HISTORY OF BANKING

2.1 WHAT IS BANK?

There is no consensus on the origin of the word Bank. According to some authorities, the word

bank itself is derived from the word “bancus” or “banque”, means a bench. The early bankers, the

Jews in Lombard, who are thought to be the forefathers of Banking used to transact their business

on benches in the market places. The word bankrupt also comes from there. However, the Oxford

Dictionary’s Millennium Issue gives a precise meaning of the word bank defined as” Bank is an

establishment of depositing, with drawing and borrowing money”.

Although banking has developed too much than deposits withdrawl and
borrowing of money, yet the basic function of bank remains as described above.
BRIEF STUDY OF BANKING
Banking is thought to begin somewhere in early 2000 BC when the Babylonians developed a
banking system. The origin of modern banking can be found in the modern dealers in Florence,
who received money on deposits, and were lenders of money in the 14th century, and the names
of the Bardi, Acciajuoli, Peruzzi, Pitti and Medici soon became famous throughout Europe as
Bankers. The structure and modern form of banking started taking shape when many of the
Lombardy merchants came to England in the 14th century and settled in the part of the city of
London now called Lombard Street. They were so resourceful that even the kings had to depend
on them for loans. The goldsmiths at that time also started issuing receipts to their depositors in
respect of the cash or gold articles left with them. These were called Goldsmith Notes. An
important step in the evolution of banking was taken when these goldsmiths started lending at
interest and issues cheque books. Some of the goldsmiths, after they were refused payments by
Charles II, formed themselves into a Corporation in1965, known as the Bank of

England.
This proved to be a turning point in banking history and paved the way for
modern banking through different legislatures by the British Government.
BANKING IN INDO-PAKISTAN SUBCONTINENT

Ever since, money became the medium of exchange in our society, banks existed in one form or

the other. In those days their function was mainly to lend money to the people and the kings.

The Vedic Epics clearly mentioned about giving and taking of credit and also contracts of debts at

dicing. 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, veracious, having many relatives wealthy and honorable”.Manu has also

prescribed the rules to govern the policy of loans and rates of interest.

During the fifth century people were accustomed to use “hundies” as a credit instrument. The

land revenue was collected generally in kind, while the services were paid mostly in cash.

Therefore, banker’s assistance in these and other financial matters of State was very much

necessary. The bankers enjoyed very good reputation, and the people deposited their jewelry and

cash holdings with them for custody.

Loans were given to the people against personal and other securities such as ornaments, goods
and immovable properties and the banker and customer had very cordial relations. The Muslim
rulers provided substantial encouragement to the farmers by giving them interest-free loans and
grants in cash. They also allowed them to pay the land revenue in cash or kind. This “agricultural
finance” resulted in bumper food production, which had a great surplus after consumption at
home. Therefore, it

was being exported against pure gold.

Industrial development was not ignored at all. State loans were also given for increase in

production. These factories thus produced enough for local consumption and left substantial

quantities for exports. Textile, calico-printing and dyeing, pottery, china-ware, indigo, opium,

metal-work, paper, leather and sugar etc. were being exported to foreign countries like China,

East Indies and Pacific Islands against pure gold. Thus the port towns of “Surat” and “Coa”

(Gujarat), “Calicut” and “Cochin” (Malabar coast); “Masulipatam” and “Negapatam”

(Coromandal coast) became the centers of the world trade, where foreign buyers used to come for

purchase of Indian commodities. Muslim historians of the 12th century have also mentioned

some, bankers known as “Multani” and “Shroffs”. They used to act as agents to the government

to collect revenue. Such a prosperous society did need a well-regulated financial administration

and monetary system. Muhammad Tughlaq was the first king to have introduced token currency

in India.Akbar established mints all over the country to prepare and issue currency. Royal

Treasuries were also established all over the country under a well conceived plan so that they
could function as the offices of “Central Bank” of that time, they also worked as the drawing and

disbursing offices to the Government.

Though the Muslim rulers did not establish “Bank” as such, yet the revolutionized the entire

financial and monetary structure in India and the old “Sahokars” and “Mahajins” were eliminated.

Government introduced reforms were so effective that these “classical-bankers” were pushed into

the past. Due to the prosperity of Indian society of that time, the Royal mints and Treasuries did

act as agencies for transfer of money as well as for custody of valuables.

BANKING IN PAKISTAN

At the time of independence, the areas, which now constitute Pakistan, were producing only food

grains and agricultural raw material for Indo-Pakistan subcontinent. There were practically no

industries, and whatever raw material was produced was being exported from Pakistan. However,

commercial Banking facilities were provided fairly well here.

Before partition of sub-continent, the entire baking system was almost in the hands of non-

Muslims. When Hindus capitalists became sure of division of sub- continent, they transferred

their funds to safe places in India. Pakistan was declared an independent state. In mass scale

migration of Non-Muslim from Pakistan to India caused the reduction in bank deposits. The

number of scheduled bank branches was reduced from 619 to 213, and the number of non-

scheduled bank reduced from 411 to 106. The independent state of Pakistan did not have a central

bank of its own at the time of independence.

As a new country without resources it was very difficult for Pakistan to run its own banking

system immediately. Therefore, in accordance with the provision of Indian independence Act of

1947, an Expert Committee was appointed to study the issue. The Committee recommended that

the Reserve Bank of India should continue to function in Pakistan until 30th September 1948, so

that problems of time and demand liability, coinage, currencies, exchange etc. are settled between

India and Pakistan. It was also stipulated that Pakistan would take over the management of public
debt and exchange control from Reserve Bank of India on Ist. April, 1948, and that Indian Notes

would continue to be legal tender in Pakistan till 30th September 1948. Following the

announcement of independence Plan June 1947, the Hindus residing in the territories now

comprising Pakistan started transferring their assets to India. Moreover, the banks including those

having their registered offices in Pakistan transferred to India in order to bring a collapse of new

State. Some important dates are mentioned here,

Thefir s t important date was establishment of Habib Bank Limited, on August 25, 1941 at

Bombay. This was the first bank in Indian sub-continent, which was operated by Muslims. Habib

bank Limited transferred its Registered Head Office to Karachi on August 07, 1947. It played a

great role in the Pakistan’s Economic Development.

Thesecond important date in the history of Banking in Pakistan is the establishment of

Australasia Bank limited, at Lahore on December 03, 1942. Its name was changed to Allied Bank

of Pakistan Limited, on July 01, 1974. After nationalization of the Banking Industry on January

01, 1974, three other banks were merged in to it.

The other important date is July 09, 1947; when the Muslim Commercial Bank Limited was

registered and incorporated at Calcutta. Its registered Head Office was transferred to Dacca on

August 17, 1948. Subsequently its registered Head office moved to Karachi on August 23, 1956.

The most important date is July 01, 1948, when State Bank of Pakistan was established at

Karachi as the Central Bank of the country. Central bank addressed itself with an urgent task of

creating a national banking system. In order to attain this goal it provided every help and

encouragement to Habib Bank to expand its network of branches, and also recommended to

Government the 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 on November 09, 1949, and by 1952 it
became strong enough to take over the agency function from the Imperial Bank of India. This was

the first Commercial Bank in the public sector. By December 1973 there were 14 scheduled

banks with 3042 branches all over the country. They were:

National Bank of Pakistan.

Habib Bank Limited.
Habib Bank (overseas) limited.
United Bank Limited.
Muslim Commercial Bank Limited.
Pak bank Limited.
Standard Bank Limited.
Commercial Bank Limited.
Australia Bank Limited.
Bank of Bahawalpur Limited.
Premier Bank Limited.
Sarhad Bank Limited.
Lahore Cooperative Bank Limited.
Punjab Provincial Cooperation Bank Limited.

At the end of June 1999, the number of scheduled Banks in Pakistan was 52 with 7,874

branches.Out of these; there are 25 Pakistani banks with 7,779 branches and 27 foreign banks

with 95 branches.