Subject: FInance, banking and Insurance 2nd paper

Code: 293
Chapter: 1
Topic: Preliminary Concept of Banking system.

"Concept of bank"
There are several accords of opinions about the origin of the word ‘Bank’. According to some monetary
experts, the word ‘Bank’ is derived from ‘Banco’. ‘Bancus’, ‘Banque’ or ‘Banc’. All of which means a
bench upon which the early moneylenders used to display their coins and transact business across the
bench in the market place.

According to Prof. Sayers – “Bank is an institution whose debts (bank deposits) are widely accepted in
settlement of other people’s debts to each other.” A bank is a financial institution that collects society
surplus, cash and provides a part of that as loan to investors with a view to earn profit. It acts as
intermediaries between surplus units of people who saves and deficit units of people who borrow.
Surplus unit is referred to the units which consume less than their income. They deposit their surplus
amount of money in form of deposits in the bank. Deficit units are referred to the units who earns large
amount of money but still need larger sum for their endeavors. The surplus unit may not have enough
trust to let the deficit unit borrow a sum of money from them. For this reason, financial intermediaries
like bank is needed. In this course, banks earn profits through receiving interests from borrowers of
short-term and long-term loan and providing lower interest rates to the depositors for providing their
fund for use by the bank. Banks not only keeps deposits of the surplus unit but also provides security
and interest for the provided funds which encourages people to deposit their savings.

Banks run on the principle, "All the people will not withdraw their money on the same day". The
creation of credit differentiates a bank from non-financial intermediaries. All the banks of a country is
regulated and authorized by the Central Bank of that country and all the banks of world is regulated by
the World bank. Examples of banks are Dutch-Bangla Bank and Janata Bank Ltd.

"Nature of Banking Business"

There are various financial institutions all over the world but banking business has it's own distinct
nature compared to them. Some natures of banking business can be defined below:

1. Intermediaries:
Banks serve as intermediaries between the surplus and deficit units of the society. An intermediary is
one who stands between two other parties. People with extra money can store their money in a bank
rather than look for an individual who is willing to borrow it from them and then repay them at a later
date. Thus, banks act as financial intermediaries by filling gap between the surp[us and deficit unit of the
society. All the funds deposited are mingled in one big pool, which is then loaned out.
2. Keeping secrecy:
Banks run under the conditional agreement between the bank and its clients that all foregoing activities
of the client will remain secure, confidential, and private. Therefore, banks do not disclose to any
unauthorized third party, information it has received as part of its handling of a client’s account.

3.Issuing Loans:
All banks allow lending to gain business profit. Banks allow car loans, home loans, personal loans, etc at
a certain rate of interest. Each loan interest varies from bank to bank. The bank uses customer’s money
or the money from saving accounts in order to loan money to other customer.

4. Receiving deposits:
Deposits consist of money placed into banks for safekeeping and increasing the value of money.When
someone opens a bank account and makes a cash deposit, he surrenders the legal title to the cash, and
it becomes an asset of the bank. In turn, the account is a liability to the bank.The account holder has the
right to withdraw deposited funds, as set forth in the terms and conditions governing the account
agreement. Accepting deposits is the primary function of a commercial bank.

Types of bank:
There are various types of banks which operate in our country to meet the financial requirements of
different categories of people engaged in agriculture, business, profession, etc. On the basis of
functions, banks may be divided into the following types:

Types of bank on the basis of functions:

1.Central Bank:
A central bank is a monetary institution, which fully controls the production, circulation, and the supply
of money in the market, seeking to regulate the commercial banks and stabilize a nation’s economy and
national currency.. It's function is controlling credit, bankers' bank and issuing currency note. Central
bank is called the banker of the banks because it regulates banks all over the country. Every country of
the world has a central bank. Central bank also helps other banks in financial sectors. For example: Bank
of England.

2. Commercial Bank:
A commercial bank is a monetary institution which serves the interest of its depositors by providing with
security vaults for the surplus resources and, on the other hand, makes profits by investing its resources
in the productive measures by extending loans. Commercial banks are important to the economy
because they create capital, credit, and liquidity in the market. There are altogether 50 commercial
banks in Bangladesh. Such as - Bangladesh Development Bank.

3. Specialized Bank:
The specialized banks are defined as those banks which banking operations that serve a specific type of
economic activity, such as industrial activity or agricultural or real estate, under the resolutions of their
establishment. These types of banks mainly concentrate on financing specialized economic and social
activities. Specialized activities may be small and cottage industries financing, financing the rural asset
less and landless people etc.For instance, transportation banktakes part in development of transport
sector by supplying loan to manufacturers of transport, import spare parts etc, Industrial banks or
investment banks provide medium and long-term loans and also supply fixed capital to the industrial
concerns, agricultural banks help to develop the agriculture sector and to help the farmer’s etc.Probashi
Kollyan Bank and Rajshahi Krishi Unnayan Bank are the two examples of specialized bank in our country.

"Types of banks on the basis of organizational structure"

1. Sole proprietorship bank:

The type of bank which is owned and operated by a single owner is called Sole proprietorship Bank. This
bank is a single ownership Bank. Despite having a lot of facilities, this type of banks have a high-risk rate
because in case of loss, the whole liability falls under one person. There is no sole proprietorship bank in
our country.

2. Partnership Bank:
The banks operating under joint ownership of government and private sector is known as partnership
bank. Partnership banks must have minimum 2 partners and maximum 10 partners. For example-

3. Joint stock company bank:

Banks whose capital is controlled, formed and directed under the scope of company law is called joint
stock company bank. The owners of these kind of banks could be shareholders, government or any
general partner. For example- Dutch Bangla Bank Ltd and AB Bank.

4. Cooperative bank:
The banks which are formed, operated and controlled by the existing acts of cooperative soceties and
banking laws, are called co-operative banks. The main objective of these banks is to ensure the social
well being of the public. They accept deposits from members and grant loans to them at low rates of
interest. Cooperative bank is also classified into three levels- . For example- The Dhaka Mercantile
Co-operative Bank Ltd and Bangladesh samabaya bank Ltd.

5. State owned banks:

The banks which are owned by the government and the direct control of the government are called
State Ownership Banks. A state bank is not the same as a central bank, these institutions are primarily
concerned with influencing a government's monetary policy. Such as - BASIC Bank Limited and Agrani
Bank Limited.

"Importance of bank on the Economic Development"

A strong banking sector is critical to economic growth and development in a developing country. A
robust and well-functioning banking system facilitates the efficient allocation of resources to individuals,
organisations, and projects that can use those resources effectively.
The imporantance of bank on the economic development is given below:

1. Increasing foreign Remittance:

Banks play a major role in facilitating remittances by migrant workers. Banks help workers to transfer
money from one country to the other reducing the risk of carrying cash and making transaction easy.
Bangladesh received higher remittances during the last fiscal year resulting from a strong pick-up in
global economic activities, especially in the Middle East countries.

2. Contribution to the agriculture sector:

Given the importance of the agriculture sector, the government has given highest priority to agriculture
and its allied sectors for adequate credit with low cost. In a changing environment, banks are
diversifying their role in the agriculture sector in order to get revenue from their significant contribution
to agriculture. Some of the new roles that banks have adopted are: Marketing, training and consultancy,
insurance and financing for infrastructure via private-public participation.

3. Development of Small and Medium Enterprises (SME):

Bangladesh Bank introduced several programmes to help provide capital to small and medium
enterprises (SMEs). The central bank now has a specialised SME and Special Programmes Department to
facilitate the development and support of SMEs by the banking sector. Apart from this, banks sanctions
loans and helps the small and medium enterprises to form capital and encourages them to advance to
their goals. SMEs are extremely important to a developing country's economy as they create new jobs,
and they can help reduce economic inequality thus providing a boost to the country's economy.

4.Providing loan:
Banks provide loan to the businessmen and helps them in expanding their businesses. Banks provide
short term, mid term and long term loans based on the individuals needs. This creates encouragement
among them and also helps the country economically.