History of Banking
History of Banking
History of Banking
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UNIT I
3
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Presentation Outline
i. Evolution of the banking sector in the world
and Tanzania
ii. Outline theories of banking structure
iii. Explain functions of commercial banks in an
economy
iv. Explain the importance of bank regulation and
supervision
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History of Banking
Banks are said to be the oldest and
most familiar of all financial institutions.
† Evolution of commercial banking is
related to the practice of safe-keeping of
gold and other valuables by the people
with merchants/goldsmiths/money-
lenders
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History of Banking
† In the 17TH century many
people in London held their wealth in
gold.
† During the civil wars people came to
fear loss of their valuable assets due
to theft and expropriation by the
government. They usually looked
around for someone who had vaults
and safes to look after their wealth.
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History of Banking
† Gold and silver smiths had such
vaults/safe.
† Goldsmiths took these deposits for
safe keeping, issuing a receipt which
acknowledged the deposit for money
and incorporated a promise to return
it on demand.
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History of Banking
† More and more people came to hold
these receipts and they came to
circulate amongst merchants.
† Originally, merchant A wishing to buy
something from B, would take his
receipt back to the goldsmith
surrender it, and get his money back.
Then he would buy the article from B
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History of Banking
This was taking quite longer hence it
was quicker and more convenient for
A to pass the goldsmith’s receipt on
to B, who could either keep it or cash
it at the goldsmith. Where the
goldsmiths name was well known and
his reputation good, such circulation
became common thing.
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History of Banking
To pass the right to the ownership of
the receipt to B, A ‘endorsed’ the
receipt before passing it on to B, that
is, he signed his name on the back of
it.
† In time B found it more convenient to
pass the receipt on to C rather than
to cash it.
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History of Banking
† The receipts came to be issued in
convenient amounts - £5, £10, £100,
etc.
† To facilitate this passing of the
receipts from one hand to another,
the goldsmiths began to write on the
note his personal promise to pay any
bearer.
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History of Banking
† After circulation of these receipts for
a certain time the need for
endorsement disappeared since the
receipts had the power to pay the
bearer.
People stopped calling them receipts
and addressed them as ‘goldsmith’s
notes’.
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History of Banking
† From this it can be noted that the
goldsmiths began to exercise some
of the functions of a banker such
as;
They kept money and valuables on
safe deposit.
They issued notes.
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History of Banking
† And it was no longer before they
developed another important
banking function, that of lending.
† Goldsmith noticed that the
demands of repayment were
always less than the total deposits.
† The goldsmith always had some
cash in hand, and he started to
lend this out, charging interest.
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History of Banking
† In the beginning, the merchants
always paid commission or a fee on
the deposits.
† But after realising that these business
is profitable they began to offer
interest on deposits, so as to get
more money deposited, which he
could then profitably lend.
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History of Banking
† In the county side, there were no
banks to go to, it was usual for the
farmer to approach the most
prosperous and best established
trader in the country town, and ask
him if he would lend the money,
which he usually did, of course
charging interest.
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History of Banking
† The trader thus started to lend but
with time like the goldsmiths they too
encouraged people to deposit money
with them, so that he would have
plenty to lend, and issuing his notes
for such sums deposited. This was
thus the beginning of the country
banks.
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History of Banking
† However, with time banks became a
very large part of the economy of
various countries.
† The first modern bank was the Bank
of England in 1694.
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Evolution of the Banking Sector
in Tanzania
The evolution of banking sector in Tanzania can be
broken down into three main phases.
colonial era and the period before Arusha Declaration
of 1967,
post Arusha Declaration and the period prior to 1991,
and
the period after 1991up to date.
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Colonial Era and the Period Before Arusha
Declaration in 1967
• The development of the banking sector started way back in the early
1900s.
• During the German rule there were two commercial banks established in
Tanganyika, namely:
– the Deutsche Ostafrikanische Bank (1905)
– Handels bank fur Ostafrika (1919)
• These banks were mainly for serving colonial rulers and a few
businesses.
• After World War I in 1918, the British took over the control of the
country from the Germans.
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Colonial Era and the Period
Before Arusha Declaration in
•
1967
Three commercial banks were established in order to replace the
German banks. These banks were:
– the National and Grindlays Bank,
– the Standard Bank and
– the Barclays Bank D.C.O.
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Banking System in Tanzania
† During the colonial period there was no
Central Bank and the EACB used to act
as the Central Bank by controlling over
the supply of currency.
† Originally, EACB operated in Tanzania
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Banking System in Tanzania
† After independence the banking
industry still continued to face
numerous changes.
† In 1965 the decision by the East
African authorities was to stop the
functions of EACB and establish
separate Central Banks in Tanzania,
Kenya, and Uganda.
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Banking System in Tanzania
† The Bank of Tanzania Act, 1965,
was passed by the National
Assembly in December 1965, and
the Bank was opened by the first
President of Tanzania Mwalimu
Julius K. Nyerere on June 14, 1966.
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Banking System in Tanzania
† The Act empowered the Bank of
Tanzania to perform all the traditional
central banking functions.
† However, within eight months of the
inauguration of the Bank, in February
1967, the Arusha Declaration was
proclaimed, and, with it, the Bank
had to reorient its policies.
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Banking System in Tanzania
† Following the Arusha declaration of
February 1967, all commercial banks in
Tanzania, with the exception of National
Cooperative Bank (NCB) and the Peoples
of Bank of Zanzibar (PBZ), were
nationalized
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Post Arusha Declaration and the Period Prior
to 1991
• In 1967, following the Arusha Declaration, all private commercial banks
were nationalized and their assets and liabilities were merged resulting
into the establishment of one big commercial bank, namely the National
Bank of Commerce (NBC)
– There was an increase in the subsidies to the banks which were a burden
to the Government.
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The Period After 1991
• Following recommendations of the Commission, the Banking and Financial Institutions Act (BFIA)
was enacted in 1991 to govern the conduct of banking business in Tanzania.
– The Act gave the Bank of Tanzania powers to license, regulate and supervise banks and financial institutions.
• Some of the early entrants into the banking system with years of entry in brackets were: Meridian
Biao Bank Tanzania Limited (1992) later taken over by Stanbic Bank Tanzania Limited (May 1995),
Standard Chartered Bank Tanzania Limited (December 1993), Eurafrican Bank Tanzania Limited
(November 1994), and Citibank Tanzania Limited (May 1995).
• The NBC was restructured in 1997 and three separate entities were formed, namely:
– NBC (1997) Limited,
– the National Microfinance Bank Limited and
– Consolidated Holdings Corporation.
• The Cooperative and Rural Development Bank was also restructured into a private bank in 1996 and
renamed CRDB (1996) Bank Limited. This bank later changed its name to CRDB Bank PLC
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The Period After 1991
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ii. Theories of Banking
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The Financial Intermediation Theory of Banking
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The Financial Intermediation Theory of Banking
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The Financial Intermediation Theory of Banking
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Credit Creation Theory of Banking
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Credit Creation Theory of
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Banking
Credit creation theory of banking suggests that individual
banks can create money, and banks do not solely lend out
deposits that have been provided to the bank.
Instead, the bank creates bank deposits because of bank
lending.
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Credit Creation Theory of
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Banking
A bank’s ability to create new money, which is
referred to as ‘credit money’, is a result of a range
of factors;
Non-cash transactions account for more than 95% of all transactions
conducted within the economy,
Non-cash transactions being settled through non-cash transfers
within the banking system.
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Credit Creation Theory of
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Banking
Consequently, the amount of money that a bank can create is
not constrained by their deposit taking activities, and the act
of bank lending creates new purchasing power that did not
previously exist.
Banks’ ability to create credit money arises from combining
lending and deposit taking activities.
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The Fractional Reserve Theory of Banking
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The Fractional Reserve Theory of Banking
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The amount of money that banks are required to hold back is set by
the Central Bank as a percentage of total deposits and the Central
bank changes the reserve requirement periodically to ensure the
safety of the banking system as well as to influence the money
supply.
Since the amount of money available can affect inflation, interest
rates, and other economic variables, the Central Bank changes the
reserve requirement at banks when necessary to help keep those
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Functions of Commercial Banks in an Economy
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Functions of Commercial Banks in an Economy
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Functions of Commercial Banks in an Economy
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Functions of Commercial Banks in an Economy
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Primary Functions:
1. Acceptance of Deposits
From the standpoint of withdrawal, deposits accepted by
banks fall into two categories;
Demand deposits, and
Time deposits.
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Functions of Commercial Banks in an Economy
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Functions of Commercial Banks in an Economy
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Functions of Commercial Banks in an Economy
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Functions of Commercial Banks in an Economy
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2. Lending or Investment
Lending
Investments
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Functions of Commercial Banks in an Economy
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Secondary Functions
Besides the primary functions, banks also carry out other
functions termed as Secondary or Auxiliary functions, these
are of two types;
Agency Services, and
General or Miscellaneous Services
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Functions of Commercial Banks in an Economy
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Agency Services;
Colleting and payment of cheques
Buying and selling of the securities
Trustee and Executor services
Collection and payment of bills
Standing instructions
Etc.
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Functions of Commercial Banks in an Economy
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Etc.
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iv. Bank Regulation and Supervision
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Bank regulation and bank supervision are two terms which are
sometimes used interchangeably, but they are different.
Bank regulation: This refers to the written rules that define
acceptable behaviour and conduct for financial institutions.
Bank supervision refers to the enforcement of these rules.
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Bank Regulation
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Arguments for Regulation
Several economic and non-economic reasons have been
given to justify banking regulations. These include:
To protect depositors,
To assure the safety and soundness of banks,
To avoid (or to limit) the effects of bank failures,
To maintain monetary stability,
To protect the payment system and
To encourage efficiency and competition in the
financial system and in the economy.
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Arguments Against Regulation
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Arguments Against Regulation
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Arguments Against Regulation
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Bank Supervision
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Introduction
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Restrictions on Entry and Bank Examination
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Restrictions on Entry and Bank Examination
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International Banking Regulation
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Any Issues for Clarification?
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End
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