities to the industry and trade of the
area.
4. Investment of Idle Funds
A unit bank having no other branches, can not utilize its idle funds in
profitable ways.
5. Disparity in the Rate of Interest
Under the system, there prevails a great disparity in the rate of
interest in the same country as the management of different banks are
separate from each other.
Operational Classification of Banks
On the basis of nature of operation, banks can be classified into the
following two categories.
(a). Correspondent Banks
The unit banks, having no branch are linked together by correspondent
bank system. Under this system, a unit bank of a village or small town
deposits a portion of its cash reserve with another bank in the nearest
city. And this superior bank of city also deposits with another greater
bank of big city. These unit banks are linked through correspondence.
Remittances of funds of home and foreign trade transactions are made
through these correspondent banks. The unit banks are completely
independent of each other no doubt, but these are connected with one
another through correspondent system.
(b). Specialized Banks
The bank which performs one or more special functions is known as
specialized bank. As for example an agricultural bank takes up the
special responsibility of financing agricultural activities. Industrial banks
specially finance the industrial undertakings. Japan is the home of
specialized banks where different types of specialized banks are working
with their special functions.
The specialized banks have a great role in the economic development of
a country, specially of a developing country like Pakistan.
In our country, Agricultural Development Bank of Pakistan is helping
financially in the development of agricultural sector of our economy. The
Industrial Development Bank of Pakistan is another specialized bank who
is financing large scale industries in Pakistan.
Functional Classification Of Banks
Banks may be classified according to their functions. Different kinds of
banks, with different functions may be summarized as follows:
(a) Central Bank
A central bank is the most important institution in the banking system of
a country established with the objective of regulating the banking and
monetary system of the country. It issues notes and currencies within
the country and is entrusted with responsibility of maintaining the price
level in the country stable. It acts as banker to the Government and it
directly or indirectly controls the activities of all other banks. State
Bank of Pakistan is Central Bank of our country.
(b) Commercial Bank
Such type of bank is cheerfully engaged in financing internal trade. It
deals in short term credit. It takes deposit from public through
different type of deposit accounts and invests that collected fund in
advances and loan of short period to the trading and commercial
undertaking. This type of bank is familiar in most of the world. In our
country, for example, National Bank of Pakistan, Habib Bank Limited,
United Bank Limited, Muslim Commercial Bank Limited and Allied Bank
Limited are the commercial banks.
(c) Industrial Bank
Such institution specialises in financing industry. It provides long term
credit to people who carry on industrial enterprises. Industrial
Development Bank of Pakistan (IDBP) and Pakistan Industrial Credit and
Investment Corporation (PICIC) are the examples of industrial banks.
(d) Agricultural Bank
Such bank provides long and short term finance to agriculturists for
their agricultural purposes. Long term capital is required for acquisition
and improvement of land and purchase of heavy machinery and
equipments. Short period capital is required by the farmers for current
expenditure on seed, manures, wages etc. Agricultural Development Bank
of Pakistan (ADBP) is the best example of agricultural bank in our
country who provides long term, medium term and short term loans to
the agriculturists.
(e) Exchange Bank
Exchange bank deals mainly in the finance of the foreign trade of the
country. It deals in foreign exchange. On otherwards, the main function
of such bank is to buy and sell foreign currencies, rather titles to
foreign currencies in the form of bills of exchange, drafts, telegraphic
transfers etc. It purchases the bill of exchange which arise in
connection with the import and export trade of the country and they
deal in exchange. The exchange banks liquidate the international
indebtiness by exporting and importing precious metals and securities, if
necessary, they purchase bills in the international money market and
deposit them with their banking agents inbig commercial centres like
London, Paris, New York etc. They draw and sell their own drafts on
these deposit accounts.
(f) Cooperative Bank
This type of bank is organised mutually by the persons of similar
occupations within the objectives of providing banking and credit
facilities to the members. Generally in every country. Government
patronises co-operative banks in order to encourage the cultivators,
fisherman, workers in the factories etc.
(g) Mortgage Bank
Mortgage bank advances long term credits against securities of
immovable properties like, agricultural lands, buildings and machinaries
etc. Generally, credit is give to the agriculturist, small industries or
house builders. This type of bank is essential in an under developed
country where capital supply is very limited. In our country, House
Building Finance Corporation is functioning as mortgage bank providing
long term loans to house builders against securities of building and land
property.
(h) Savings Bank
Such banks provides facilities to people to save money. This type of
bank is established with the objective of promoting the thrift or saving
habits among the people of small incomes. It takes deposits from the
public and lands the collected funds to traders. Depositers are allowed
to withdraw money from their deposits twice in a week. Post offices in
Pakistan carry on functions of saving bank. Of course commercial and
other bank also accept saving deposits.
Q.2. Define Central Bank. State the origin and growth of central bank.
OR
What is credit control, explain the various methods of credit control
followed by the central bank of a country?
Definition of Central Bank
In every country, there is a principal bank who is responsible for
guidance and regulation of the financial system in the country. Such
type of bank is known as Central Bank.
A Central Bank may be defined as
The principle banking institution of a country operating under some
degree of state control and entrusted with the special responsibility of
maintaining economic equilibrium and stability in the prices and in the
over all interest of the country.
Nature of Central Bank
From the above definition we find the following main features of Central
Bank:
1. The Central Bank is the principle banking institution of a country.
2. It is operated under some degree of state control. But in practice,
the structure of central banks vary from country to country. In U.K.
and France, the bank of England and Bank of France are solely owned,
managed controlled by the state on the other hand, Federal Reserve
System, the Central Bank of the U.S.A is owned, managed and
controlled by the private share holders. Of course, there are some
central banks which are owned, managed and controlled jointly by the
Government and the private share holders. e.g., State Bank of Pakistan
before nationalisation 1974.
3. The Central Bank is entrusted with the responsibility of maintaining
economic equilibrium and stability in prices by controlling money supply
and volume of credit with in the country.
4. A central bank does its works not for making profit but in the overall
interest of the country.
5. The central bank is reservoir of credit. All other banks can look to it
for accomodation.
Functions of Central Bank
The central bank is the pivote of all the banking system. The chief
functions of a central bank may be described as follows:
1. Issuing Notes
The central bank has the sole responsibility and monopoly of issuing
notes within the country. It is the sole currency authority. The central
bank is required to keep a certain percentage of gold reserves against
issue of notes. Usually, it keeps 30% to 40% gold as reserve. It
undertakes expansion and contraction of the currency alongwith business
demand. Money supply is raised by issuing notes. On the other hand, it
can decrease money supply by selling government securities. By enjoining
monopoly of note issue it gives uniformity to the system of note issue in
the country.
2. Governments Banker
The central bank acts as a financer of the government of the
government. It is a government banker not only collecting and paying
money on behalf of the government but it also manages the public debts.
It keeps the government funds in the custody free of interest. On the
other hand it gives loans to the government without limitation of amount.
It is the fiscal agent of the government. It helps the government in
designing a fiscal policy for the country so its also plays the role of
financial adviser to the government.
3. Banker's Bank
It acts as the custodian of cash reserves or balances deposited
compulsorily by the scheduled banks. Either by law or custom the
member banks are to keep certain portion of their deposits with the
central bank as reserve. For example in our country the scheduled or
commercial banks are to keep cash reserve with State Bank of Pakistan
to the extent of 5% of their deposits. Central Bank also provides short
term credit to commercial banks by rediscounting first class bills and
other securities. So it plays the role of banker's bank.
4. Management of Gold Standard
Where the currency of a country is on gold standard, it is the
responsibility of the central bank to manage the gold standard in order
to control the stability of exchange rate. It regulates and checks the
movement of gold in the country. The management of gold standard is
not so vital and important these days.
5. Credit Control
It is another important function of central bank. It controls the flow of
credit in accordance with the needs of business in the country. Credit
plays an important role as the medium of exchange, so its expansion or
contractors effects the price level in the country. In order to maintain
stability in the price level, central bank controls the volume of credit.
Usually, it controls credit by changing bank rate, purchasing and selling
securities and by changing reserve rates of the member banks. In this
way central bank attempts to control the volume of credit and stablishes
the business conditions in the country.
6. Clearing House
It is the Clearing House of the bankers. Under this function central
bank of facilitates the settlement of bills and cheques of other banks.
7. Exchange Control
It is the responsibility of the central bank of control foreign exchange
and maintain the rate of exchange. It purchases and sells approved
foreign currencies at the current or fixed rate. It also acts as the
custodian of foreign exchange reserve.
8. Lender of Last Resort
As lender of last resort, it is implicit that the central bank assumes the
responsibility of meeting directly or indirectly all reasonable demands
for accommodation by commercial banks in the times of difficulties and
crises. If any commercial bank faces any serious financial difficulty for
any reason, it is central bank who comes forward to help it.
9. Custodian of National Reserve
The Central Bank acts as the trustee of the entire economy of the
country and thus keeps in its custody all national reserves in form of
gold, silver and securities.
Credit Control
Credit plays an important role in maintaining and changing the price level
as medium of exchange. It is the responsibility of the central bank to
regulate the volume of credit and its direction to maintain stability in
the price level.
Following are the main objectives of credit control by central bank
1. Safe Guarding the Gold Reserves
The central bank adopts various measures of credit control to safe
guard the gold reserves against internal and external drains.
2. Stability in Price Level
Credit control provides stability in price level in the country.
3. Exchange Stability
Another objective of credit control is to achieve the stability of foreign
exchange rate. If the foreign exchange rate is stabilized, it indicates
the stable economic conditions of the country.
4. Stability in Investment and Production
Control of credit by central bank also provides stability in the
investments and production by making price level stable.
'5. Cooperation
Control of credit is done to promote cooperation with other countries for
the purpose of maintaining world economic stability.
Methods Or Techniques of Credit Control
The central bank usually controls the volume of credit through the two
types of methods, quantilative and quantitative.
1. Bank Rate Policy
It is also known Discount Rate Policy. Bank rate is the rate of interest
which is charged by the central bank on rediscounting the first class
bills of exchange and advancing loans against approved securities. This
facility is provided to other banks.
Importance
The bank rate is different than the money market interest rate. The
charges in bank rate are followed by other banks in the country in
changing their interest rate. If the bank rate is raised by central bank,
other rates of money also go up. Conversely, the market rate of
interest and other rates go down, when central bank decreases its bank
rate. These changes effect the supply of and demand for money.
Borrowing is discouraged when the rate of interest increases and
encouraged when the rate decreases.
Effects of Changes in Bank Rate
The changes in the bank rate may cause the following effects.
a. Changes in Deposit Volume
When the central bank increases the bank rate, commercial banks also
increase the rate of interest and consequently the deposits of the banks
also increase. Conversely, when bank rate is decreased the deposits of
commercial bank also decrease.
b. Controls the Borrowings
When the bank rate is raised, the rate of interest and discount of
other banks goes up margin of profit falls and it discourages the
businessmen to borrow money and thus the volume of loans and
discounting of bills is minimised. On the other hand a fall in the bank
rate encourages loans and bill discounting.
c. Changes in the Prices of Shares and Securities
A rise in bank rate makes shares and securities in the market cheaper
and conversely, by a fall in the bank rate, shares and securities
becomes dearer.
d. Changes in the Volume of Speculative Business
A rise in the bank rate restricts the volume of credit and discourages
speculative business. But the volume of speculative business is expended
due to the increase in the credit supply.
e. Changes in the Foreign Trade
A rise in the bank rate encourages export and discourages import. A fall
in the bank rate encourages import and discourages export. When the
bank rate is raised, the demand for home currency goes up and the
demand for home currency falls with in the bank rate.
f. Changes in Balance of Payment
Due to rise in the export trade, a rise in bank rate causes a favourable
balance of payment. But a fall in bank rate causes an unfavourable
balance of payment.
2. Open Market Operation
The open market operation means the buying and selling of securities by
the central bank in order to influence the money and credit supply in the
country. This technique is effective upto some extent in both conditions
of inflation and deflation.
3. Change in Reserve Ration
The member banks of central bank are required either by law or custom
to keep a certain percentage of their deposits with the central bank. It
is called as Cash Reserve Ratio. The central bank may controls credit by
changing the reserve ratio. When the reserve ratio is increased the
member banks to some extent are discouraged to bank money. When
this ratio is falls, the member banks are encouraged to expend credit.
Clearing House
The central bank manages and supervises the clearing house to facilitate
the clearing of cheques between banks. Every banker usually receives
number of cheques drawn on other banks from his customers as
deposits. In other words banks receives cheques drawn on other banks
from their account holders. As a result, there arises inter bank
indebtedness. For example National Bank of Pakistan receives deposit of
cheques worth Rs. 6,000/= drawn on Habib Bank Limited, Habib Bank on
the other hand, receives cheques worth Rs. 5,000/= drawn on National
Bank of Pakistan. Thus National Bank owes Rs. 5,000/= to Habib Bank
and Habib Bank owes Rs. 6,000/= to National Bank.
Inter bank indebtednesses are settle through a central organisation
known as Clearing House. "A clearing house is a general organisation of
banks of a given place, having for its main purpose, the off setting of
cross obligations in the form of cheques. The indebtednesses of the
member banks are settled only by paying the differences. Generally
central bank of the country performs the function of clearing house. In
Pakistan, State Bank of Pakistan performs the duty of clearing house.
Role of Central Bank in Economic Development
The economic stability of a country is solely dependent on the Central
Bank. It is the only financial institution in the country which is
responsible for regulating the banking and monetary system of the
country. The need of a central bank in a country is essentially felt
considering the following services rendered by a central bank for
economic development of a developing country.
1. Capital Formation
Economic progress of a country requires adequate amount of capital.
Capital is required for agriculture, industrial and commercial
development. But in a developing country like Pakistan. It is a chronic
problem to procure capital. Central Bank as a national institution plays
prime role in capital formation in the interest of the nation as a whole.
As the guardian of the money market, it regulates the capital flow in
the country in proper form and suitable time.
2. Credit Control
Credit is one of the most important source of financing trade and
industry. The central bank as the controller of credit can encourage a
particular sector of economy by adopting selective credit control.
3. Developing Banking System
As a guardian of all banks, the central bank works for the development
of banking system of the country.
4. Protecting Interest of the Depositors
The central bank protects the interest of the depositors in banks by
guiding, controlling and checking the member banks operations in the
country.
5. Stability in Prices
The central bank keeps the price level stable in a country by controlling
money and credit supply.
6. Advice to the Government
The Central Bank extends valuable suggestions and advices to the
Government in respect of economic and monetary policies.
7. Personnel Training
The central bank in some countries provides training facilities to the
bank personnel.
Q.3. Discuss the different types of bill.
Definition and Salient Features
According to Negotiable Instrument Act a Bill of Exchange is "An
instrument in writing containing an unconditional order, signed by the
maker directing a certain person to pay on demand or at a fixed or
determinable future time, a certain sum of money only to, or to the
order of a certain person or to the bearer of the instrument.
Thus we find the following important features of a bill of exchange:
1. The order to pay a bill must be unconditional one.
2. The order to pay must be made in writing on the bill.
3. The bill must be signed by the drawer of the bill. Without signature
of the drawer the bill will not be genuine one.
4. The order to pay under a bill must be addressed to a certain person
which, of course, includes ndividuals, firm, company, corporation etc.
5. The amount to be paid under a bill must be certain one.
6. The money under a bill must be paid in legal tender currency.
7. The amount should be payable to or to the order of a specified
person or to the bearer of the instrument.
8. The amount should be payable either on demand or at a fixed
determinable future time.
9. The bill must be duly stamped.
10. The other formalities like dating, stating the names of the parties
concerned etc. must be observed.
Parties to a Bill of Exchange
Following are the various parties related to a bill transaction
a. The Drawer
The person who draws the bill and puts his signature on it is known as
the drawer of the bill. He is also called the "maker" of the bill.
b. The Drawee
The person on whom the bill is drawn is called as the drawee of the bill.
c. The Acceptor
The person who accepts the bill is known as the acceptor of the bill.
Usually, the drawee accepts the bill. But sometimes, a third party may
also accept a bill on behalf of the drawee. The acceptor puts down his
signature across the bill showing his acceptance.
d. The Payee
The person to whom the amount of bill is to be paid is known as payee
of the bill. The drawer may make the bill payable to himself or to any
other person he likes.
e. The Endorsee
The holder of the bill may endorse the bill in favour of someone else
known as endorsee. The person who endorses the bill is called endorser.
f. The Holder
The person who holds the bill and is entitled to realise the amount of
the bill from the drawee is known as holder of the bill.
Types of Bills
Bills may be of the following types:
a. Inland Bills
Inland bill means the bill which is drawn and payable within the same
country. Thus, the bill which is drawn in Pakistan and will also be paid in
Pakistan is termed as an inland bill.
b. Foreign Bill
The bill which is drawn in one country and accepted and payable in
another country is known as a foreign bill.
c. Accommodation Bill
The bill which is drawn and accepted by the parties concerned for their
mutual accommodation with a view to raise money by negotiating it, is
known as an accommodation bill. The parties concerned bind themselves
as the drawer and the acceptor without any valuable consideration.
d. Demand Bill
The bill which is payable "on demand" or "on presentation" or "at sight"
is known as demand bill.
e. Time Bill
The bill which is payable at a fixed or a determinable future time is
known as time bill. The time bill may further be classified as following:
* After Date Bill:
The bill whose tenure is counted from the date of drawing it is known as
after date bill.
* Sight Bill:
The bill whose date of payment is counted from the date of acceptance
is known as after sight bill.
f. Documentary Bill
When a bill is accompanied by shipping documents like, Bill of Lading,
Invoice, Insurance Policy relating to goods against which the bill is
drawn, is then known as a documentary bill.
g. Sent Bill Or Bills for Collection
When bills are handed over to a bander by his customer in order that
they may be collected when due and the proceeds credited to the
customer's account. They are called as Bills for Collection.
h. Bills Negotiated
The bills for which the banker has given the value at once, without
waiting for the proceeds after collection.
i. Bills in Set
When bills of exchange are drawn in two or more parts, they are called
"bills in set". The foreign bills are generally drawn in sets of two or
three. The each of the set is on a seperate piece of paper, but all
parts are worded exactly in the same language except that the parts
are numbered as "The 1st of exchange", "2nd of exchange" etc.
j. Bills Retired
When a bill is withdrawn from circulation or taken back before it is due,
it is known as "retired bill".
Discounting of Bills
A time bill is payable on future date and the holder of the bill is to wait
for a specific period of time to receive the amount of the bill. But the
modern commercial banks are providing the facilitates of discounting of
bill to the holder to have money earlier. For discounting of bill, the bank
purchases the bill from the holder at a reduced rate before maturing of
the bill and receives the amount of the bill from the acceptor on due
date. The reduction in the value of bill at the time of purchase by bank
is known as "discount" and it is charged on the basis of interest rate.
Thus, discounting of bill is a sort of short term credit given to the
holder of the bill by a banker and the discount forms the profit to him.
Discounting of bill very useful from the point of view of traders and
bankers. It benefits the importer, exporter and bankers equally. The
exporter or seller can get immidiate cash as soon as he handed over the
goods to the transporters. The importer or buyer gets enough time to
sell the goods after having received it. The bankers earn a lot by
effecting these transactions.
Precautions in Discounting a Bill of Exchange
Like advancing other loans and credit, discounting of bills also is a very
risky job on the part of the banker. He must be careful and cautious
with discounting the bill of exchange and must take the following
precautions are measures in discounting of bills:
1. He should examine financial standing of the holder and acceptor of
the bill. If the parties concerned have bank accounts with him, the
banker can easily learn their financial stability. If there is no such
account with him, the banker should refer to the bank where they have
got account to know their financial position.
2. The banker is also to examine the financial status of other parties
engaged in the bill.
3. The banker should see whether the acceptor dishonoured any other
bill in past time.
4. Th banker should satisfy himself whether the bill is a bonafied trade
bill which is accepted for value received in course of business. The
banker should, as for as possible, avoid the accommodation bills.
5. The banker should examine the bill whether all the formalities as of
date, stamp, signature etc, have been compiled with.
6. He must see whether the bill is capable of being endorsed. If so, the
banker should see whether the bill is duly endorsed by the payee.
Presentation of Bills
Bill has to be presented first of all before the drawee for acceptance
and again in due date it is to be presented before the acceptor for the
payment. Thus, presentation of bill may be of two types viz,
1. Presentation for Acceptance
2. Presentation for Payment
1. Presentation for Acceptance
Presentation for acceptance is made not only for the acceptance of the
bill but also to fix-up the time, place etc., for the payment. In case of
time bill, where the tenure of the bill is clearly stated, the bill is
presented for acceptance of the drawee to confirm the stipulated time
for payment.
A bill should be presented for acceptance within a reasonable tenure
after the drawing or negotiation of the bill.
2. Presentation for Payment
If refers to presentation of a bill before the draw or acceptor or
before the agent of the drawee or acceptor for the payment of the bill
on due date. The presentation for payment is subject to the following
rules:
* In case of "demand bill", the bill must be presented within a
seasonable time after its drawing or endorsement as the case may be,
* In case of time bill, the bill should be presented for payment on the
due date.
* The bill should be presented for payment during the business hours of
working days.
* The bill should be presented for payment at the proper place. The
term proper place may refer to any one of the following
(i) The place mentioned in the bill for payment.
(ii) Where no specific place is mentioned in the bill, the address of the
drawee or acceptor.
(iii) Where no address is given, of any place where the drawee or
acceptor can be found including his residence.
Q.4. What do you know about the development of banking in Pakistan.
Introduction
Pakistan came into being as a state of Muslims in the Sub-Continent on
14th August, 1947. Pakistani banks follow the British pattern of banking
system (Branch Banking). Before independence, there were 44 banks
having 631 branches in the areas of Pakistan including east Pakistan
(Now Bangladesh) and only 487 offices in the territories now comprising
Pakistan.
At the time Pakistan was producing food grains and other agricultural
raw material exports. There were particularly no important industries
and agricultural produces were mostly being exported. However
commercial banking facilities were provided fairly well here. But shortly
after independence, the number of banks and their branches as the
Hindu bankers migrated to India from Pakistan. In addition majority of
Hindus residing in the territories now constitute Pakistan started
transfering their assets to India. By 30th June, 1948, the number of
offices of scheduled banks in Pakistan declined from 487 to only 195.
Then this country faced a great banking crices.
There were 19 non-Indian foreign banks with the status of small branch
offices which were engaged financing of exports of Pakistani crops.
There were only two Pakistani banks i.e., Habib Bank which transfered
its office from Bombay to Karachi and The Australasia Bank which was
in existance in the Pakistani territory. There was a panic of uncertain
economic future which shook the confidence of the people. The
Government, therefore, promulgated the Banking Companies Ordinance,
1947, to safeguard the interest of both the bankers and the public.
Under the prevailing critical situation at that time the Father of Nation
Hazrat Quaid-e-Azam Muhammad Ali Jinnah and his fellows in the
Government felt much the need of sound was taken and the State Bank
of Pakistan was established on 1st July, 1948.
After the opening the State Bank of Pakistan took initiative for the
development of banking system. Many new commercial banks were
established and they increased the number of their branches day by
day. For the growth and development of agricultural and industrial
sector specialized banks and other financial institutions were also setup
and now the network of bank branches covers a very large segment of
national economy. By June 1988 the number of bank branch office has
increased to more than 7100 which are spreaded over in every nook and
corner of Pakistan.
Nationalization of Banks
The Government of Pakistan nationalized all the Pakistani banks on June,
1974. The ownership, management and control of these banks stood
transfered to and vasted in the Federal Government. The shareholders
were compensated by 15 years Federal Government bonds.
By December 31, 1973, there were 14 scheduled Pakistani commercial
banks with 3323 offices all over the country and 74 offices in foreign
countries. Inspite of this tremendous growth and development of
commercial banks and their prominent role of financing in the country's
economy, it was felt that these banks failed to ensure that the
resources flow in those sectors of economy where they would produces
goods and services needed badly by a very large number of people in
Pakistan. Therefore the nationalization of banks was considered
necessary. On January 01, 1974, Pakistani Banks were nationalized
under the bank (Nationalization) Act, 1974, with following objectives.
1. To provide the fair distribution of credit. All the sector of economy
will enjoy the credit facility.
2. The encourage and stimulate the effective nationalization of savings
in the country.
3. To provide social justice in the country by proper allocation of credit
and financial resources to different classes of the society.
4. To enable the Government to use the capital concentrated in the
hands of a few rich bankers for the repaid economic development of the
country and the more urgent social welfare projects.
5. To co-ordinate the banking policy in various areas of feasible joint
activity without eliminating healthy competition among banks.
According to section 5 of this Act the State Bank of Pakistan;
Industrial Development Bank of Pakistan, The Punjab Provincial
Cooperative Bank and all commercial banks incorporated in Pakistan and
carrying banking business in Pakistan or abroad have been nationalized
and the number was brought down to five.
Banking Council
For coordinating the planning and operations of banks and monitoring the
cost of operation the Pakistan Banking Council was set up under section
9 of the Bank (Nationalization) Act 1974.
The nationalized banks made good progress in expending the banking
services in the nooks and corners of Pakistan despite very low level of
domestic savings and heavy dependence on foreign borrowings. The
number of branches which stood at 3397 on December 31, 1973,
reached about more than 7,000 by June, 1988. Similarly, the bank
deposits which stood at 1925 crores of 1973 reached the high mark of
Rs. 23,867 crores by June, 1988.
Organization of Pakistani Banking
Pakistani banking system was expended remarkably and it can be
compared with banking system of any developing country of the world.
At present the banking structure in Pakistan comprises of the following:
1. Central Banking
State Bank of Pakistan is the central bank of the country with its
offices at Karachi, Hyderabad and Sukkur in Sindh; Rawalpindi, Lahore,
Faisalabad, Gujranwala, Sialkot and Multan in Punjab; Peshawar in
N.W.F.P and Quetta in Balochistan. Central Office is located in
Islamabad.
2. Commercial Banking
Commercial banks have been the most effective mobilizors of savings and
have been providing short term requirements of working capital to trade,
commerce and industry. After nationalization commercial banks have
been providing short term finance to agricultural sector also.
After the nationalization in 1974 all the 14 commercial banks were
reorganized and merged into the following five banks:
* National Bank of Pakistan
* Habib Bank Limited
* United Bank Limited
* Muslim Commercial Bank Limited
* Allied Bank of Pakistan Limited
The other banks were merged in these banks. Bank of Bahawalpur was
merged with the National Bank of Pakistan; Habib Bank (Overseas)
Limited, and Standard Bank Limited were merged with Habib Bank
Limited; Premier Bank Limited with Muslim Commercial Bank Limited;
Commerce Bank Limited with United Bank Limited and Sarhad Bank
Limited and Pak Bank Limited with Australasia Bank Limited and renamed
as the Allied Bank of Pakistan Limited.
3. Exchange Bank
Foreign bank generally have been engaged in financing the foreign trade
but they are fully authorised to discharge normal banking functions
including the acceptance of deposits from public. At present there are
eighteen foreign banks with 64 branches. They are located in Karachi
and other commercial cities of Pakistan. The State Bank of Pakistan
does not allow them to open branches in small towns in the interior of
the country.
4. Savings Banks
Post Office Savings Bank is the only Saving Bank in the country. It is
controlled by the Government of Pakistan. It accepts deposits from
public and invest them in various Government projects.
5. Co-operative Banks
Generally there are three systems of cooperative banking in Pakistan.
They consist of primary cooperative societies at the base; Central
Cooperative Banks and Banking Unions in the middle and Provincial
Cooperative Banks at the top. There are four Provincial Cooperative
Banks, one each in Punjab, Sindh, N.W.F.P and Balochistan; 52 central
cooperative banks and Banking Unions and above 28,000 primary
Agricultural and credit societies.
These cooperative banks are integrated taking a very active part in the
promotion of thirft, self help and mutual aid among agriculturalists and
others with common economic needs as as to bring about better living,
business and production.
6. Specialized Financing Institutions
These institutions are Government sponsored corporations. The main
objective of these institutions is to stimulate the development of
country's economy by providing capital resources and technical advice to
industrial and commercial and agricultural sectors. They provide long
term and medium term credit to these sectors.