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The U
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ROLE AND FUNCTIONS OF COMMERCIAL BANK
Group Members
=> Muhammad Waqas Malik
The U
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The U
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DEFINING COMMERCIAL BANK
Kinley: says“A bank is an institution which receives deposits
and advances loans.” Kent: says
“An organization whose principal operations are concerned with the accumulation of temporarily idle money of the general public for the purpose of advancing it to others for expenditure.”
According to Cairncross:“Bank is a financial intermediary dealer in loans
and debts.”
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The U
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BANKING COMPANIES ORDINANCE 1962
“Banking means that, acceptance of deposits for the purpose of lending or investing the
deposits of money from the public repayable in demand or otherwise and withdrawable by
cheque, draft order or otherwise.”
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THE CONCEPT OF COMMERCIAL BANK
It is an institution which accept deposits, make business and personal loans, and offer related services.
Commercial banks also allow for a variety of deposit accounts, such as current a/c, saving a/c, and time deposit accounts.
These institutions are run to make a profit and owned by a group of individuals.
While commercial banks offer services to individuals, they are primarily concerned with receiving deposits and lending to businesses.
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COMMERCIAL BANKS IN PAKISTAN
On Jan 1, 1974, the government of Pakistan decided to nationalize the Pakistani Scheduled Banks. The banks nationalization act was promulgated in order to enable the government to use the economic wealth concentrated in the banks for the macro-economic development and prosperity. Afterwards in accordance with section 15 of the banks nationalization act 1974 the Pakistan banking council forwarded a plan for the reorganization of banks. As a result of this the banks Amalgamation scheme was notified. This process of amalgamation finished on 30th June 1975. Under this scheme, the small banks were merged with the bigger ones forming the following 5 unsolicited banking units.
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MUSLIM COMMERCIAL BANK LTD
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HABIB BANK LTD
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UNITED BANK LTD
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ALLIED BANK LTD
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NATIONAL BANK OF PAKISTAN
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COMMERCIAL BANKS IN PAKISTAN
Afterwards:With a view to deregulate and liberalization of banking, trade and commerce, the govt. of Pakistan adopted the policy of privatization of commercial banks Nationalization (2nd Amendment) ordinance 1991 was promulgated. As a result MCB was first disinvested in two phases and Allied Bank of Pakistan was sold to the employees of the bank.
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FUNCTIONS OF COMMERCIAL BANK
The functions of commercial bank can be classified as follows:
I. Primary Functions.II. Secondary Functions.
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PRIMARY FUNCTIONS
The primary functions include those functions which form the basis of commercial bank operations. These functions are central in nature and are the core of the whole operations of the bank.
Primary functions includes the following:a) Acceptance of Deposits.b) Advancing of Loans.
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PRIMARY FUNCTIONS
a) Acceptance of Deposits: Its the fundamental function of a commercial
bank all other functions are based upon this function.
Banks accept deposits from those who have surplus money, but are unable to use it in a profitable way.
The commercial bank provide an opportunity to general public to make good use of their savings by depositing them.
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PRIMARY FUNCTIONS
In order to attract general public and to persuade people to deposit money in bank, three different types of accounts are maintained by commercial banks:
1. Current Account2. Saving Account3. Fixed Account
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PRIMARY FUNCTIONS
1. Current Account: Current account is one where the depositor is
allowed to withdraw his amount any time he wishes. Normally the traders and merchants keep such accounts with commercial banks.
This makes it possible for them to deposit or withdraw money at their ease. As the amount can be withdrawn at any time that’s why the bank does not pay any interest on such accounts.
Current accounts are also called as demand deposit accounts.
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PRIMARY FUNCTIONS
2. Saving Account: Saving accounts are helpful for those people
who have low level of incomes and savings. Saving accounts help in the mobilization of
the savings of low income people. The amount from this account can be
withdrawn subject to certain terms and conditions of the bank. A nominal rate of interest is paid by bank in such accounts.
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PRIMARY FUNCTIONS
3. Fixed deposits: Fixed deposits as the name implies are
accepted by the banks for a certain fixed period of time. The customer however can withdraw his money during usual banking hours after giving a reasonable notice.
In case the customer wishes to draw very huge fixed deposit before the expiry, the bank may pick certain period of time to fulfill the obligation. The bank normally pays higher rate of interest on such accounts.
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PRIMARY FUNCTIONS
b) Advancing of Loans: The money which the banks have received
from public, they lend from this money at a rate of interest higher than that they are paying to the depositors.
This process of advancing loans is the second fundamental function of commercial bank and it also forms the basis of the earnings of a commercial bank.
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PRIMARY FUNCTIONS
1. Overdraft: This is a short term financing facility. Under
this bank allows his client to withdrew certain amount from his account over and above the balance actually laying in his current account.
The bank charges interest on the amount withdrawn by the client. When the client has surplus funds, he can pay the amount to settle his overdraft balance.
The overdraft facility is for short term and is provided on the current account only.
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PRIMARY FUNCTIONS
2. Discounting Bill of Exchange: This is another form of bank lending.
Discounting of bills of exchange refers to the process of making payment before the maturity of bill.
The discount charged by the bank for making payment before maturity, constitutes the banks earning.
The payment made by the bank before the date of maturity is the loan to the holder of the bill. At the maturity the drawee makes the payment to the bank.
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PRIMARY FUNCTIONS
3. Loans: Commercial banks advance short, medium and
long term loans to investors and businessmen. While advancing such loans a complete legal systematic procedure is followed.
As the banks deal in some other peoples money, the banks management takes all necessary precautions to make certain the return of the money advanced.
The loans are normally advanced against securities which are valued by banks experts. The amount of loan is credited in the borrowers account and from there money can be drawn through cheques.
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PRIMARY FUNCTIONS
4. Cash Credit (c.c. limit): The bank normally provides this facility to the
business and commercial units. The facility is provided against appropriate security.
A cash credit is an arrangement whereby the bank agrees to lend money to the borrower up to a certain limit. The bank puts this amount of money to the credit of the borrower. The borrower draws the money as and when he needs. Interest is charged only on the amount actually drawn and not on the amount placed to the credit of borrower’s account.
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SECONDARY FUNCTIONS
The secondary functions of the commercial bank can be classified as follows:
a) Agency functions.b) General utility services.c) Miscellaneous / other.
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SECONDARY FUNCTIONS
a) Agency Function:The bank performs different functions for there clients and doing so they act as an agent of their clients such functions are called agency functions and they are as follows:
1. Collection of dividends:Bank acting as an agent of their clients collects dividend and interest on stock and shares the bank charges a nominal commission against the provision of such services.
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SECONDARY FUNCTIONS
2. Collection of cheques:Commercial bank act as an agent of its clients while collecting and making payments of bills, cheques etc.
3. Selling and purchasing securities:Commercial banks some times purchase or sell securities or shares on behalf of its clients.
4. Obeying standing instructions:Sometimes clients order the bank to make payments directly such payments may include subscription fees of clubs or journals, annual membership fees etc. the bank charges a minute amount for the execution of such instructions.
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SECONDARY FUNCTIONS
5. Executor or Trustee: A client may direct his bank to act as a
executor or trustee in dealing with other business parties or while setting business disputes with other parties.
He may ask his bank to provide technical knowledge or assistance on certain particular matters. The bank shall perform such functions in the interest of his client. The bank charges a small fee for providing such services or technical assistance.
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SECONDARY FUNCTIONS
6. Funds Transfers:Commercial banks can transfer funds from one bank or branch to another. This gives an ease to the clients and in a way increases the liquidity of the money deposited in the bank. A client can use his cheque book even at a place where his bank has no branch.
7. Agent Representative:A commercial bank may act as an agent of his client in dealing with other banks or financial institutions. A bank can also be a representative or correspondent of his client as required by the circumstances.
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SECONDARY FUNCTIONS
(b) General Utility Functions:Commercial bank performs variety of utility services for their clients. These are as follows:
1. Providing lockers:Commercial banks provide lockers for their clients. This is a mean of providing safe custody to the valuables of their clients. This has minimized the risk of loosing valuables due to robbery.
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SECONDARY FUNCTIONS
2. Issuance of credit instruments:Commercial banks issue various kinds of credit instruments and through this they play a unique role in increasing the liquidity power of the clients. Commercial banks issue travelers cheques, draft etc.
3. Providing trade information:Certain famous commercial banks have separate panel of experts. This panel provides necessary trade information as required by different clients. Such information help the clients in deciding that whether its right time to invest or purchase or its better to wait.
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SECONDARY FUNCTIONS
4. Financing Foreign Trade:Commercial banks discount foreign bills of exchange. While performing this function they play their role in foreign trade and in facilitating exports. It also acts as an important source of income for a bank.
5. L/C operations:Commercial banks plays an important role in foreign trade by performing L/C operations. L/C is a guarantee that insures reliable import and export deal.
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MISCELLANEOUS FUNCTIONS
Zakat collection. Collection of utility bills. Hajj services.
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ROLE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF A COUNTRY
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IMPORTANCE OF COMMERCIAL BANK
Commercial bank enjoy a crucial position in the economic setup of a country. This not only places heavy responsibilities over the shoulders of commercial banks but also gives them immense importance.Meaning of Economic DevelopmentIt can be defined as a process by which the total output of a society increases over time. It refers to the process whereby the total supply of goods and services of the society increases leading to improved living standards.
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ROLE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF A COUNTRY
Commercial banks play an important and active role in the economic development of a country.
If the banking system in a country is effective, efficient and disciplined it brings about a rapid growth in the various sectors of the economy.
The following is the significance of commercial banks in the economic development of a country.
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ROLE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF A COUNTRY1. Banks promote capital formation2. Investment in new enterprises3. Promotion of trade and industry4. Development of agriculture5. Balanced development of different regions6. Influencing economic activities7. Implementation of Monetary policy8. Monetization of the economy9. Export promotion cells 10. Expansion of credit11. Financing priority sectors12. Optimum utilization of resources13. Creators and distributors of money14. Attaining self sufficiency15. Growth of right industries16. Research and development
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The U
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ROLE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF A COUNTRY
1. Banks promote capital formation:
Commercial banks accept deposits from individuals and businesses, these deposits are then made available to other businesses which make use of them for productive purposes in the country.
The banks are, therefore, not only the store houses of the country’s wealth, but also provide financial resources necessary for economic development.
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ROLE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF A COUNTRY
2. Investment in new enterprises:
Businessmen normally hesitate to invest their money in risky enterprises. The commercial banks generally provide short and medium term loans to entrepreneurs to invest in new enterprises and adopt new methods of production.
The provision of timely credit increases the productive capacity of the economy.
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ROLE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF A COUNTRY
3. Promotion of trade and industry:
With the growth of commercial banking, there is vast expansion in trade and industry.
The use of bank draft, check, bill of exchange, credit cards and letters of credit etc has revolutionized both national and international trade.
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ROLE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF A COUNTRY
4. Development of agriculture:
The commercial banks particularly in developing countries are now providing credit for development of agriculture and small scale industries in rural areas.
The provision of credit to agriculture sector has greatly helped in raising agriculture productivity and income of the farmers.
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ROLE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF A COUNTRY
5. Balanced development of different regions:
The commercial banks play an important role in achieving balanced development in different regions of the country.
They help in transferring surplus capital from developed regions to the less developed regions.
The traders, industrialist etc of less developed regions are able to get adequate capital for meeting their business needs.
This in turn increases investment, trade and production in the economy.
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ROLE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF A COUNTRY
6. Influencing economic activity:
The banks can also influence the economic activity of the country through its influence on
a. Availability of creditb. The rate of interest If the commercial banks are able to increase the
amount of money in circulation through credit creation or by lowering the rate of interest, it directly affects economic development.
A low rate of interest can encourage investment. The credit creation activity can raise aggregate
demand which leads to more production in the economy.
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The U
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ROLE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF A COUNTRY
7. Implementation of Monetary policy:
The central bank of the country controls and regulates volume of credit through the active cooperation of the banking system in the country.
It helps in bringing price stability and promotes economic growth with in the shortest possible period of time.
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The U
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ROLE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF A COUNTRY
8. Monetization of the economy:
The commercial banks by opening branches in the rural and backward areas are reducing the exchange of goods through barter.
The use of money has greatly increased the volume of production of goods.
The non monetized sector (barter economy) is now being converted into monetized sector with the help of commercial banks.
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The U
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ROLE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF A COUNTRY
9. Export promotion cells: In order to increase the exports of the
country, the commercial banks have established export promotion cells.
They provide information about general trade and economic conditions both inside and outside the country to its customers.
The banks are therefore, making positive contribution in the process of economic development.
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The U
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ROLE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF A COUNTRY
10. Expansion of credit Commercial banks are the factories that create
credit. In fact the credit creating function of a commercial bank plays an important role in a economy. To maintain high level of economic activity, credit expansion is essential.
Commercial banks make a substantial contribution to economic progress by making funds available for development of infrastructure.
This not only raises the level of economic activity but also increases the speed of economic development.
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ROLE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF A COUNTRY
11. Financing priority sectors
In order to increase the pace of economic development and to meet current challenges commercial banks have to frame new advanced policies.
Commercial banks in this regard finance those special sectors which produce direct effect on the basic economic indicators.
Commercial banks policies are a mirror that reflects the economic priorities and fiscal targets of the country.
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ROLE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF A COUNTRY
12. Optimum utilization of resources
Commercial banks help in the just and optimum allocation of resources. Bank lend only after observing all necessary precautions. Mega loans are advanced only in the areas which have enough potential and great scope of expansion.
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ROLE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF A COUNTRY
13. Creators and distributors of money
Commercial banks acts as factory that creates and distributes money. Commercial banks channel finances towards creative issues.
They, as required by circumstances, increase or decrease the supply of money in an economy to attain macro-economic stability and growth.
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ROLE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF A COUNTRY
14. Attaining self sufficiency
A major problem of third world countries is foreign debts and dependence on other countries.
Commercial banks provide incentives for the entrepreneurs to take risks and to use the idle resource for more and better production. This leads to outward shifting of production possibility frontier and helps in the process of attaining self sufficiency.
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ROLE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF A COUNTRY
15. Growth of right industries
Each country’s economic setup has different fiscal and social priorities according to the traditions, customs or monetary agenda.
Commercial banks help in the growth and development of right type of industries which are directly related with raising the living standards of local people. Also environment friendly industries are encouraged by commercial banks.
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ROLE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF A COUNTRY
16. Research and development
Commercial banks sometimes do provides finances for research and innovations. This aspect leads to improvement of products and uplifting of living standards over time.
Commercial banks also advance loans to different research institutes.
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ROLE OF BANKS IN 21ST CENTURY The 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 system of all economic development in the country.
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VIRTUAL BANKING What is virtual banking? Providing the banking services through
extensive use of information technology without direct recourse to the bank by the customer is called virtual banking.
The origin of virtual banking can be traced to the 1970,s with the installation of ATM’s.
The principal types of virtual banking services include automated teller machines (ATM’s), phone banking and most recently internet banking.
With the increasing use of internet banking there is greater reliance now on information technology and the decrease of physical bank branches to deliver the banking services to the customer.
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