SME Banks

SMEs have assumed great importance in the developing counties in recent years. Though they contribute very greatly to trade, commerce and industry yet they have difficulties it raising capital for them. Keeping all these issue in view SME banks have been established in Pakistan to cater to the financial needs of these enterprises. The SME banks are providing basically short term working capital to the small and medium enterprises in Pakistan.

What is Eximp Bank?

These are the banks which provide finance for promotion of imports and exports to trade,commerce and industry. These bank are contributing greatly towards the expansion of international trade of developed countries where they function mainly in private sector.

What is Cooperative Bank?

These were the banks established and registered as a cooperative venture to provide banking facilities to the members of cooperatives. In Pakistan the Federal Bank of Cooperatives was such a bank but now it has been merged with Zarai Taraqiati Bank.

What is Development Bank?

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, established under a specially promulgated law.
Zarai Taraqiati  Bank of Pakistan and Industrial Development Bank of Pakistan are very well-known development banks.

What is Investment Bank?

The investment banks assist business houses and the governmental bodies to rise money through the sale of stocks and bonds for usually long term purposes. These banks perform the usual functions of rising deposits of idle money from the public and finance the business houses and other bodies.

What is Consumer Bank?

These banks provide finance for purchasing consumption goods for the use of the borrowers. Consumer finance companies,sales finance companies and credit unions are some of the popular forms of consumer Banks.

Treasury Input

The inputs of commercial banks are deposits from customers. These are the sources of funds (liabilities), which are payable with or without profit on demand or at a specified date. Hence are called the demand and time liabilities of the bank. Out of these total demand and time liabilities, specific percentage amounts are kept towards maintenance of CRR(currently 5%) and SLR(currently 15%) requirements. The CRR is the cash reserve maintained with Central Bank at 0% rate of profit on daily basis. Similarly SLR is the liquid assets to be maintained in the form of liquid cash and government securities namely Federal Investment Bonds, Pakistan Investment Bonds and Market Treasury Bills. The rest of the funds i.e. remaining 80% may be used for lending and other investment purpose.

Treasury Banking

The Basic functions of treasury include.

1.       The Balance Sheet Management

·         Complaint to Central Bank regulations

ü  Statutory Cash Reserve Requirement (SCRR or CRR)

ü  Statutory Liquidity Reserve requirement (SLR)

ü  Foreign Exchange Exposure Limit (FEEL)

ü  Statutory requirements in Investments

ü  Statutory requirements towards foreign currency deposit.

ü  Other requirements

·         Liquid

·         Profitable

2.       Risk Management

·         Interest Rate Risk

·         Exchange Rate Risk

3.       Managing  /Advising Transfer Pricing

4.       Trading

·         Bonds/Securities trading

·         Foreign Currency trading

What is Mortgage Bank?

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. Saving and Loans associations and farm-loan associations are some of the well known forms of the mortgage banks.

What is Saving Bank?

The basis purpose of these banks is to inculcated the habit of savings in the people. The saving banks 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 banks 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 saving banks and saving account at National Saving Organization are well known Operational Saving Banks in Pakistan.

What is Merchant Bank?

Merchant Banks are those which have been mainly financing the domestic and international trade in United Kingdom. During the late 18th and early 19th Centuries the trade between countries was financed by bills of exchange by well reputed merchant houses for which they would charge a commission for their service. Thus the business of excepting bills of exchange to finance the trade developed and gradually this 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 has been gradually faded away.

What is Commercial Bank?

The Commercial Banks receive deposits from the general public which are repayable on demand upon written orders of the depositors. As their most distinctive feature the commercial banks maintain chequing accounts for the stituents.

The commercial banks are also distinguished for providing short term finance to trade,commerce and industry to enable these sectors to expand their productive activities.

Development of Modern Banking

The restriction however paved the way for deposit banks and cheque currency and soon the cheque currency proved to be very suitable. The reduction in stamp duty on personal cheques in 1853 gave further impetus for cheque currency, and they became very popular with the customers who would either pass them from hand to hand when expressed tro be payable to bearer or indorse when expressed to order.

In 1854 the Joint Stock Companies Act opened an ear of corporations and the Limited ?Liability Act 1855 restricted the liability of shareholders of a Limited Company to the amount of the successfully paid-up value of the shares held by them. In the succeeding years Joint Stock Banks became very common either by absorption of private banks or amalgamation amongst Joint Stock Banks themselves. Thus in 1918 came into being eleven Clearing Banks of today.

The effect of this historical development of banking in England has been fairy wide first emergence of a small number of large banks with wide net-work or branches and second increase in the popularity of bank-acccounts and a large scale use of cheques. The development of large and financially strong banks gave a sense of security to the depositors in Britain but at the same time it was felt that if the process of amalgamation was carried on still further there would be a danger of financial monopoly. Therefore in 1918 Treasury and the Board of Trade set up a committee to consider the matter of further amalgamations and absorption among the banks. The committee suggested that "legislation should be passed requiring that the prior approval of the Government must be obtained before any amalgamations are announced or carried into effect". The committee further proposed that the approval must be obtained from the Treasury and the Board of Trade both prior to amalgamation.

The recommendations of the Treasury Committee were approved and as a result only a small number of other banks were absorbed by larger London banks.

In 1946 the Labour Government nationalized the Bank of England and transferred the existing stock to the nominee of the British Treasury and empowered the Crown to appoint its Governor Deputy Governors and Directors. The other shareholders of the bank were given in exchange three per cent long term Government stock, thus keeping the holders content and happy as they were getting the same return as before.

In 1955 the British banks made a departure from traditional banking by undertaking hire-purchase finance for companies buying industrial plants and machinery and took interest on hire-purchase finance. The percentage of interest was so high that a number of companies became subsidiaries of the lending  banks.

Modern Banking Part 2

In 1672,however,British banking faced a great crisis when Charles-II borrowed huge sums of money from the goldsmiths and later refused to pay them back!Therefore,a number of goldsmith-bankers formed themselves into a Corporation in 1695,known was the Bank of England. This bank lent £ 1,2000,000 at 8% interest to William-III,who in return,allowed a number of privileges to the bank,specially the right to issue Notes payable to bearer on demand up to the amount of this loan. This was known as 'fiduciary' issue,not covered by gold. This new bank became a very serious competitor to the comparatively smaller private banks run by the London goldsmiths.

By the year 1700,the Bank of England was not only issuing Notes but also conducting accounts for customers. Being a Joint Stock Bank by Charter, its Directors were conducting the business like that of Limited Companies. The Bank of England was the only Joint Stock Company which was given the monopoly of issuing Bank Notes, though the very successfully outside London and were receiving valuables and money for safe-keeping,and also issued Notes as many instances the business of banking overshadowed the original occupation and became the main one.

This was affecting the position of the Bank of England. Therefore by an Act passed in 1708, the privilege to issue Notes in England was withdrawn from Joint Stock Banks and confound to the private banks with not more than six partners. This compelled the private bankers in London to develop the business of accepting money on deposits repayable by cheques.

In his book 'Lombard Street' Bagehot says:"Upto 1813 or thereabout in England the main profit of Banks was derived from circulation (of notes) and for many years after that deposits were treated as very minor matters"

Modern Banking Part 1

Despite the classical origin,banking in its modern form and structure started in Britain when many of Lombardy merchants came to England in the fourteenth century and settled in the parts of the city of London now called Lombard Street. These Lombards were so resourceful that even the kings had to depend on them for loans despite the face that the Church was firmly against usury. They dealt with not only keeping the money in safe custody from general public but also changed money for the travelers or merchants engaged in foreign trade.

By that time maritime transport picked up fast and it provided further expansions to trade to and from London.The Lombards responded to the needs of this expansion and developed the most important banking facility of documentary credits, in additions to other lending products for trade. The links with other countries outside Britain helped them to introduce money-transfer operations as well. All these banking services were however,provided at every high rate of usury. Therefore,it forced King Henry III of Britain to issue an order to ban charging of interest in excess of 43% per anum.

The Business of changing money was so lucrative that Kind Edward-III of Great Britain established the Office of Royal Exchanger for changing foreign money at a profit for the benefit of the Crown.

The discovery of America brought riches to Britain and gave a tremendous boost to foreign trade. The merchants now began to hold part of their riches in cash. These transactions,however,received a big setback in 1640, when King Charles-I seized £ 130,000 and bullion left for custody with the city merchants at the Royal Mint.

This shook the confidence of the merchants in the Royal Exchanger and the Royal Mint. Consequently this business was taken over by the goldsmiths who, up to that time,were dealing only in gold and silver. Since these goldsmiths required strong safes for the purpose of their own business,they introduced necessary facilities of safe-keeping of the valuables and cash of their customers. These goldsmiths issued receipts or notes to their depositors in respect of the cash or articles left with them. These were called Goldsmiths Notes, and carried an undertaking to return the money and articles to the depositors or bearers on demand. There was a considerable number of such Notes in circulation among various classes of merchants;and thus they can be aptly called 'Bank Notes' in their earliest form.

Over a period of time,these goldsmiths discovered that large sums of money were left in their custody for long periods;therefore,they started the use of this cash to advance loans to other persons for a fixed period of time and at a considerably high rate of interest. Moreover,they further encouraged cash deposits by their customers by offering them a part of the profits earned on the money. Thus began the 'issue' and 'deposit' banking of modern times. Some of the enterprising goldsmiths issued 'check books',for the attraction of their customers;and thus another important step in the evolution of banking was taken.

Early Growth

Banking in face is as primitive as human society,for ever since man came to realize the importance of money as a medium of exchange, the necessity of a controlling or regulating agency or institution was naturally felt.

Perhaps it were the Sumerians who carried on some such activities around 3400 BC which are considered as 'banking activities'.Later on the Babylonians further enlarged these activities.The scripts dating back to 20th century,discovered in Babylonian area,confirmed that Babylonians made great advancements in the areas of credit,specially in agriculture credits.It is evident that the temples of Babylon were used as 'Banks' because of the prevalent respect and confidence in the clergy.

King Hammurabi(1728-1686 B.C.) the founder of the Babylonian Empire,drew up a Code wherein he laid down standard rules of procedure for banking operations by temples and great land-owners. He got his Code inscribed on blocks of diorite about 8 feet tall,containing about `50 paragraphs which deal with nearly all aspects of deposits,and loans,interest,pledges,guarantees,natural accidents,loss,theft etc.

In the following era we find Greeks carrying on banking activities similar to those in Babylonia in 4th Century BC.Because of their sancity the temples remained the most popular place of banking activities. The Greek temples of Ephesus and Delphi were the biggest 'Banks' of their time,where the people not only deposited their money and valuables for safety and security,but also borrowed money from there.The business of exchanging money and making remittances between various cities was also carried out under the Greek system.After some time,Aristotle's dictum that "Charging of interest was un-natural and immoral" became very popular,but in the following periods growing necessity forced the acceptance of the principle of interest in lending and borrowing.

Evolution of money as medium exchange and store of value brought a revolution in the monetary and financial systems,yet it is not certain as to who invented money. History records that Gyges,King of Lydia,casted elect-rum(a natural alloy of gold and silver) ingots of identical shape and of uniform weight with a triple emblem engraved on it as an official guarantee of value in 687 B.C. They are regarded as the earliest currency coins in the world.

The Romans brought some drastic changes in the banking procedures and practices established by the Greeks earlier. They regulated the conduct of private banks in such a way that utmost confidence of the people was created in them because the banking business was mostly done by individuals.

The Egyptians brought a great deal of improvement in the banking and other financial activities during first and second centuries A.D. These developments could not be perpetuated in the following years due to instability,disturbance of peace and interruptions in the means of communication. The ultimate fall of the Roman Empire and subsequent effects completely destroyed the established traditions and practices of banking and finance by 5th Century AD.

The fall or Roman Empire caused adverse effects on banking but the 'Revival of Civilization' (Renaissance) in the following century brought great increase in commercial transactions in European countries. It heralded re-emergence of banking operations in the area. Foreseeing the opportunities in near future many dealers in money started moving to the cities where business potentials were high. The cities of Venice,Florence and Genoa became the center of trade and commerce. The development compelled the business community to borrow from the Hebrew money dealers on high rate of interest and usury.

Generally these money dealers were sole proprietors and provided their services at very harsh terms and conditions. Therefore,it was felt necessary to regulate it and institutionalize it.Some countries established public banks either to facilitate trade and commerce or to serve the government. The earliest known public bank is said to be the Bank of Venice which was establish in 1157 A.D. This was followed by some 'Monte' or 'standing' banks during 1336 to 1349 in various cities in Italy. Though all these institutions were called banks,but they were not 'banks' in the same sense as we see them today.

Seeing the change,other money-dealers started organizing themselves;and banks started coming up at the principal seaports in southern Europe also. Soon Venice and Genoa became the most important money-markets of the time;and banking,though different from its present from,flourished.What we know now as 'modern banking' originated, in face, in the 14th century in Barcelona.

In 1401 a German public bank was formed comprising the operations of discounting,deposit and transferring of money. This was followed by the formation of Bank of Genoa, in 1407. By the 16th century, some more public banks were formed in Venice,Milan,Amsterdam,Hamburg and Nuremberg.

Introduction

Evolution Of Banking.

It has not so far been decided as to how the world 'Bank' originated.Some authors opine that this word is derived from the words 'Banque' which mean a bench. The explanation of this origin is attributed to the face that the Jews in Lombardy transacted the business of money exchange on benches in the market-place; and when the business failed, the 'Baancus' was destroyed by the people.Incidentally the word 'Bankrupt' is said to have been evolved from this practice. The opponents of this opinion argue that if it was so, then how is it that the Italian money changers were never called 'Banchierei' in the middle ages?

Other authorities hold the opinion that the word 'Bank' is derived from the German word 'Bauk' which means 'Joint stock fund'.Later on,when the Germans occupied major part of Italy,the word 'Bauk' was Italianized into 'Bank'.

It is,therefore,not possible to decide as to which of the opinions is correct, for no record is available to ascertain the validity of any of the opinions.