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Origin and Evolution of Banking

Explanation of What is a Bank?
If we think of the people in an economy from the point of view of whether they have or do not have spare, extra money or whether they possess or do not possess potentially lucrative ideas of their own to gainfully employ the extra money, we find that the economy is composed of the following four types of people.

1. People with no extra money and no ideas.
2. People with extra money but no ideas (or no time to implement any ideas).
3. People with ideas but not enough money.
4. People with both ideas and extra money.

The first type does not play a major role, they have just enough money to cover their needs, and have no ideas.
People of the fourth type who have extra money, and have ideas as well. They are the self sufficient entrepreneurs who use their own money in their own business ventures.

We will focus our attention on type 2 and type 3.

Type 2 with extra money but no ideas are usually households or investors or retired people. They are the surplus entities.

Type 3 are mostly companies who have no money but they have ideas and time to utilize money in productive enterprises that can generate incomes and cash flows. These are deficit entities.

Banks are actually the intermediaries who collect and gather small individual amounts of money from a large number of households (Type 2) , pool this money and lend the same in large chunks to companies (Type 3) who use the money in cash flow generating production or infrastructure projects.

Companies pay part of the cash flows to banks as interest or profit. Banks keep some to cover their expenses and remuneration for their own services and the balance is paid to households as return/interest as compensation for parting with the money.

Banks thus assist in the setting up of large projects in industry and infrastructure for economic development of the countries and reduction of poverty by pooling the small, idle savings of households for use in industrial enterprises.

The above is by way of understanding the important role of the banks in creating and supporting employment generating productive enterprises. The formal definitions of BANK will follow later in this treatise.


Let’s now look at the financial markets which assist in the channelization of idle resources into productive avenues.

BANKING AND FINANCIAL SERVICES
DIRECT AND INDIRECT INVESTMENTS IN FINANCIAL MARKETS

First of all we study the function of the BROKERS in the MARKET mechanism

DIRECT INVESTMENT IN FINANCIAL MARKETS THROUGH BROKERS

DIRECT INVESTMENT IN FINANCIAL MARKETS

FUNDS FLOWS

HOUSE HOLDS →→ →→ →→
BUSINESSES CASH (FINANCIAL CASH BUSINESSES
CORPORATIONS MARKETS) CORPORATIONS
GOVERNMENT
BROKERS GOVERNMENT
(Net Savers) Securities Securities (Net Borrowers)
Surplus Units Stocks/Shares Stocks/Shares Deficit Units
Bonds Bonds
←← ←← ←←

1) Brokers earn BROKERAGE COMMISSION for facilitating direct investment by Net Savers/Surplus Units.
Brokers receive cash from Net Savers and ON-PAY to net borrowers/Deficit Units. They receive share scrips/bonds and ON-PASS to savers/investors/surplus units.
2) Investors i.e. Savers/Surplus Units bear the investment/default risk but also benefit from possible high profits/gains.
3) Brokers do not assume/bear any investment/default risks nor are benefitted from profits/gains on investments.
Disadvantages of Direct Investment to Savers
Risk of financial Loss
Risk of Liquidity Loss


Next we look at the function of BANKS in the MARKET system

INDIRECT INVESTMENT IN FINANCIAL MARKETS THROUGH
FINANCIAL INTERMEDIARIES—BANKS AND OTHER FINANCIAL INSTITUTIONS

INDIRECT INVESTMENT IN FINANCIAL MARKETS
THROUGH FINANCIAL INTERMEDIATION










FUNDS FLOWS

HOUSE HOLDS →→ →→ HOUSE HOLDS
BUSINESSES
BUSINESSES CASH (FINANCIAL CASH LOAN CORPORATIONS
CORPORATIONS INTERMEDIATION) GOVERNMENT
GOVERNMENT
(Net Savers) (Net Borrowers)

Current Accounts BANKS &
SURPLUS Savings Accounts FINANCIAL LOAN DEFICIT
UNITS Fixed Deposits INSTITUTIONS DOCUMENTATION
SECURITIES UNITS
←← ←←


Advantages of Intermediation

1) Banks (Financial Intermediaries) accept cash from savers/surplus units & give bank
accounts allowing savers liquidity as per deposit terms irrespective of possibility
of default.
2) Financial Intermediaries pool the accounts & deposits and give loans to deficit entities and receive Security Documentations and Collateral.
3) Risk of default in investment in deficit entities is assumed by the financial intermediary.
4) Banks gain from fund based interest income and non fund based business
like imports/exports from the borrowers /deficit units.
5) The savers are benefitted as they do not face investment/default risk or liquidity risk.
Disadvantages of Intermediation
In intermediation the savers get lesser return as compared with direct investment since the intermediary organization does not pass on the full gain to the saver.
Also the Deficit units, the borrowers, have to pay a higher price for the use of funds because they have to pay for both the costs of the intermediary bank and the saver for parting with the money.

INTRODUCTION to Banking
Banking, in its most primeval practice, can be traced back to 2000 BC in Babylonia; a more evolved and relatively modern form of banking dates back to early 14th century in Italy.
The term “bank” is derived from the Italian word "banca". The Jews of Lombardy (a province in Italy) used to transact money sitting on benches placed in market places. Those benches were called '“banca” meaning “the money changer’s place”. “Banca” later convened into the word "bank". The first modem bank, “Bank of St. George”, was founded in Italy in 1406. In the beginning banking operations were restricted to the giving and taking of money, whereas today they are engaged in performing many other financial activities like management of investment funds, credit operations and insurance activities.
A bank is defined as an institution which has been licensed by the Central Bank of its country to accept deposits repayable on demand or otherwise, and withdrawal by cheques, draft, order or otherwise. This definition also includes specialized banks such as agricultural banks, investment banks, SME banks, microfinance banks and Post Office Saving Banks, etc. A bank can also be defined as “an institution whose primary activity is to act as a payment agent for customers to borrow and lend".
According to the Banking Companies Ordinance 1962 Sub Section (c): "Banking Company means any company that transacts the business of banking in Pakistan and includes their branches and subsidiaries functioning outside Pakistan of banking companies incorporated in Pakistan inserted by Finance Act 2007)". Section 13 of the Banking Companies Ordinance deals with the minimum paid-up capital and reserve requirement for the commencement of banking business in Pakistan. The authority to alter this requirement lies with the State Bank of Pakistan.
Legal/Statutory definitions of Banking in India and Pakistan:-
India - The Banking Regulations Act 1949 (Section 5 b) defines banking as:
“Banking means the accepting for the purpose of lending or investments, of deposits of money from the public, repayable on demand or otherwise and withdraw-able by cheque, draft, order or otherwise”.

Pakistan - Section 5(b) of the Banking Companies Ordinance 1962 defines “banking” as:
“Accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise”.
Primarily there are two main functions of a bank - accepting money from the depositors and offering that money in the form of loans to the creditors. Depositors lend money to the bank and are paid for it; similarly the bank lends money to the creditors and is paid for it. The earnings of a bank and its shareholders are thus the difference between these two costs - the cost of deposits and the cost of credits. A bank’s primary aim is to keep its depositors and lenders satisfied by giving both parties the maximum benefits in terms of attractive profits and quality services.
At the time of partition there were only a limited number of commercial bank branches present in Pakistan and banking facilities were available only in big cities. With the passage of time, the number of banks and their branches has increased substantially. At present there are more than 10,500 branches of commercial banks providing banking services to more than 30 million customers. Banks have played a vital role in the development of Pakistan’s agricultural and industrial sector.
Every country has its own set of laws and regulations for protection of public interest and to ensure smooth and lawful running of its banks. Similarly, in order to commence banking operations in Pakistan, either domestically or internationally, a bank has to obtain a banking license from the regulator. This license is issued upon ensuring successful adherence and fulfilment of relevant laws and regulations as prescribed by the State Bank of Pakistan. The State Bank of Pakistan is the official regulator of banks in Pakistan as per the Banking Ordinance 1962.
After obtaining a license to operate, a separate license is required to open every new branch under Section 28 of Banking Companies Ordinance 1962. Microfinance banks are licensed under Micro Finance Institutions Ordinance 2001.
The State Bank of Pakistan provides guidance and support to the banking sector for developing and maintaining good business practices. In order to ensure availability of banking facilities to all corners of the country, SBP has instructed banks to open at least 20% branches in rural/under¬served areas. New options for opening sub-branches, sales and service centers and mobile banking units have also been introduced. Banks are being encouraged to enhance their scope towards branchless banking and collaborate by signing Service Level Agreements (SLA) with large companies to extend banking services to the public at non-banking locations. The number of branchless banking accounts has already reached 2.4 million plus and SBP is keen to increase the number of people who have a bank account.
Evolution Of Banking Industry In Pakistan.
Before partition, in the undivided India, the central bank under which banks operated was the Reserve Bank of India and the Reserve Bank of India continued to function as the Central Bank of the banks operating in the newly formed Pakistan.

The then government of the newly established state of Pakistan realized the need to have a central regulatory authority of their own to ensure smooth operations of all the existing and future banks. Despite the shortage of experienced staff and other resources, Quaid-e-Azam Muhammad Ali Jinnah inaugurated The State Bank of Pakistan (SBP) on 1st of July 1948.

In October 1948 Pakistani notes were issued to replace Reserve Bank of India notes. Habib Bank Ltd was already functioning from pre partition days. The National Bank of Pakistan came into being in 1949 as a scheduled bank and to serve as an agent of SBP. Later, Industrial Development Bank of Pakistan and Agriculture Development Bank of Pakistan were formed to support the industrial and agricultural sector. With the development of agriculture, trade and industry, the functions of the state bank became wider. To progress this situation, the State Bank of Pakistan Act 1956 was promulgated. During this period two new banks, Muslim Commercial Bank (MCB) and Pakistan Industrial Credit and Investment Corporation (PICIC), were formed. This was the period of expansion in the banking arena. In late 1959 United Bank Limited (UBL) was established, while Commerce Bank limited and Standard Bank Limited followed soon after.

Nationalization
On 1st of January 1974 banks in Pakistan were nationalized and the Banks Nationalization Act 1974 was promulgated. After nationalization, the formation of new banks in the private sector stopped completely. Due to increasing political interference in the affairs of the banks, business decisions and appointment of staff were not taken on merit. Office discipline deteriorated to a point of non-existence and some nationalized banks were on the verge of collapse.

Denationalization
After 16 years of experiencing nationalization it was realized that, rather than being productive, nationalization actually proved to be quite disastrous for the banking industry. In 1991 the government changed its stance and announced a policy of denationalization of nationalized banks so as to encourage the formation of new banks in the private sector.
Today, the five large network banks - The National Bank of Pakistan, Habib Bank Limited, United Bank Limited, Muslim Commercial Bank Limited and Allied Bank Limited - possess more than 50 % of the country’s deposit base. The remaining 50% is divided between other foreign and private sector banks. Both Muslim Commercial Bank and Allied bank were privatized in 2000 and showed significant improvements in profit and deposit growth. The privatization of Habib Bank and United Bank Limited soon followed. The National Bank of Pakistan, however, is still government owned and is currently the largest bank in deposit base and is almost the sole beneficiary of lucrative government deposits.
Before privatization the five large network banks used to support certain non-lucrative projects on government demand, which included:
• Lending to support projects patronized by influential authorities under government sponsorships.
• Extending loans without requisite collateral.
• Extending loans below market rate returns.
• Utility bill collection below banks cost of management of the bill collection process.
• Over-collection of taxes from these institutions to cover Government revenue shortfall.
• Over-staffing of these institutions with under-skilled ‘preferred’ people.
• Forced branching in unbanked areas.
The above mentioned practices have been reduced substantially as a result of privatization as well as parallel reforms within the sector. Other than the banking industry, Pakistan’s financial sector comprises of the development finance institutions (DFIs), insurance companies, mutual funds, the stock exchange and leasing companies.
The future growth of the banking industry depends on overall economic activity but, more specifically, on the expansion of the industrial sector. The on-going privatization process is providing momentum to the industrial sector which in turn is fuelling the growth of the banking industry.
Steps toward Turnaround
After privatization of the four big banks, the following actions were taken to enhance profitability and reduce costs:
• Headcount reduction to eliminate redundancy by almost 50%.
• Closing down of loss making business areas.
• Merging of close vicinity branches into single units.
• Automation at both head office and branch level.
• Introduction of new products.
• Induction of competitive staff based on merit and emerging requirements.
• Streamlining of the internal audit and compliance functions.
• Increased focus on developing both corporate and consumer portfolios to enhance profitability.
• Streamlining international operations to ensure enhanced profitability.
The above steps have resulted in improvements in the banking arena both in terms of profitability and service standards. These changes have been recognized both locally and internationally, the impact of which can be seen in the form of improved credit ratings by Moody's Investor Services.

Future trends in the Pakistani banking industry
Trends in the Pakistani banking industry in the next few years are likely to be extraordinarily competitive. After a decade of aggressive progress, the industry will take some time for consolidation. Due to the rise in inflation, interest rates will increase farther and the net income spread of the banks will be reduced. Due to the economic uncertainty, the number of non-performing portfolios will also increase. The future approach of the banks will be to focus on Information Technology (IT).
The future success of the banking industry lies in the effective use of information technology, because it benefits the banks and their customers in terms of cost, speed and convenience. At present IT is playing a key role in managing all types of banking operations, product development and improvement of services. It has also helped in defining new customer service standards with the increase in usage of phone banking, Interactive Voice Response (IVR) systems, internet banking, Point of Sale (POS), credit and debit cards. With the increased dependency on the use of information technology, it is imperative that maximum security standards be adopted to ensure the safety, security, and maintenance of e-banking transactions. The number of Automated Teller Machines (ATM) in the country is now well over 5,000. Out of 10,500 branches in the country, more than 8,100 branches are offering real time online banking services. Banks must design infallible data security processes to strengthen controls. Information technology and compliance requirements will, over the next few years, continue to be the most significant determinants of productivity. Skills are a mid-ranking factor among the drivers of productivity, although in the wholesale sectors and in investment and fund management, technical skills will be the most important contributors.

Use of Core Banking System (CBS)
The majority of banks are using the Core Banking System (CBS) as a comprehensive banking solution. It works on a real time basis and the entire banking network resides on one host which leads to efficient reconciliation of head office account entrIes and maintenance of customers’ account details under one CIF (customer information file)
with information on borrowing of all kinds. This system allows an insight of all the relationships a customer maintains with the bank on the basis of a unique ID, generally the CNIC of the customer. In the absence of a core banking system, different departments within banks use different programs for their banking needs. Post implementation of CBS, all functions are centralized at one point of control. All banks in future will move on to implementation of the Core Banking System.
Rules for customers' protection
Since 2008, the State Bank of Pakistan has witnessed an unprecedented growth in consumer banking, which has led to an increase in the grievances of consumers about the products and services of banks/DFIs. In order to deal effectively with these increasing consumer grievances and to put in place an appropriate policy and regulatory mechanism for their redress, SBP has created a Consumer Protection Department. In addition to dealing with and deciding on consumers’ public grievances / complaints regarding consumer products and services, the newly created department also handles complaints related to all types of bank products. It serves a dual purpose, i.e. it protects the customers of the bank and on the other hand it also supports the banking industry by suggesting improvements in banks’ policies. In future, principles-based regulations will be modified for banks’ as well as for customers’ protection.
Centralization of processes
Maximum centralization of processes will be a key factor in future. Account opening, clearing processing inward and outward, collection, Credit Administration department (CAD) affairs, etc will all be centralized. A few major banks have already centralized these functions.
Outsourcing services
Due to unproductive union activities, some banks have started outsourcing various tasks, including security services and hiring of third party staff. In some parts of the world, for example in India, a public sector bank has outsourced work for the installation and maintenance of 1,000 ATMs as part of its plan to scale up alternative channels for business operations. In Pakistan also, instead of setting up a fully fledged department and hiring a huge work force, the trend for allocating specialized jobs to third parties is becoming more popular.
Branchless Banking
It is said that “branchless banking” is the future of Pakistan’s financial sector, as it opens up great opportunities for banks to bring the unbanked segment of society into the financial system. The State Bank of Pakistan, being the central bank of the country, is taking steps to make the branchless banking regulatory framework more flexible to broaden the scope of financial services in line with the other, more traditional banking channels. Branchless banking has huge potential to reach this unbanked and untapped segment of society. This is not only cost effective for the banks but represents an affordable solution for the financially excluded, underprivileged class of society. That is why Pakistan’s financial sector is witnessing a dynamic transition, led by this branchless banking solution. This transition can be witnessed by a comparison of the number of branches versus branchless banking outlets. At present, numbers of branchless banking outlets have reached around 14,000 in around two years, against a total branch network of around 10,500 in 63 years.
According to one estimate, the cost of setting up a conventional branch is 76 times higher than using a third party agent to bring the unbanked areas into the financial system. At present the most popular branchless banking products in the market are “Omni” of UBL, “Easy paisa” of Tameer Bank, MCB Mobile, KASB Mobile and HBL Uphone. According to the SBP disclosure, more than 400,000 branchless/ mobile banking accounts were opened collectively by all banks in the last 18 months. In branchless banking billions of rupees have been transferred from one person to another, from one account to another, and from government to the public sector. The total branchless banking customer accounts is now above 2.4 million.
Priority to the agriculture sector
These days an increasing number of resourceful people are setting up agri-based businesses because real farmers are not getting benefits of agricultural reforms. The major land holding is with the “Zameendars/ Waderas”.
Since 2008 the government has increased the purchase price of wheat, the cost of cotton is increasing worldwide, rice production is increasing although its price is stable, fruit production and exports are also increasing and all these factors have led to an increasing interest in the agricultural sector.


Functions of State Bank of Pakistan

Traditional and Non-Traditional Functions of the State Bank of Pakistan
The State Bank of Pakistan is the Central Bank of the country. In order to achieve its objectives the State Bank performs all the traditional and non-traditional functions. Traditional functions are those which are performed by the central banks of all countries. Non-traditional functions are those which are not traditional or conventional but which SBP has assumed these functions taking into account the specific requirements of the country. In the Statute of the Bank for International Settlements, Basle, Switzerland, a central bank is defined as
'the bank in any country to which has been entrusted the duty of regulating the volume of currency and credit in that country' (Article 56 a).
Traditional functions
Traditional functions performed by Central Banks everywhere are divided into two groups, i.e. primary functions and secondary functions.
Primary functions are issuance of notes, regulation of the financial system, lender of last resort, and conduct of monetary policy.
Secondary functions are management of public debt, management of foreign exchange, advising government on policy matters, securing the payment system and maintaining relationships with international institutions.
1. Sole authority to issue Notes:
Under section 24 of the SBP Act 1956, this is the primary function of the bank - to issue notes in accordance with the requirements of business and the public as a whole. According to section 30 of the SBP Act, assets of the Issue Department (gold / silver reserve, approved foreign exchange, special drawing rights held with IMF and other approved assets.) at no time should fall below its liabilities, i.e. total of notes issued. Out of total assets a minimum Rs.1.2 billion must be kept in the form of gold coins, gold bullion, and silver bullion or approved foreign exchange.
2. Conduct of Monetary and Credit policy:
According to section 9A of the SBP Act, the State Bank of Pakistan is responsible for regulation of the monetary and credit policy of the country in such a manner that it should bring economic stability to the country. The Bank uses direct and indirect instruments for credit control, such as discount rate for three days repo, T-bill auction rate, and open market operations. The Bank also controls credit by prescribing credit ceilings, setting the credit/ debit ratio, and fixing margin requirements. Since 1995, SBP has been controlling liquidity through open market operations.
3. Regulation and supervision of Financial System:
As the central bank, SBP is responsible for safeguarding the soundness of the financial system of the country. Under section 40 A of the Banking Companies Ordinance 1962, it is the responsibility of the SBP to monitor the performance of every banking company and DFIs, as well as Micro Finance banks.
Non-bank financial companies (NBFCs), such as investment banks, leasing companies, mutual funds, Modarba companies, the stock exchange and insurance companies, etc, all fall under the ambit of the Security and Exchange Commission of Pakistan (SECP) which is responsible for monitoring the affairs of these companies.
4. Off-site and on-site monitoring
The Bank monitors banking activities through a combination of off-site monitoring and on-site inspection. Off-site surveillance is conducted by the State Bank through various periodical returns received from banks and DFIs, while on-site inspection is undertaken on the premises of the banks concerned. The purpose of inspection is to check the assets and liabilities as they appear on the books, to evaluate the quality of the assets, to determine compliance with laws, regulations, directives and policy guidelines provided by the State Bank, to judge the soundness of operations and the prudence of lending and investment policies, to appraise the quality of the management and to attempt an estimate of the overall position of the bank.

5. Prudential Regulations
In order to safeguard the interest of depositors and to ensure the safety and soundness of the banks/DFIs, the State Bank has issued Prudential Regulations. The State Bank has devised separate Prudential Regulations for different areas, viz. Corporate and Commercial Banking, Small Enterprise and Medium Enterprise Financing, Consumer Business, Micro Financing and Agriculture Financing.
The Prudential Regulations for Corporate and Commercial Banking govern operations of the financial institutions in respect of their dealing with corporate entities. The Regulations focus on Credit Risk Management, Corporate Governance, Anti Money Laundering and Operations. Regulations for Consumer Financing have been devised to encourage the banks to expand their loan portfolio through creation of new products and to ensure that banks undertake consumer financing in a sensible manner. Consumer financing covers any financing allowed to individuals for meeting their personal, family or household needs and includes credit cards, auto loans, housing finance and other methods of consumer financing.
The Prudential Regulations for Small Enterprises and Medium Enterprises (SMEs) facilitate and encourage the flow of bank credit to the SME sector with the purpose of moving away from collateral-based lending to cash- flow- based lending. The maximum limit of clean financing against personal guarantees has increased to Rs. 5 million for SMEs. This is greater than that for consumer financing as well as for corporate clean financing. The requirement for banks/DFIs to obtain a copy of accounts has been relaxed for exposures of up to Rs. 10 million.
The State Bank has also issued Prudential Regulations for Microfinance Banks and institutions. Microfinance Banks/Institutions (MFBs/MFIs) shall not commence business unless there is a minimum paid-up capital as prescribed in MFIs Ordinance 2001. A MFB/MFI shall also maintain equity equivalent to at least 15% of its risk-weighted assets shall maintain a cash reserve equivalent to not less than 5% of its time and demand liabilities in a current account opened with the State Bank or its agent. In addition to a cash reserve it shall also maintain liquidity equivalent to at least 10% of its time and demand liabilities in the form of liquid assets, i.e. cash, gold and unencumbered approved securities. In particular:
• The MFB/MFI shall not extend loans exceeding Rs. 100,000/- to a single borrower.
• The outstanding principal of the loans and advances, payments against which are overdue for 30 days or more, shall be classified as Non-Performing Loans (NPLs).
6. The Bankers' Bank
The SBP also functions as the bankers' bank. Banks are classified as scheduled and non-scheduled. A scheduled bank is that which fulfils the requirements of a scheduled bank according to section 37(2) of the SBP Act 1956, such as capital and reserves are not less than the requirement prescribed by SBP.
The State Bank maintains an updated list of all scheduled banks at its various offices. These banks are entitled to certain facilities from the State Bank and in return they have some obligations to it. The State Bank provides the following three important services to the scheduled banks:
I. SBP keeps the deposits of commercial banks, which constitute the statutory reserves of scheduled banks. Scheduled banks are required to keep with the State Bank a certain percentage of their demand and time liabilities under Section 36 of SBP Act, 1956.
II. The State Bank also provides wide-ranging remittance facilities to banks at a concessional rate. The Bank provides this facility through the media of its own offices, the branches of National Bank of Pakistan acting as its agents, and treasuries and sub-treasuries holding permanent currency chests at places where the State Bank has no office.
III. In order to streamline payments through the financial system, the Bank also manages the operations of clearing houses. In the major cities, the functions of the SBP clearing house has been handed over to a private agency, namely National Institutional Facilitation Technologies Private Limited (NIFT), to the extent of sorting of payments instruments and preparing clearing schedules.
7. Lender of Last Resort
One of the most important functions of the State Bank is that it acts as the lender of last resort. Under section 17 of the SBP Act 1956, the State Bank provides loan and re-discount facilities to scheduled banks in times of dire need when they can find no other source of funds. These facilities are ordinarily provided by the Bank against government securities, trade bills, agriculture bills, etc. A 3-Day Repo facility was introduced by the State Bank of Pakistan with effect from 1st February, 1992, with the purpose of accommodating the short-term liquidity requirements of financial institutions.

8. Banker to the Government
The State Bank provides business banking facilities to Federal and Provincial Government and some government agencies. These functions performed by the Bank are similar to those ordinarily performed by commercial banks for their customers. The Bank provides the following services to government:
1. Accepts deposits of cash, cheques and drafts by the Government and undertakes the collection of cheques and drafts drawn on other banks. The Bank transfers government funds from one account to another or from one centre to another as advised by them.
2. Federal and Provincial government keep their deposits with the State Bank free of interest. In turn, the State Bank does not charge any commission for the banking services rendered to them.
3. Federal and Provincial government can obtain advances from the SBP subject to mutual agreement in respect of the terms and conditions for such advances.
4. According to section 17, sub section (13) of the SBP Act, SBP, on behalf of Federal, Provincial or Local government, undertakes sale/purchase of gold, silver, approved foreign exchange, securities or shares in any company, and collection of returns on these shares/securities, transaction of Special Drawing Rights (SDR), etc.
{Sometimes called 'paper gold' the SDRs are accounting unit in the books of IMF}

Types of Banks

Primarily all banks gather temporarily idle money for the purpose of lending to others and for 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 and central banks etc.
It is important to note that the large banks like Habib, United, MCB etc perform all or many of the functions described under separate categories below and at the same time there are banks which perform only one or more specialized functions. So these types are at times overlapping and not always mutually exclusive.

Commercial Banks
The commercial banks receive deposits from the gen¬eral public which are repayable on demand upon written or¬ders of the depositors. As their most distinctive feature the commercial banks maintain chequeing accounts for the con¬stituents.
The commercial banks are also distinguished for pro¬viding short term finance to trade, commerce and industry for their working capital requirements and short term investment.

Merchant Banks
Merchant banks are those which have been mainly fi¬nancing the domestic and international trade in United King¬dom. During the late eighteenth and early nineteenth centu¬ries the trade between countries was financed by bills of ex¬change 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 de¬veloped 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 in trade financing, the term 'merchant banks' have gradually faded away.

Savings Banks
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 Savings Organization are well known operational Savings Banks in Pakistan.

Mortgage Banks
These banks mainly deal in loans for the acquisition or construction of real estate against the security of mortgages. Quite a few such banks are operating in developed part of the world. Savings and Loans associations and farm-loan as¬sociations are some of the well known forms of the mortgage banks. House Building Finance Corporation in Pakistan is a Mortgage Bank.


Consumer Banks
These banks provide finance for purchasing consumer goods for the personal use of the borrowers. For example Car Loans, Consumer durable goods like air conditioners, refrigerators, furniture and House Loans for Residential purposes. Consumer Finance Companies, sales finance companies and credit unions are some of the popular forms of consumer banks. Consumer banks do not give loans for productive/business purposes.

Investment Banks
The investment banks assist industrial / business houses and the government bodies to raise money through the sale of stocks and bonds for usually long term purposes. Main objective of investment banks is to achieve disintermediation where they assist businesses to raise finances for projects directly from the savers through issuance of bonds and issuance of shares. Investment banks serve the investors through floatation of mutual funds. These banks also perform the usual intermediation functions of raising deposits of idle money from the public and finance the business houses and other bodies.
Other functions:-
Assisting Companies in mergers, take-overs.
Consulting services for privatisation.
Services for Public Issues including Underwriting of share issues.
Assisting Companies in the issuance of Term Finance Certificates both Public issues and Private Placements.
Share Brokerage
Managing Mutual Funds.

Development Banks
These banks have been established to provide long term development finance to the trade, commerce, and industry. In Pakistan they are generally government owned
banks, es¬tablished under specially promulgated laws. Zarai Taraqiati Bank of Pakistan, and Industrial Development Bank of Paki¬stan are very well-known development banks. The private commercial banks are usually shy of financing to long term and greenfield projects. This gap is filled by Development Banks.

Cooperative Banks
These were the banks established and registered as cooperative ventures 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.
At one stage of history of banking in Pakistan the Cooperative Societies in the country started doing bank type business. They were not properly regulated and they defrauded the general public in a very big way. Subsequently Cooperative Societies were totally banned from conducting bank like business.

Exim Banks
These are usually the government or semi government banks which provide finance and insurance for promo¬tion of imports and exports to trade, commerce and industry. Every country wants to increase its exports to earn valuable foreign exchange but there are many risks for the exporters because the buyers are in distant lands. Exim Banks provide finance for the exporters and provide insurance to the exporters against default of the buyers or country risks. These banks are contributing greatly towards the expansion of international trade of countries, where they func¬tion.

Small and Medium Enterprise Banks. (SME Banks)
SMEs have assumed great importance in the developing countries in recent years. Though they make a huge contribution 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 fi¬nancial needs of these enterprises. The SME Banks are pro-viding basically short term working capital to the small and medium enterprises in Pakistan.


DICTIONARIES YOU MUST HAVE ON YOUR WORK TABLE

1) Oxford Advanced Learners English Dictionary
Latest 8th Edition
Oxford University Press
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Please buy the dictionary which has a CD THAT YOU CAN
SAVE electronic dictionary ON YOUR COMPUTER’S HARD DISK.

2) Oxford Dictionary of Finance and Banking, published by Oxford University Press.

3) Oxford Dictionary of Law, published by Oxford University Press.

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