Banking Explained

Banking explained

Banking explained-Money and credits

The bank is an organization where the people of a country deposit money who have excess amounts of money and to give the loans to the businessmen who need credit.

Banking is a process of depositing money and investing in clients in a systematic way.
Dr. Md. Makhluk Hasan says,” Banking is the activities of a banker. Banking is what is done by the banker.”


Banking explained for the students

Origin of the word Bank

There seems no uniformity amongst the economist about the origin of the word Bank. According to some authors the word “ Bank”, itself is derived from the word “Bancus” or – Banque that is a bench. The early bankers, the

Jews in Lombardy, transacted their business on benches in the market place, when, a banker failed, his

‘Banco’ was broken up by the people; it was called Bankrupt. This etymology is, however, ridiculed by mcleod on the ground that “The Italian Money changers as such were never called Banchier in the middle ages.”

It is generally said that the word “Bank” has been originated in Italy. In the middle of 12th century, there was a great financial crisis in Italy due to war. To meet the war expenses, the government of that period forced subscribed loans on citizens of the country at the interest of 5% per annum.

Such loans were known as ‘Compare’, ‘Minto’ etc. The most common name was “Monte’. In Germany, the word ‘Monte was named as ‘Bank’ or ‘Banke’. According to some writers, the word ‘Bank’ has been derived from the word bank.

It is also said that the word ‘bank‘ has been derived from the word ‘Banco’ which means a bench. The Jews money lenders in Italy used to transact their business sitting on benches at different market places. When any of them used to fail to meet his obligations, his ‘Banco’ or banch or bench would be broken by the angry creditors. The word ‘Bankrupt’ seems to be originated from broken Banco. Since the banking system has been originated from the money lending business; it is rightly argued that the word ‘Bank’ has been originated from the word “Banco’. Whatever be the origin of the word ‘Bank’ as Professor Ram Chandra Rao says, ―It would trace the history of banking in Europe from the Middle Ages.

Today the word bank is used as a comprehensive term for a number of institutions carrying on certain kinds of financial business. In practice, the word ‘Bank’ means which borrows money from one class of people and again lends money to another class of people for interest or profit.

Banking Services

In this changing scenario, the role of banks is very important for the growth and development of customers as well as the economy. Banking Sector is offering traditional and other services as under:

Regular Saving and current accounts

Regular fixed deposits

ATM services

Credit cards

Debit  cards

Student banking

Special NRI Services

Home loan, Vehicle loan

Tele and internet banking

Online trading

Business multiplies A/Cs


Relief bonds & mutual fund

Loans against shares

Retail banking

Special deposit scheme

Senior citizen – special deposit scheme

Other facilities for customers.


01. A traditional financial institution that issues stock and is owned by its stockholders.


A credit union (or Caisse Populaire in

Quebec) is a not-for-profit, co-operative financial institution owned by its members.

02. Banks and Trust Companies are for-profit entities whose interests include earning a return on their investments. Credit unions are not-for-profit.


03. Traditional banks serve customers from the general public. Most anyone can use a bank, subject to its policies. Credit unions exist solely to serve their members. A person must be within the credit union’s field of membership, as defined by its charter, in order to join, although this common bond requirement has been loosened in recent years.
04. Like other for-profit businesses, banks must pay taxes to the government. Like other not-for-profit institutions, credit unions are exempt from paying federal income tax
05. Most bank deposits are federally

insured up to $100,000 per depositor, per institution by the CDIC, a Crown Corporation.


Most credit union deposits are provincially insured by provincial stabilization funds and/or deposit insurance corporations, with the amount of coverage varying by


Role of the central bank of a country

[A] Traditional Function

Issue of the Currency Note

Banker to the Banks

Banker to the Government

Exchange Rate Management

Credit Control Function

Supervisory Function

[B] Developmental Function

Development of the financial System

Development of Agriculture

Provision of Industrial Finance

Provision of Training

Collection of Data

Publication of the Reports

Promotion of Banking Habits

Promotion of Export through Re-Finance

[C] Supervisory Function

Granting Licenses to the Banks

Bank Inspection

Control over NBFIS

Implementation of the Deposit Insurance System

[D] Traditional Banking Functions

Receiving of Money on Deposit

Lending of Money

Transferring Money From Place to Place

Miscellaneous Functions: Safe custody of valuables, issue of various forms of credits e.g. letters of credit, traveler‘s cheques and furnishing guarantees on behalf of customers and providing fee based services are also important functions performed by banks.

Functions of Commercial Banks:

Acceptance of deposits



Challenges in Banking Sector

Improving Risk Management System

Rural Coverage

Technological Problems

Customer Services

Branch Banking

Corporate Governance: Banks not only accept and deploy a large amounts of uncollateralized public funds in a fiduciary capacity, but they also leverage such funds through credit creation. Banks are also important for the smooth functioning of the payment system. The profit motive cannot be the sole criterion for business decisions. It is a significant challenge to banks where the priorities and incentives might not be well balanced by the operation of sound principles of Corporate Governance. If the internal imbalances are not re-balanced immediately, the correction may evolve through external forces and may be painful and costly to all stakeholders. The focus, therefore, should be on enhancing and fortifying the operation of the principles of sound Corporate Governance.

Problem and Prospect of Banking:

During the post-reform period and due to the situation of Liberalization, Privatization, and Globalization, the banking sector is facing some problems and challenges. These are as under:

Low Profitability and Productivity

Lack of Integrity

Increase of Administrative Expenses

Survival of loss-making branches


Lack of Professional Behavior

Lack of professional and friendly approaches with customer

Non-performing Assets

Customer-oriented market

The problem of customer satisfaction

Depression period running over the country

Managing workforce

Management of technological advancement