Banking Essay

A bank is a financial institution where customers can save or borrowmoney. Banks also invest money to build up their reserve of money. What they do is regulated by laws. Those laws differ in different countries. The people who work at a bank are called bank employees. Certain banks deal directly with the public and they are the only ones which an ordinary person will deal with. Other banks deal with investments and international currencytrading.

Customers' money may be placed in the bank for safe keeping. Banks may give loans to customers under an agreement to pay the bank back at a later time, with interest. An example is getting a mortgage to buy a house or apartment. Banks also can use the money they have from deposit accounts to invest in businesses in order to make more money.

In most countries the rules for banks are made by the government acting through laws. A central bank (such as the Bank of England) adjusts how much money is issued at a particular time. This is a factor in the economy of a country, and the government takes the big decisions. These "banks of issue" take in, and issue out, coins and banknotes.

History[change | change source]

The word bank comes from an Italian word banco, meaning a bench, since Italian merchants in the Renaissance made deals to borrow and lend money beside a bench. They placed the money on that bench.

Elementary financial records are known from the beginning of history.[1] Baked clay records were done before the invention of writing.[2]

In the 17th century, merchants started storing their gold with goldsmiths in London. The goldsmiths had their own vaults, and charged a fee for storing the merchants' gold. The goldsmiths eventually started loaning money using the gold left to them, and also paid interest on the gold.

The Bank of England began issuing banknotes in 1695. The oldest bank still in existence is Monte dei Paschi di Siena in Siena, Italy, which started in 1472.

Banking activities[change | change source]

A bank usually provides the following services:

Types of banks[change | change source]

  • Community development bank: regulated banks that provide financial services and credit to under-served markets or populations.
  • Land development bank: The special banks providing long term loans are called land development banks, in the short, LDB. The history of LDB is quite old. The first LDB was started at Jhang in Punjab in 1920. The main objective of the LDBs are to promote the development of land, agriculture and increase the agricultural production. The LDBs provide long-term finance to members directly through their branches.
  • Credit union or Co-operative bank: not-for-profit cooperatives owned by the depositors and often offering rates more favorable than for-profit banks. Typically, membership is restricted to employees of a particular company, residents of a defined area, members of a certain union or religious organizations, and their immediate families.
  • Postal savings: savings banks associated with national postal systems.
  • Offshore bank: banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks.
  • Savings bank: focuses on accepting savings deposits and paying interest on deposists.
  • Building society and Landesbanks: institutions that conduct retail banking.
  • A Direct or internet-only bank is a banking operation without any physical bank branches, conceived and implemented wholly with networked computers.

References[change | change source]

  1. ↑Mesopotamia of 8000 BC.
  2. ↑Davies G. & Bank J.H. 2002. A history of money: from ancient times to the present day. University of Wales Press.

The role of banks in economic development is to remove the deficiency of capital by stimulating savings and investment.

A sound banking system mobilizes the small and scattered savings of the community, and makes them available for investment in productive enterprises.

In any plan of economic development, capital occupies a position of strategic importance. No economic development of sizable magnitude is possible unless there is an adequate degree of capital formation. A very important characteristic of an under-developed economy is deficiency of capital which is the result of insufficient savings made by the community. Backward economies hardly save 5% of the national income, whereas they should save and invest at least 15%.

In 1950, Colin Clark, estimating the capital needs of China, India and Pakistan, pointed out that they must save 12.5% of the national income to absorb the increasing labour force and maintain the past rate of increase in productivity.

In the under-developed countries, not only is the capital stock extremely small but, as pointed out above, the current rate of capital formation is also very low. The serious capital deficiency in under-developed countries is reflected in the small amount of capital equipment per worker and in limited knowledge, training and scientific advance.

These are serious handicaps in economic development and here the banks can play a useful role:

The role of banks in economic development is to remove the deficiency of capital by stimulating savings and investment. A sound banking system mobilizes the small and scattered savings of the community, and makes them available for investment in productive enterprises.

In this connection, the banks perform two important functions:

(a) They mobilize deposits by offering attractive rates of interest, thus converting savings,, which otherwise would have remained inert, into active capital.

(b) They distribute these savings through loans among enterprises which are connected with economic development. In this way, they promote the development of agriculture, trade and industry.

It is difficult to see how, in the absence of banks, could small savings be stimulated or even made possible. It is also difficult to see who would distribute these savings among entrepreneurs. It is through the agency of the banks that the community’s savings automatically flow into channels which are productive.

The banks exercise a degree of discrimination which not only ensures their own safety but which makes for optimum utilization of the financial resources of the community. We see that in India the period of economic development has coincided with a phenomenal increase in bank deposits—and bank offices.

Thus, the banks have come to play a dominant and useful role in promoting economic development by- mobilising the financial resources of the community and by making them flow into the desired channels. The Indian banks are now playing a very active role in fostering economic development of the country.

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