INTRODUCTION TO BANKING

The banking system is a lifeline of an economy and as it plays very important role in
the development of any country. Banking sector have a significant influence in
supporting economic development through financial services. A bank is an institution
which accepts deposits and lends advances. It accepts deposits from general public
and institutions and lend money to the eligible investors for productive purposes.
Protection of deposited money of people is the major responsibility of banks.
A general definition of a bank is “Bank is an institution which gets loans to lend and,
in this way, creates credit”. A bank is an intermediate party between the borrower and
lender. It borrows from one party and lends to another”. Generally, a bank performs
the following functions:
i.Acceptance of deposits.
ii.Advancement of loan.
Banking plays an important role in economic growth of any country. Major
Development for a country depends on banking sector as bank maintain the currency
value and stability of foreign exchange. People trust banks and deposit their surplus
money in bank accounts which banks used it for investment and making loans to
needy.
Functions of Bank:
i. Acceptance of deposits:
Banks accepts money from the people in the form of deposits which are usually
repayable on demand and pays interest on deposited money after specific time period.
ii. Advancing money:
The funds collected as deposits are then given as loan to the businesses and
individuals as per their requirements.
iii. Discounting and Collecting negotiable instruments:
Banks discount and collect negotiable instruments on behalf of the customers. If a
creditor wants money immediately and has a bill of exchange, the bank gives his
money by discounting the bill of exchange. The banker deposits the amount of the
bill in the current account of bill-holder after deducting the rate of interest.
iv. Agency Services:
The agency services include transfer of funds from one account to another, regular
periodic payments, collecting cheques, managing investment accounts etc. The banks
charge fee to their clients for performing these services.
KINDS OF BANKS

Primarily all banks gather temporarily idle money for the purpose of lending to others
and investments which bring gain in the form of return, profit and dividends etc.
However, due to the variety of resources of money and the diversity in lending and
investment operations, banks have been placed in various categories, such as
commercial banks, savings banks, merchant banks, mortgage banks, consumer banks,
investment banks, development banks, cooperative banks, eximp banks, Riba Free
(Islamic) Banks and central banks etc.

1. Central Bank:
Central bank does not deal directly with general public but acts as regulator of other
bank. Its main function is to regulate the monetary policy and to control the working
of all commercial bank for the proper regulation of monetary and economic policy. A
central bank has sole authority of issuing currency. Central banks occupy unique
position in the banking structure of a country because they have been entrusted with
the responsibility of controlling the money supply, interest rates and financial market
of the country for the purpose of economic development. State Bank of Pakistan,
Bank of England and Federal Reserve Bank of U.S.A. are well known central banks.
2. Commercial Bank:
A commercial bank main objective is to earn profit by lending to the eligible
businesses. Bank receives deposits from people and pay interests and lends apportion
of those deposits to the people who need it and charge high interest. Commercial
banks also perform functions like collecting cheque, safe locker, transfer of money.
3. Industrial Bank:
These banks are established for the promotion of industrial sector of country. Provide
loan for the setup of new industries or the extension of already existing industries.
Industrial development bank of Pakistan (IDBP) is an example of the industrial banks
in Pakistan.
4. Mortgage Bank:
These banks provide financing for buying property i.e. houses, flats, shops, etc. on
installment basis and charge interest on them. House Building Finance Corporation
(HBFC) is the major example of mortgage bank in Pakistan. These banks mainly deal
in loans for the acquisition or construction of real estate against the security of
mortgages.
5. Investment Bank:
Investment bank is a bank which deals in sale and purchase of securities ( stock, bonds)
and financing long term projects. These banks work mainly in the capital markets for
facilitating customers for buying securities.
6. Agriculture Bank:
Agriculture banks are formed for the development of agriculture sector by providing
finance for the purchase of machinery and other tools. Zarai Tarqiati Bank of Pakistan
is working as agricultural bank in Pakistan.
7. Foreign Bank:
Foreign bank are owned by foreign based shareholders and they provide services in
another country.
8. Domestic Bank:
These are owned by local shareholders and provide services in their own country of
origin as commercial or other type of bank.
9. Saving Bank:
These banks are established for collecting saving through collection of money that is
lying idle with people. Directorate of National Savings is working in Pakistan on this
pattern for promoting savings. The basic purpose of these banks is to inculcate the
habit of savings in the people. The savings bank deposits are not repayable upon only
the written orders of the depositor but the depositor or his agent has to appear
personally at the saving bank to make withdrawal, and for this purpose he must
present a pass book, a certificate of deposit or some similar documents to prove his
right to receive payment. Post Office Savings Banks and Savings Account at National
Saving Organization are well known operational Savings Banks in Pakistan.
10. Cooperative Bank:
These banks are formed to facilitate the small farmers or workers to increase their
income level. Usually, governments support these types of banks by providing
subsidized credit. These were the banks established and registered as a cooperative
venture to provide banking facilities to the members of the cooperatives. In Pakistan,
the Federal Bank of Cooperatives was such a bank, but now it has been merged with
Zarai Taraqiati Bank.
11. Merchant bank:
Merchant banks are those which have been mainly financing the domestic and
international trade in United Kingdom. During the late eighteenth and early
nineteenth centuries the trade between countries was financed by bills of exchange by
well reputed merchant houses for which they would charge a commission for their
service. Thus the business of accepting bills of exchange to finance the trade
developed and gradually these business houses entered into other banking activities
and became known as "merchant banks". Since all the commercial banks, in addition
to other banking functions, also deal with trade financing, the term 'merchant banks'
has gradually faded away.
12. Consumer Banks
These banks provide finance for purchasing consumption goods for the use of the
borrowers. Consumer, finance companies, sales finance companies and credit unions
are some of the popular forms of consumer banks.
13. Development Banks
These banks have been established to provide long term development finance to trade,
commerce, agriculture and industry. In Pakistan they are generally government owned
banks, established under a specially promulgated law. Zarai Taraqiati Bank of
Pakistan, and Industrial Development Bank of Pakistan are very well-known
development banks.
14. Eximp Banks
These are the banks which provide finance to trade, commerce and industry for
promotion of imports and exports trade. These bank are contributing greatly towards
the expansion of international trade of developed countries, where they function
mainly in private sector.
15. Small and Medium Enterprise Banks. (SME Banks)
SMEs have assumed great importance in the developing counties in recent years.
Though they contribute very greatly to trade, commerce and industry yet they have
difficulties in raising capital for them. Keeping all these issue in view SME Banks
have been established in Pakistan to cater to the financial needs of these enterprises.
The SME Banks are providing basically short term working capital to the small and
medium enterprises in Pakistan.
16. Riba Free (Islamic) Banks
It is a banking system based on Islamic principles and laws called Shariah. It is a new
system introduced in 1981 and it is growing rapidly. Currently this system is being
practiced in 46 countries including Pakistan where it is growing very fast. There are
five specialized banks in Pakistan which are exclusively providing Sharia-compliant
products,