The Evolution of Banking

The word "Bank" has been derived from the word "Bancus" or "Banque" which means a bench. In the early days, Jews in Lombardy transacted the business of money exchange on benches in the market place. The word "bankrupt" has been used to denote the failure of a business.
 
Some people are of the view that the word "Bank" has been derived from the German word "Back" which means "joint stock fund". Later on, when the Germans occupied Italy, the word "Back" was Italianized into "Bank". Existence of banking operations have been found during the period of Babylonian Empire by temples and great land-owners. In Greece, the temples of Ephesus and Delphi were the biggest banks of their times. Romans also regulated the conduct of private banks in such a way that utmost confidence of the people was created in them.
 
If we look into Banking in the modern times, we find great Britain as the pioneer and the Lombard Street as the place where banking was formally started in the fourteenth century. These Lombardy merchants were so forceful that even kings had to depend on them for loans. The business of changing money was so lucrative that king Edward III established the office of Royal Exchanger for changing foreign money at a profit for the benefit of the Crown. The 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. Thus began the "issue" and "deposit" banking of modern times. In the year 1672, English 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 goldsmiths bankers formed themselves into a corporation in 1695, known as the Bank of England. By the year 1700, the Bank of England was not only issuing Notes but also conducting accounts for customers. Modern Banking

Modern banking has developed both in England and America. Limited liability concept has considerably expanded banking industry. In the succeeding year, 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 today. The development of large and financially strong banks gave a sense of security to the depositors in England; 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.
 
America has also been a center of banking development. Although the first bank in that country was established in 1780, the banking system in that country was established in 1780, the banking system in that country has been without a central bank up to 1940. During the Colonial period, the development of banking in America was linked with the exigencies of financing a new and developing country. Therefore, very little was done in the field of modern banking. Since there was lack of public confidence, the earliest banks were generally State Monopolies run in the interest of the merchants who organized and managed them. These banks were mainly transacting the business of short term commercial loans, yet due to their poor management they went bankrupt very easily and created financial panic from time to time.
 
Banks were also established in various countries of the world. In 1401 a German Public Bank was established. In the 16th century, banks were also established in Venice, Milan, Amsterdam, Hamburg and Nuremberg. Banko di Rialto was formed in Genoa in the year 1587. Bank of Amsterdam was founded in 1609. Bank of Hamburg came into existence in the 1960. This Bank rendered great service to the merchants as well as the countries it dealt with until 1873, when it was merged with the Reichbank.. 

Banking In The Sub-Continent

Banking has existed in the subcontinent since time immemorial. In the Hindu book of Vedic Epic, giving and taking of credit has been stated. Later on, Manu in his "Sammurti " clearly mentioned these transactions by saying: "A sensible man should deposit his money with a person of good family, of good conduct, well acquainted with the law, viracious, having many relatives wealthy and honorable." Manu has also prescribed the rules to govern the policy of loans and rates of interest. In the fifth century people were accustomed to use hundies. The ancient Indian bankers were also transferring the funds of their customers from one place to another with the help of hundies. These bankers were charging high rates of interest on the money lent to farmers against the mortgage of the standing crops; and sometimes at the rate was as high as 40 to 60 per cent per annum.
 
During Muslim period also banking received considerable impetus. Muslim rulers provided considerable encouragement to the farmers by giving them interest- free loans and grants in cash. Industrial development was not ignored at all. During this period, substantial qualities of textile, calico-printing and dyeing, pottery, china-ware, indigo, opium metal-work, paper, leather and sugar etc.were exported. Muslim historians of the 12th century have also mentioned some bankers known as "Multani" and "Shroffs" who were acting as agents to the government to collect revenue. Though the Muslim rulers did not establish "Bank" as such, yet they revolutionized the entire financial and monetary structure in India wherein the old "Sahokars" and "Mahajans" were eliminated.
 
Public Banks were not established in India till 1809 when the bank of Bengal was established. The bank was authorized to charge the maximum of 12% interest per annum, the power to issue Notes was not given to the bank till 1823 ; and the bank was allowed to open more branches in 1839. The year 1840 saw the establishment of the Bank of Bombay, followed by the Bank of Madras in 1843 with a Government subscription of Rs. 3 lacs each in their share capital. With the acceptance of limited liability concept, many joint stock banks were established. During the boom period of 1906 to 13, a number of joint stock Indian banks were established . With the passage of Imperial Bank of India Act in 1920, Peoples of Bank of India Limited, the Central Bank of India Limited, and the Bank of Baroda Limited were amalgamated into the Imperial Bank of India in 1921. With the passage of an act in the assembly, Reserve Bank of India started functioning in April 1935 as the Central Bank of India.
 
Banking facilities were well provided in those areas which constituted Pakistan. There were about 500 offices of scheduled banks in the territories now constituting Pakistan. Since Pakistan at that time was not in a position to establish her own banking system, It was arranged that the Reserve Bank of India should continue to function in Pakistan until 30th September 1948, so that the problems of time and demand liability, coinage, exchange etc. be settled between India and Pakistan. Unfortunately due to non-cooperation of Indian authorities., it was decided to establish our own central bank. The foreign expert advised that due to acute shortage of qualified staff the establishment of a Central Bank was not practicable. In spite of this state of affairs, the Govt of Pakistan decided to establish a full fledged Central Bank. Consequently the Governor General of Pakistan and the Father of the Nation, Quaid-i-Azam Mohammad Ali Jinnah inaugurated the State Bank of Pakistan on July 1948. Thus a landmark has been achieved with the establishment of our own Central Bank. In addition to 19 non-India foreign banks, thee were only two Pakistani banks i.e., Habib Bank and the Australasia Bank. In order to expand banking facilities in the country, the State Bank recommended expansion of Habib Bank and also establishment of a new bank which could serve as an agent of the State Bank. As a result, The National Bank of Pakistan came into being in 1949.
 
Although separation of East Pakistan has considerably disrupted the banking system of the country, yet the development of banking continued unabated. The network of branches now covers a very large semen of national economy. Besides increase in the number of bank branches, specialized credit and financial institutions have also developed over the years. Such institutions like National Investment Trust (N.I.T.), Investment Corporation of Pakistan (I.C.P.) and Small Business Finance Corporation etc. have been established which are catering to the financial needs of specific sectors.
 
Nationalization of banking sector has opened a new era of development of banking in the country. Considerable expansion has taken place in the banking sector and network of branches have considerably increased. Now the process of denationalization and privatization has started. Already Muslim Commercial, Allied Bank and United Bank have been privatized. Habib Bank Ltd., the largest commercial bank of the country is also in the process of denationalization. A much larger number of Private Banks have been established and these banks are providing valuable and competitive services to their customers. The contribution of these private banks is most valuable for the country.