role of banks in 21st centruy

Role of Banks in 21st CentruyThe commercial banks are now not confined to local banking. They are fast changing into global banking i.e, understanding the global customer, using latest information technology, competing in the open market with high technology system, changing from domestic banking to investment banking etc. The commercial bank are now considered the nerve center of all economic development in the country.

1Com-721 Operations of Banks & Financial Institutions-UAF

Efficiency of a Good Bank

The efficiency or performance of a commercial bank is judged as to how it manages its assets & liabilities in order to earn highest possible profit. In technical term, we can say that the efficiency of a bank is judged from its Portfolio Management. A manager while managing the assets and liabilities of a bank has the following four main concerns.


Concerns of a banker

The main concerns of a banker are as under:1.Liquidity Management:

Liquidity means the relative ease and speed with which an asset can be converted into cash. The banker has to keep the portion of its total deposits in the form of cash or in the form that can be easily & quickly converted into cash to pay its depositors on demand. The liquidity is necessary for maintaining confidence of the depositors of the bank.


2. Asset Management:Another important consideration

for an efficient banker is to minimize the risk of default or the failure of the borrower to repay the loan. The risk of default can be reduced by investing in assets which have a low rate of default. The loans should be given to a large number of individuals or businesses and not a few. The diversification of loan advances keeps the assets of the bank safe and secure.


3. Liability Management:Liability mangement is an important

concern for an efficient banking. A prudent banker should try to acquire funds from money market at low cost. They should not depend on current deposits as the primary source of bank funds. Instead they should aggressively set target goals for their assets growth. For example, the funds can be acquired from loan markets which involve lesser transaction costs.


4. Managing Capital Adequacy:An efficient banker must decide the

amount of capital he needs and then make efforts to acquire the needed capital at minimum possible cost.


Features of an Efficient BankWhile managing the assets and liabilities for

attaining highest possible profits banker has to keep in mind the four words:

Safety Greater Liquidity Depositor’s Confidence Maximum Profitablity


The bank’s needs for liquidity, solvency and profit are competitive in nature. For example, the bank assets that provide maximum liquidity generate little or no income. An efficient banker, has to strike a nice balance between liquidity of funds and profitablity of investement. If he succeeds in achieving this objective, the bank will regarded as efficient bank.


In the words of Crowther, “The secret of success of a bank is not on the availablity of more and more funds but on employment of funds in a manner in which it maintains a stable balance between liquidity and profitbility.


Classification of BanksBanks can be classified into various types on the basis of their functions, ownership, domicile , status etc. The main types of banks in Pakistan are as under:

A) Classification on the basis of functions: 1.Central Bank:

Every civilized country now has its own central bank. The primary function of the central bank is to regulate the flow of money & credit in order to promote efficiency, stability and growth in the country.


The central bank of any country has only the authority to issue currency notes. The State Bank of Pakistan, the Reserve Bank of India, the Bank of England, and the Federal Reserve System of America are the names of some of the Central Banks of different countries.

2.Commercial Banks:Commercial Banks are those banks

which are engaged in performing the routine duties of banking business. They conduct their business purely on profit motive. The main


Function of a commercial bank is to accept deposits from those who have surplus funds and lend on interest to those who require funds. Commercial banks also manufacture credit money. They also provide agency services and general utility services. The banks, in short are considered the lifeblood of the economic society. The National Bank of Pakistan, the Habib Bank Limited, the Muslim Commercial Bank Limited, the United Bank Limited etc are performing the functions of Commercial banks in Pakistan.


3. Exchange Bank:The exchange banks are those

specialized banks which carry on foreign exchange business. Foreign trade transactions are settled through these banks because they mainly deal with international trade. These banks take the resonsibility of settlement of foreign exchange and arrange the foreign business. In Pakistan some of the commercial banks are autorized to conduct foreign exchange business. Some foreign banks like


Grindlay Bank Ltd, the Standard Chartered Bank Ltd are functioning as exchange banks in Pakistan.

4.Saving Banks:The principle aim of saving banks is to

collect and pool together the scattered savings of the community. They are called thrift promoting instituions. The saving banks invest the funds in the safest government securities. Commercial banks, post offices and saving centers perform the functions of saving banks in Pakistan.


5. Agricultural Banks:Agricultural banks are set up to

provide financial assistance to the agriculture sector. The agriculture banks provide short term credit to the farmers for the purchase of seeds, fertilizers etc. They also make medium term advances for buying tractors and introducing modern techniques in farming. In Pakistan Agricultural Development Bank of Pakistan was set up in 1981 for meeting the financial requirement of agriculture.


Zarai Taraqiati Bank of Pakistan, the Federal Land Bank of America and the Agricultural Mortage Corporation in England are the examples of agricultural banks.

6. Industrial Banks:Industrial banks are those which

provide the medium term & long term credit to the industries. The leading countries of the world have separate industrial banks to provide industrial finance. Industrial Development Bank of Pakistan was established in 1961 to provide


financial assistance for the promotion of industries. The Industrial Bank of Japan, the Industrial Mortgage Bank in Finland, Industrial Development Bank of India (IDBI) and the Industrial Development Bank of Pakistan are the examples of Industrial banks.

7.Investment Banks:Investment banks purchase and sell

shares, bonds and securities. They assist joint stock companies and government bodies to raise money through the sale of shares and bonds. They also act as underwriters for new companies. Investment banks also perform the


usual banking functions for receiving deposits and advancing loans. Investment Corporation of Pakistan (ICP) and National Investment Trust (NIT) are serving as investment banks in Pakistan.

8.Mortgage Banks:These banks provide loans to people

against their movable & immovable property. Generally, they pledge or mortgage movable property in form of gold, silver and financial doucments and immovable property like house, shop & land etc.


Mortage bank is helpful to buy and develop lands. These loans are generally granted to agriculture. House Building Finance Corporation (HBFC) is working as mortgage bank in Pakistan to provide funds for house building.

9.Consumer Banks:These banks are established to facilitate

the consumers for purchasing consumer goods. Normally, these loans are termed as productive loan. There is no consumer bank in Pakistan.


The commercial banks are performing the functions of consumer banking.

10.Islamic Banks:A banking system that is based on the

principles of Islamic law (also known Shariah) and guided by Islamic economics. Two basic principles behind Islamic banking are the sharing of profit and loss and, significantly, the prohibition of the collection and payment of interest (Riba). Collecting interest is not permitted under Islamic law. Meezan Bank, Alfalah Islamic Bank, Faysal Al-Barkat islamicBank etc.


11.Micro-Finance Banks:The main objectives of micro-finance

banks is to provide small loans to small traders, the loans are granted for short term & medium term. In Pakistan Khushhali bank, Tameer Bank,

Waseela Bank, FINCA Microfinance Bank (Kashf Microfinance Bank) are the examples of such type of banks in Pakistan.


B) Classification on the basis of ownership:The banks are classified, on the basis of

ownership into three categories i.e: (i)Public sector banks (ii) Private sector banks (iii) Cooperative banks.

1.Public Sector Banks:The banks which are owned and

controlled by the governement of a country are called public sector banks. For example National Bank of Pakistan Ltd, First Women Bank Ltd etc.


2. Private Sector Banks:The banks which are owned and operated

by the private sector are called private sector banks. For example, Bank Al-Habib, Bank Alfalah, Silk Bank, JS Bank etc.

3. Cooperative Banks:The banks which are established and

controlled under Co-operative Societies Act are called co-operative banks. In Pakistan these banks are set up under the Co-operative Society Act 1925. These banks provide loans and are


Very essential for imporving the conditions of rural agriculturists and small procedures. They are not profit making institutions. The Federal Co-operative Bank, Punjab Provincial Cooperative Bank Ltd, Sindh Provincial Cooperative Bank Ltd, KPK Provincial Cooperative Bank Ltd, Baluchistan Provincial Cooperative Bank Ltd are the examples of Co-operative banks in Pakistan.


C) Classification on the basis of domicile:The banks are divided on the basis of

domicile into two categories;1.Domestic Banks:

The banks which are registered and incorporated within the country are called domestic banks. These banks provide financial assistance domestically. In Pakistan the banks registered under Pakistan Companies Ordinance 1984 and regulated under Pakistan Banking Company Ordinance -1962 are called domestic


banks. HBL, UBL, MCB, NBP, Askari Bank are the example of domestic bank.

2.Foreign Banks:The banks which have their origin and

head offices in the foreign country are called foreign banks. Foreign banks are the branches of banks incorporated abroad. The Standard Chartered Bank Ltd, HSBC, Barclays Bank Ltd etc are some examples of foreign banks.


D) Classification on the basis of Status:The banks are divided on the basis of

status into two categories;1.Scheduled Banks:

A bank which are registered in the list of central bank. They are bound to follow the instructions, prudential regulations and policies of the central bank. Schedule banks should co-operate with central bank in making its monetary policy successful. A scheduled bank may be commercial bank, industrial bank,


agricultural bank or an exchange bank. ABL, HBL, MCB etc are the examples of these banks in Pakistan.

2. Non-Scheduled Banks:These are the banks which are not

registered in the list of central bank. They are not bound to follow the instruction & policies of central bank. Such banks does not require to maintain any balance with the central bank or satisfy other requirements. Al-Faysal Investment Bank and Franklin Investment Bank etc are the examples in Pakistan.


role of banks in 21st centruy

Education

bank assets

commercial banks

efficient banker

liquidity of funds

liquidity management

role of banks

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