INTERNATIONAL ISLAMIC UNIVERSITY CHITTAGONG

DHAKA CAMPUS
BANK FUND MANAGEMENT
MODULE 1
EVOLUTION OF BANKING INSTITUTIONS
According to some economists, the word Bank has been derived from the German
word BANK which means a joint stock firm. While others say that it has been
derived from the Italian word BANCO which means a heap or mound. As a matter of
fact, at the time of establishment of Bank of Venice in 1157, the Germans were
influential and hence, perhaps the word Banc or Banco was used by Italians to
denote the accumulation of securities or money with a joint stock firm which later on
with the passage of time came to be known as Bank.
There is still another group of people who believe that the word Bank has been
derived from the Greek word BANQUE which means a bench. In olden days Jews
entered into money transactions sitting on benches in a market place. When a banker
was not in a position to meet his obligations, the bench on which he was carrying on
the money business was broken into pieces and he was taken as Bankrupt. Thus, both
the words Bank or Bankrupt are said to have their origin from the word Banque.
However, the first view of the origin of the word Bank from the words Banc or
Banco seems to be more convincing since it was used in the establishment of the Bank
of Venice which is supposed to be the most ancient bank.
DEVELOPMENT OF BANKING INSTITUTION
1.

The business of banking is as old as the civilization itself. As early as 2000 B.C.,
the Babylonians had developed a system of banks. They used their temples for
lending at higher rate of interest against gold and silver which had been left
with them for safe custody. Around the same time, the Greek temples were
used as depositories for peoples surplus funds and these were the centres of
money lending transaction. The priest of the temples acted as financial agents
till they lost public confidence on account of peoples disbelief in religion.

2.

After the death of Emperor Justinian in 565 A.D., the Mighty Roman Empire
failed resulting in severe damage to the banking business. It was only with the
revival of the trade and commerce in the middle ages that the lesson of
finance was learnt afresh from the beginning. However, during this period,
banking was mainly confined to money-lending activities, which was largely in
the hands of Jews and the Lombardy who lent money to all.

3.

The Christians were forbidden by their religion to lend money on interest since
it was considered to be sinful activity. However, with the passage of time the
hold of the Church on the Christians weakened and with development of
process of trade and commerce around the 13th century, the Christians also
started money lending business.

4.

In the ancient times, the main functions of the banks related to granting of
loans to individuals or the state in times of crisis. Later on, they developed
other activities, which we now call as banking business.

5.

In the initial stages, the banking largely meant money lending and it was
restricted to selected number of families working as sole proprietary firms. The
Bank of Venice founded in Italy in 1157 was the first public banking institution.
The Bank of Barcelona was established in 1401 followed by Bank of Geneva in
1407. The bank of Amsterdam was established in 1609. All these banks
accepted the deposits, which could be drawn on demand or transferred from
the account of one person to another.

6.

In England, the development of business of banking can mainly be attributed

to the London Goldsmiths during the reign of Queen Elizabeth I. They used to
receive their customers valuables and funds for safe custody. Their receipts
acknowledging the same in the course of time became payable to the bearer on
demand and hence, enjoyed considerable circulation.

7.

The Goldsmiths used to deposit their funds/reserves in the exchequer with the
sanction and under the care of the Government. However, King Charles II
issued a directive in his regime that no payment would be made to the
Goldsmiths and as a result, the Goldsmiths were ruined. However, the ruin of
Goldsmiths proved a turning point in the history of English banking. It led to
the growth of private banking and later on establishment of Bank of England in
1694.

8.

Geofrey Crowther, a noted economist has identified three ancestors of the

present day banker. The merchant, the moneylender and the goldsmith. The
merchant, because of his high and widespread reputation or credit, could able
to collect money from his customers and issue documents that were accepted
as titles of money by all over then known world.

9.

The money-lender usually conducted business with his own money. Later, he
also started accepting money from his clients when he found it profitable to
borrow at lower rates of interest and lend it at higher rates of interest.

10.

The Goldsmiths mainly functioned in England. They received gold and silver for
safe custody and the receipts issued by them acknowledging the same were
initially used for withdrawals of the deposits made with them. These receipts
with passage of time became payable to the bearer on demand and enjoyed
considerable circulation. In this way, the goldsmiths note became the fore
runner of modern band note. Later on, when the goldsmiths started
transferring of the deposits made with them on the basis of letter issued by the
depositors, this led to the origin of modern cheque currency. Thus in a way,

the goldsmiths can rightly be termed as the forerunner of the modern banking
institutions.
11.

As a matter fact, even after the establishment of Bank of England in 1694 in

England, the development of modern commercial banking institutions had to
wait even in England for nearly another one and a half-century, till the passage
of Banking Act of 1833. Of course, the origin of banking and its development in
some countries was earlier and faster than the others. However, it was only in
19th century that the modern joint stock commercial banking system developed
in most of the leading countries of the world.
CLASSIFICATION OF BANKS
1.

Savings Bank A savings bank serve as reservoir for collecting the small and
scattered savings of community.
2.
Agricultural Bank An agricultural bank functions as a specialised institution
providing credit to agriculture. Co-operative bank, regional rural banks, land
mortgages bank fall in this category.
3.
Exchange Bank An exchange bank primarily finances the foreign trade of a
country. Settlement of transactions in foreign trade involves exchange of one
currency into another. Most of the major commercial banks and foreign banks
having offices in our country are engaged in this business.
4.
Central Bank A central bank functions as a top controlling bank for all other
banks of the country.
5.
Industrial Banks An industrial bank primarily meets the long-term capital
requirements of industry. Such finance is required for acquisition of fixed
assets viz Plant and Machinery, Land and Building etc. for the business.
6.
Commercial Banks A commercial bank is essentially meant for short-term
credit to trade and industry.
FUNCTION OF COMMERCIAL BANK
1.

Primary function of comm. Bank

a. Accepting of deposits Deposits are an important source of a banks funds.
They may broadly be classified into 3 categories:
Savings deposit
Current deposit
Fixed deposit
b. Lending of money A major portion of the deposits received by a bank is
lent by it. This is also the major source of a banks income. However,
lending
money is not without risk and therefore, a banker must take proper
precautions in this process. The lending may be in any of the following
forms:
Loan it is a kind of advance made with or without security. It is given for a
fixed period at an agreed rate of interest.

Cash Credit it is an arrangement by which a banker allows his customer to

borrow money upto a certain limit against security of goods.
Overdraft - it is an arrangement by which a customer has been allowed
temporarily to overdraw his current. It is without any security.
Discounting and purchasing of bills time bills are discounted while demand
bills are purchased by the banks. In both the cases the banks credit the
account of their customers by the amount of bills less any discount or
commission charged for such discounting or purchasing of the bills.
2.
Secondary function of comm. Bank
a. Agency service As agent they provide the following services:
Collection of drafts, bills, cheques, dividend etc. on behalf of the customers
Execution of the standing orders of the customers viz payment of
subscription, rent, bills, promissory notes.
Conducting of stock exchange transactions i.e. purchasing and selling of
securities for the customers.
Acting as correspondent or representative of customers, other banks and
financial corporation.
Functioning as an executor, trustee or administrator of an estate of a
customer.
Preparation of income tax return, claiming of tax refunds and checking of
assessments on behalf of the customers
b. General utility services issue of letter of credit, travellers cheques,
accepting valuables for safe custody, acting as a referee as to the
respectability and financial standing of the customers, providing specialized
advisory services to customers, issue of credit card, issue of debit card,
issue of bulletins about general trade and economic condition both inside
and outside the country.
SOURCES AND EMPLOYMENT OF COMM. BANKS FUNDS
Sources of Funds
1.
Capital
2.
Reserve and Surplus
a. Statutory Reserve According to Banking Regulation Act 1949, every
banking company is required to transfer at least 20% of its profit each year
prior to declaration of dividend to reserve fund.
b. Capital Reserve The reserve created out of capital profits
c. Share Premium Premium received by a banking company on issue of share
capital.
d. Revenue and other reserve They include dividend equalization reserve,
debenture redemption reserve, and contingency reserve.
Share capital and reserve at present do not constitute more that 5% of the
fund of comm. Banks.
3.
Deposits Deposits are a major source for the funds of a banking company.
They constitute more than 80% of a Commercial Banks funds. Deposits can be
classified into 3 categories:

a. demand deposit
b. savings bank deposit
c. fixed deposit
Borrowings
Other liabilities:
a. Bills payable - This represent letters of credit or bank drafts issued by the
bank in favour of third parties.
b. Inter office adjustment (net) This represents the debts on account of
incomplete recording of transactions between branches or between one
branch and the head office. It may be a credit or debit balance. In case of a
credit balance it should be shown under this head. It may noted that only
net portion is to be shown of inter-office account
c. Interest accrued
d. Others provision for income tax, surplus provision for bad debt, proposed
dividend, staff security deposit
e. Balance of profits.

4.
5.

EMPLOYMENT OF FUNDS:

1.

Cash balance maintained by a bank with itself. This balance is maintained

by the bank to meet any demand on its funds by its customers.
Cash with Central Bank.
Balance with other banks and money at call and short notice.
Money at call and short notice. This represents the loans given by one bank
to another for a short period. Call loans are repayable at any time the banker
recalls them while short notice advances are repayable within a short notice of
say 24 hours.
Investments These include securities of the central bank, share, debentures
or bonds gold etc.
Advances
Fixed assets
Other assets These comprises of inter-office adjustments (net), tax paid in
advance, stationery and stamps.
Contingent liabilities Contingent liabilities are those liabilities which may not
happen.. These are to be shown outside the balance sheet. They comprise of
the following items:

2.
3.
4.

5.
6.
7.
8.
9.

a.
b.
c.
d.

Acceptance, endorsements
Guarantee
Liability on account of outstanding forward exchange contracts
Other items for which the bank is contingently liable

Non Performing Assets (NPA):

Bad & Loss

Doubtful
Sub-Standard