Chapter-01

1. Meaning of a Bank:

According to some economists, the word ‘Bank’ has been derived from the German word ‘BANC’ 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 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 the olden days Jews entered into money transactions sitting on bench 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. As a matter of fact, it was originally not a bank but simply an office for the transfer of public debt.

Now a bank is a financial intermediary accepting deposit and granting loans, offers the widest menu of services (ancillary, subsidiary, miscellaneous etc.) of any financial institution.

Banks are financial service firms producing and selling professional management of the public’s funds and performing many other roles in the economy.

Banks cater the needs of agriculturists, industrialists, traders and to all other sections of the society. Thus they accelerate the economic growth and steer the wheels of the economy of a country.

2. Bank Business:

According to Banking Companies Act 1991

"Banking Business" means the 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”.

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2.1 Business of Banking Company:

Business of banking company is classified as:

(a) Main Business or Functions(b) Subsidiary Business or Functions or services.

Main Business or Functions

The Banking companies are permitted to do the following main activities: The borrowing, raising or taking up money. The lending of money with or without security. The granting and issuing of letters of credit of various kinds of travelers cheque. The buying, selling and dealing in bullion/ species. The buying and selling of foreign exchange including foreign currencies. The acquiring, holding, issuing on commission, underwriting and dealing in stock,

funds, shares, debentures, bonds, securities and investments of all kinds. The purchasing and selling of bonds, scripts etc, on behalf of customers or

receiving such securities for safe custody. The providing of safe deposit vaults. The collection and transmission of money and securities.

Subsidiary Business or Functions:

In addition to the above main functions, the banking companies are permitted to render the following subsidiary services:

Acting as agents for individuals, governments etc. Carrying on agency business of any description. Contracting, negotiating and issuing public and private loans. Carrying on and transacting every kind of guarantee and indemnity business. Managing, selling and realizing any property which may come into its possession

in satisfaction on any of its claims. Acting as trustees for customers. Undertaking of the administration of estates as executor or otherwise. Dealing with all or any part of the property and rights of the company.

3. Evolution of Banking Institution

3.1 The business of banking is as old as the civilization itself. As early as 2,000 B.C., the Babylonians had developed a system of banks. They used their temples for lending rates of interest against gold and silver which had been left with them for safe custody.

3.2 After the death of Emperor Justinian in 565 A.D., the Mighty Rome Empire failed resulting in severe damage to the banking business. It was only with the revival of the

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trade and commerce in the middle ages that the lessons of finance were learnt afresh from the beginning. However, during this period, banking was mainly confined to money-lending activities which were largely in the hands of the Jews and the Lombardy who lent money to all. The Christians were forbidden by their religion to lend money on interest since it was considered to be a sinful activity.

3.3 However, 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.

3.4 The Bank of Venice founded in Italy in 1157 was the first public banking institution. The Bank of Barcelona (in Spain) was established in 1401 followed by Bank Geneva in 1407. The Bank of Amsterdam was established in 1609. All these banks accepted the deposits which could be drawn on demand of transferred from the account of one person to another.

3.5 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 save custody.

3.6 Goefrey Crowther, a noted economist has identified three ancestors of the present day banker. The Merchant, the money-lending 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 the known world. 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.

3.7 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. In India, the Joint Stock Companies Act, 1850 was the first legislative enactment in the country which permitted the corporate sector to come into the banking business as per the provisions of this Act. The first bank to be established under this Act was the Oudh Commercial Bank in 1881 followed by Punjab National Bank in 1895 and People’s Bank in 1901.

3.8 After independence of Pakistan in 1947, the country started the banking business with two branches of State Bank of Pakistan and seventeen large commercial banks, two of which were controlled by the interest of the people of East Pakistan and three by foreigners other than West Pakistanis. There were fourteen smaller commercial banks.

3.9 In 1971 Bangladesh puts its name in the world map as an independent country and the Government of Bangladesh nationalized all the banks under President’s Order no. 26 of

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1972 for the purpose of exercising social control over the resources of the country. The undertaking of the then existing banks were renamed as under:

Serial No

Existing Bank New Bank

01 National Bank Sonali Bank02 Bank of Bahawalpur Ltd.03 Premier Bank Limited04 United Bank Ltd. Janata Bank05 Union Bank Limited06 Habib Bank Limited Agrani Bank07 Commerce Bank Limited08 Muslim Commercial Bank Ltd. Rupali Bank09 Standard Bank Limited10 Australasia Bank Limited11 Eastern Mercantile Bank Limited Pubali Bank12 Eastern Banking Corporation Ltd. Uttara Bank

3.10 Why Nationalization Socialization of economic activities. Constitutional obligation of the government. To exercise complete control over the bank recourses. Banks were abandoned by Pakistani/ Bangladeshi owners. To run banking business as per directive of the Government.

3.11 Impact of Nationalization: Flow of credit to priority sector through refinance. Flow of credit for reconstruction/ rehabilitation. Expansion of Bank branches in rural areas. Banking sector became over burden with non performing loans. After 1971, growth unionism in state owned enterprise- administrator for

industrial units- sell of inventories/ spare parts- customer/ consumer service deteriorated- safety deteriorated.

No work, but regular payment of salary to the employee. Incompetent management. Government influence on banks credit. Interference/ barrier by the CBA in the bank management. Bank employees treated themselves as government servants and did not care for

their responsibilities.

3.12 From 1981 privatization history in banking sector in Bangladesh starts and they occupy the lion shares of bank business legging the nationalist bank behind their achievement. So the government realizes the future fate of the nationalist banks and decided to make them corporatizasion by registered with joint stock company in 2007,

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with the intention to change their attitude, work culture, to ensure good governance and earning highest profit competing with other banks. Accordingly all the nationalist bank being corporated in 2007 started their business as state owned commercial banks.

4. Types of Banks and their Functions:

4.1 Central Bank

Bangladesh Bank, the central bank is the monetary authority of the country. It came into existence under the Bangladesh Bank Order 1972 (Presidential Order No. 127 of 1972) which took effect on 16 December 1971. Through this order, the entire operation of the former State Bank of Pakistan in the eastern wing was transferred to Bangladesh Bank.

Main functions of Bangladesh bank:

To formulate and implement monetary policy. To formulate and implement intervention policies in the foreign exchange market.

To give advice to government on the interaction of monetary policy of fiscal and exchange rate policy, on the impact of various policy measures on the economy and to propose legislative measures it considers necessary or appropriate to attain its objectives and perform its functions.

To hold and manage the official foreign reserves of Bangladesh.

To promote, regulate and ensure a secure and efficient payment system, including the issue of banks notes.

To regulate and supervise banking companies and financial institutions.

4.2 Commercial Banks

Commercial Banks play a vital role in economy of a country. The banks mobilize deposit from the public which are repayble on demand or a short notice. They lend to traders and manufactures for short and long periods. They provide the working capital to the businessmen in the form of over draft and cash credit. They also provide the different credit products among the businessman from small to big one. Besides, the banks render a number of agency and subsidery services such as: collection of cheques and bills, safe keeping the valuables, remmittance of funds etc. The services of banks are with the change in the needs and requirement of the soceity. Now in Bangladesh 49 Banks are playing role in the economy of which Sonali, Janata, Agrani & Rupali are state owned commercial Banks.

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4.3 Foreign Bank:

In Bangladesh 9 foreign banks- Citibank, HSBC, Standard Chartered Bank, Commercial Bank of Ceylon, State Bank of India, Habib Bank, National Bank of Pakistan, Woori Bank and Bank Alfalah have banking activities of Personal Banking, International Banking, Deposit & Credit Scheme, SME Banking, Foreign Currency A/C, Rural Credit, Micro Credit, Industrial Financing, Bond etc.

4.4 Specilized Banks in Bangladesh:

Other than the above mentioned banks the Govt. have established 7 specilized banks with the view to render specilized services in the field of agriculture, industry, employment and manpower export etc.

Banks like investment or industrial bank, exchange bank, co-operative bank, savings bank etc are in existance in banking sector.

4.5 Difference between Central Bank and Commercial Bank:

Central Bank Commercial Bank

Formation It is established by the special law or order of the government.

It is established by the approval of Government within the company law.

Objective Main objective is to serve the people, not to earn the profit.

Main objective is to earn profit.

No. of Banks In a country only one central bank is performed.

A sum of commercial banks have their banking activities in a country.

Govt. influence Direct influence of govt. upon the central bank.

Indirect influence of govt. and direct influence of central bank upon the commercial banks.

Stand in money market

Central bank is controller, founder and director of money market.

Commercial bank is only a member of money market.

Competition Central bank has no competitor in the country.

Commercial banks compete each other.

Note issue Central bank issue bank notes. Commercial banks have no power to issue bank notes.

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Agent Central bank is an agent of the state.

Commercial bank is an agent of customers.

Credit Control It controls lending operations in a country by controling money supplying.

Commercial banks comply the credit control policy.

5. Meaning of Banking:

Banking means the business of banks. In Banking Company Act 1991, Banking means- Accepting, for the purpose of lending or investment of deposit of money from the public repayable on demand or otherwise and withdrawable by cheque, drafts, order or otherwise.

6. Banking System:

The development of commercial banking institution has taken place in different countries according to their economic, political, social and geographical conditions. The main banking system according to which banks have developed in defferent countries can put as follows:

Branch Banking and unit Banking. Chain Banking and Group or holding company Banking.

Deposit Banking, investment Banking and mixed banking.

Branch Banking:

Branch banking is a system where a bank with a network of branches through out the country carries out its banking operations. The main features of branch banking system are:

The Bank is owned by a group of share holders and controled by single board of directiors.

The Bank has a central office popularly termed as the head office of the bank which controls the operation of defferent branches.

Each branch is managed by a branch manager who manages the affairs of the branch as per the directives and policies of the head office.

For external reporting the asset and liabilities of the branches and the head office are agregated.

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6.1 Correspondent Bank:

It is not posible for a Bank to have branches in each and every area in home and abraod. In order to have business transanction settled, a bank may have to enter into agreement with other bank to represent it in area where the former does not have its own branch but the later has. Such bank which has been appointed to represent another bank is termed as correspondent bank. Both banks open each other’s account in books for carring out their operation. These accounts are called vostro/ nostro account.

6.2 Advantages of branch banking:

Economize of scale- In case of branch banking the level of operation is quite large as compare to unit banking.

Lower cash Reserves: A large bank with a number of branches can manage its business with lower cash reserves since each of its branch can draw upon the resoures of branch or branches, if an emargency arises.

Divercification of Risk: In branch banking industrial as well as geographical diversification of loan risk is posible. As a result the loss suffered by branches on account of fall in industrial activity in a particular area may be more than compansated on account of profit made by branchs in areas where there may be boom in business and industrial activity.

Better Customer Service: Branch banking provides better service to customers in remmittance and collection of funds. Morever, the objective of opening branches is to take banking service to doors of people who need them. Thus, service is cheap as well as convenient. Each branch has to handle limited custimers of the locality, hence the branch manager can personally look to their problems.

Safety of Loans: While lending money the branch banks follow the policies as laid down by their head office. The chances of favourism are therfore reduce to the minimum. Moreover, loans beyond a particular limit are to be approved by the head office as per the prescribe procedure. This one ensures safety of loans and reduces the chances of banks suffering loses due to bad loans.

6.3 Disadvantage of Branch Banking:

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Indivitual needs ignored: In case of branch banking the branches are guided by the policies laid down by the head office which is quite unaware of the indivituals needs. The branch manager has not much role to play.

Red Tapism: in branch banking a branch manager is required to take the instruction of the head office from time to time. He cannot take several decisions at his level. Thus, there is bound to be red tapism and delay in prossesing loan application and other activities.

Lack of Effective Control: In case of branch banking, bank sometimes become unmanagable due to large increse in the number of branches. As a result the control gets slackened and increses the changes of frauds and manupulation.

Local Needs Ignored: Branch banks do not have attachment with a particular place. Branch managers are also not local people. They are subject to frequient transfers. The funds collected from local sources may be used for meeting the requirement of other places where the bank may find the investment more lucrative. Thus, local needs are not given that much of attention in case of branch banking.

Failor of Banks: In Banch banking unremunerative and inefficient branches continue to exist at the expense of remunerative and efficient branches. In case these practice goes too far it may cause failor of banks having repercussions through out the country.

6.4 Unit Banking:

Unit banking is a system where the operations of a bank are confined to a single office located in a particular area. A unit bank virtualy has no branches. In order to provide facilities to his customers in remmittance and collection of funds a unit bank resorts to coresponded banking system.

United States of America can rightly be termed as the home of unit banking system. Through its importance in that country’s banking system is declining after the World War II, there is no denying the fact that even today unit banks constitute more than 60% of the total number of banks in USA.

There are still controversy regarding which system of banking , branch banking or unit banking, is better. Both have their advantages and dis-advantages. As a matter of fact advantages of one are the disadvantages of the other.

6.5 Chain Banking:

Chain banking is a system where an individual or group of individuals or members of a family control the operations of two or more banks. The control is exercised

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either through holding majority of shares in each bank or inter-locking directorships. However, each bank remains its indivitual entry.

6.6 Group Banking:

It is a system where two or more banks are controlled by a holding company. Thus, group banking is similar to chain banking except with the difference that instead of an individual or group of individuals or members of a family, an incorporated company having a separate legal entity holds majority of the voting power in the companies of the group. Such holding company may or may not be engaged in the banking business.

6.7 Deposit Banking:

It is a system of banking where the banks involve themselves only in acceptance of deposits repayable on demand and lending money to trade and industry fot short periods not exceeding a year or for meeting working capital requirements. As a matter of fact the term commercial banks in the earlier stages was used only for such banks. In England commercial banks are mainly concerned with short term credit requirement and hence England is considered to be home of deposit banking.

6.8 Investment Banking:

It is system where banks arrange long term funds for business and industry. They work both as financiers as well as underwriters. As financiers they provide long-term funds to business and industry. As underwriters they work as middle men between business corporations and investors. They undertake the responsibility of selling shares or debentures of the corporation to the general public for commission. In the absence of failure of the public to subscribe in full, they take the unsubscribed portion of the shares or debentures underwritten by them.

6.9 Mixed Banking:

It is a system where banks combine both of deposit banking and investment banking functions. Thus in this type of banking, banks raise deposits from the public repayable on demand and lend it to meet both short term as well as long term requirements of trade and indurtry.

The system of mixed banking also started with Germany in the beginning of 20th

century. The German banks started meeting the total capital requirements of

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industry on a consortium basis. According to this basis to meet the capital requirements of a particular business, the various banks formed themselves into a group or ‘Consortium’, as popularly known. The members of the consortium provided finance in their agreed share.

7. BANKING REGULATION ACT, 1949  

Banks are public service institution dealing with the funds of the public. Unlike joint stock companies which obtained required capital from the share holders. Banks obtain a very large portion of their working capital from the public in the form of deposits. Hence in the national interest there is need to regulate the working of banks by a separate acts.

Unfortunately in India there was no separate legislation for banking till 1949 and so banks were brought under the control of the Indian Companies Act. Through the central Banking Enquiry Committee recommended the need for a separate legislation, it was not given due consideration then. However, subsequent developments like mushroom growth of banks with inadequate capital, dishonest management, speculative investment, appointment of incompetent directors for long periods with high salaries, poor liquidity of funds etc., necessitated the passing of a separate Act for banking companies. Accordingly a bill was introduced in March 1948 and was passed in the parliament in February 1949. It came into force from 16th March 1949. This Act was originally called the Banking Companies Act, 1949 and now it is renamed as the Banking Regulation Act 1949.

8. Banking Company Act 1991:

Before discussing Banking Company Act 1991, we should have a clear idea what a “company” mean. The definition of company given by Justice Lindlay has been chosen by majority and accepted by all which is stated as- ‘A company is a voluntary association or organization of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business and who share the profit or loss arising there from.’

In this subcontinent the Company Act came in forth in 1850 which was shaped in full in 1913 and was in force up to 1994.

But due to explosive expansion of banking business, it needs a separate law for the maintenance of the business activities. In 1962, the then Pakistan made an ordinance named “Bank Companies Ordinance- 1962”. The ordinance is amended in 1991 which was approved by the 5th National Assembly of the sovereign in the same year and the so called Banking Company Act 1991 comes in force. During the starting of the Act it was

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in 8 parts with 123 sections. In the long journey of the Act, some sections are amended and suspended through Banking Company (Amendment) Act 1993 (section 13), 1995 (section 25), 1997 (section 11), 2001 (section 23), 2003 (section 11).

The important sections of the act are:

Section 3- Limited application of the Act around of cooperative banks and other financial institutions.

Section 5- Definitions- Financial institutions, company, companies Act, Defaulter debtor, demand liabilities, secured loan or advance, scheduled bank, debtor, creditor etc.

Section 7- Business of the bank companies

Section 10- Disposal of non-used assets in banking business.

Section 12- Restriction in regard to removal of document and records.

Section 13- Minimum paid up capital and reserve

Section 15- Election of new directors

Section 17- Vacation of the office of the director

Section 18- The provisions concerning certain benefit of the directors.

Section 22- Restriction on the payment of dividend

Section 24- Reserve Fund

Section 25 Cash reserve fund

Section 26- Subsidiary Companies.

Section 27- Restriction of paying of loans and Advances

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