commercial bank prepared by: kamran

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.

• The other point of view is that it has originated from the German word banc which means a joint stock firm.

The earliest stage in the growth of banking can be traced to the working of merchants, these were traders in commodities. The trading activities were carried on by them from one place to another. It was risky for the traders to carry metallic money with themselves for payment. The traders with high reputation began to issue receipts or letters which were accepted as titles of money, the merchant banking thus forms the earliest stage in the evaluation of modern banking.

The second stage in the growth of banking is normally traced to earlier goldsmiths. These goldsmiths also called seths in India used to receipts gold & silver for safe custody. The goldsmiths began to issue receipts for metallic money (gold & silver) kept with them. These letters converted to notes with the passage of time on demand. Thus the goldsmiths, can be termed as the fore-runners of the modern notes.

The third stage in the development of banking arose when the goldsmiths/lender became the money lenders.

By experience the goldsmiths (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 & the rest they could easily lend.

Most of them allowed overdraft facilities, there was then too much confusion in the banking system.

The first central bank was formed in Geneva in 1578.

Bank of England was established in 1694. The modern commercial banking system

actually developed in the nineteenth century. with the passage of time the scope of

commercial banks have greatly increased. They now deal with large number of matters such as obtaining funds, advancing loan to businesses, farmers, households etc

A Bank is an institution which deals with money ….

Commercial banks receives deposits and advances loans to earn maximum profits.

“A bank collects money from those who

have it spare or who are saving it out of their incomes and advances it to those who requires it.

”Crowther”

Commercial bank accepts deposits from individuals, firms and companies at a lower rate of interest and gives it at higher rate of interest to those who need them.

The difference between the terms at which it borrows and those at which it lends forms the source of its profit.

1:Receiving Deposits 2:Lending of Money 3:Custodian of Valuable Properties

4:Transfer Facilities 5:Creation of Safest Medium of Exchange.

The 1st important function of a bank is to accept deposits from those who can save but can not make profitable use of their savings themselves.

The bank maintain the following three types of accounts

A. Current Account B. Fixed or Term deposit account C. Saving Deposits

Current account ….is the one where

money is constantly being drawn out and put in.

Since the money is withdraw able at any time by the customer, therefore the bank do not pay interest on current deposits.

Current account holders receive a cheque book and regular statements containing details of money paid in and paid out.

Fixed or Long term deposits are kept with the banks for a specified period of time. The rate of interest on fixed deposits are high.

The longer the period of deposit, the higher is the rate of interest.

These deposits are repayable only after the expiry of that period for which it is deposited.

Saving account is generally opened by persons of small income. The banks pay interest on this type of deposits.

However, the banks normally place restrictions on their frequent withdrawal.

The lending of money may in any of the following forms.

1. Loans 2. Overdraft 3. Discounting of bills

The commercial banks grant short and long term loans to individuals, firms and companies mostly against securities like guaranties.

The bank allow the facility of over drafting to their reliable and well established customers.

The permission to draw over and above the money actually deposited by the customers is the most easiest method opened to the borrower.

The bank charges interest on the extra money which borrower take from the bank.

A very important function of the modern banks is to discount bills of exchange .If any bill of exchange is presented before the bank, the bank makes cash payments after deducting its commission according to the date of maturity of that bill of exchange.

A bill of exchange is playing an important part in the commercial life of the country. The need for it arises where the buyer of goods needs a period of credit before paying it.

It is drawn by the creditors and is accepted by debtor.

According to Muller, A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time, a sum certain in money to or to the order of a certain person or to bearer.

$8,000 Kabul May 17, 2008 Stamp Two months after date pay to Mr Kamal

or his order the sum of Dollar 8,000 only, for value received.

To Rashid Ahmad Jalal Abad Hamid Zafar Afghanistan Signature

(i) Drawer: The drawer is the person who draws the

bill. He is the person who orders to pay a certain sum of money (In the specimen of the bill Hamid is drawer of the bill)

(ii) Drawee: He is the person on whom the bill is

drawn. He is the person who is ordered to make payment of the bill (In the specimen of bill Rashid Ahmad is the drawee of bill).

(iii) Payee: He is the person to whom money is directed

to be paid. He gets the payments of the bill. (In the specimen of bill Kamal Akmal is the Payee of bill).

People can deposit their valuable documents, ornaments, bonds etc for safe custody with banks…

Lockers are available for this purpose in the banks.

Bank help to transfer money from one place to another place.

This is done through cheque…. Types of cheques ….. 1=Cross cheque……… 2=Demand cheque….

Banks creates the safest medium of exchange and it performs this function through cheques.

Cheques are safe in a sense that they are able to represent a very high value with just one piece of paper.

Credit creation is the multiple uses of current deposits…

“Bank keep a small portion of deposits and advance a major portion to the borrowers”.

It is one of the methods used by the central bank with the help of commercial banks in the country.

Commercial banks maintain a fixed ratio with the central bank. lets say it is 20%

New deposits Demand deposit Loans

1000 200 800

800 160 640

640 128 512

512 102.4 409.6

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- - -

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5000 1000 4000

Assets liabilities

Cash 200

Deposits 1000

Loans 800

Balance 1000

Balance 1000

We can classify banks on two basis……

A: Classification on the basis functions………

B: Classification on the basis of ownership…

1: Central Bank.. It is responsible for the security , stability

and promotion of economic and financial condition of a country. Every country has its own central bank like…. Bank of Afghanistan.

2: Commercial banks.. Main functions are receiving deposits and

advancing loans involving in almost every sector.

3: Saving Banks.. Saving banks are mainly for promoting saving of the public. 4: Agricultural Banks.. Agricultural banks are set up to provide financial assistance

(loans) to the agriculturalists.

5: Industrial banks.. The industrial banks mainly provide,

medium and long term loans to the industries.

1: Public sector banks.. These are owned and controlled by the

government like …..Afghan mili Bank. 2: Private Sector banks.. These are owned by private people and not

the government like …..Kabul Bank.