BANKING LAW

Mid-Term Examination

APRIL 11, 2021

M. ZAIGHAM RAZA
BL-0245
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QUESTION NO. 1
Write a note on Development of Modern Banking and types of Banks.
ANSWER.
DEVELOPMENT OF MODERN BANKING:
The banking business has experienced substantial change over the last 30 years or
so as banks have transformed their operations from relatively narrow activities to
full-service financial firms. Traditional banking business consisted of taking
deposits and making loans and the majority of their income was derived from
lending business. Net interest margins (the difference between interest revenues
from lending minus the interest cost on deposits) was the main driver of bank
profitability. In such an environment banks sought to maximize interest margins
and control operating costs (staff and other costs) in order to boost profits. Banks
strategically focused on lending and deposit gathering as their main objectives.
In addition to deregulation various other factors have had an impact on banking
business globally. Capital restrictions that limited the free flow of funds across
national boundaries gradually disappeared throughout the 1980s, facilitating the
growth of international operations. The role of state-owned banks in Europe and
elsewhere declined as a result of privatization and various balance sheet
restrictions (known as portfolio restrictions) were lowered or abolished, allowing
banks greater freedom in the financial management of their activities. These global
trends have been complemented by advances in technology that have
revolutionized back-office processing and front-office delivery of financial
services to customers. The general improvements in communication technology
and the subsequent decline in costs allowed dissemination of information
throughout a widespread organization, making it practical to operate in
geographically diversified markets. Lower communication costs also increased the
role of competitive forces, as physically distant financial service providers became
increasingly relevant as local competitors.
Technology has continued to blur the lines of specialization among financial
intermediaries. Advances in computing power allowed investment banks and other
financial service firms to offer accounts with characteristics similar to bank
accounts. Technological developments, therefore, have generally facilitated growth
in the range of financial services available and heightened the competitive
environment.
In an increasingly competitive environment banks have sought to diversify their
earnings, complementing interest revenues from lending activity with fee and
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commission income from selling non-traditional banking products such as

insurance. The greater emphasis on building client relationships means that banks
have had to become much more demand-oriented, focusing on meeting the needs
of a more diverse and financially sophisticated client base.
TYPES OF BANKING:
A variety of different types of banks offers personal banking services. These
include:
i. Commercial banks:
Commercial banks are the major financial intermediary in any economy.
They are the main providers of credit to the household and corporate sector
and operate the payments mechanism. Commercial banks are typically joint
stock companies and may be either publicly listed on the stock exchange or
privately owned.
Commercial banking refers to institutions whose main business is deposit
taking and lending, it should always be remembered that the largest
commercial banks also engage in investment banking, insurance and other
financial services areas. They are also the key operators in most countries’
retail banking markets.
ii. Savings banks:
Savings banks are similar in many respects to commercial banks although
their main difference (typically) relates to their ownership features. Savings
banks have traditionally had mutual ownership, being owned by their
‘members’ or ‘shareholders’, who are the depositors or borrowers. The main
types of savings banks are the so-called savings and loan associations (S&Ls
or thrifts), which traditionally were mainly financed by household deposits
and lent retail mortgages. Their business is now more diversified as they
offer a wider range of small firm corporate loans, credit cards and other
facilities.
It should be noted that savings banks adhere to the principle of mutuality and
pursue objectives relating to the social and economic development of the
region or locality in which they operate. Unlike commercial banks, they may
pursue strategic objectives other than maximizing shareholder wealth or
profits. Typically their business focuses on retail customers and small
businesses, but as some have become very large. They closely resemble
commercial banks in their service and product offerings.
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iii. Co-operative banks:

Another type of institution similar in many respects to savings banks are the
co-operative banks. These originally had mutual ownership and typically
offered retail and small business banking services. Co-operative banks are an
important part of the financial sector in Germany, Austria, Italy, France, the
Netherlands, Spain and Finland. A trend has been for large numbers of small
co-operative banks to group (or consolidate) to form a much larger
institution.
iv. Building societies:
A building society is a mutual institution. This means that most people who
have a savings account, or mortgage, are members and have certain rights to
vote and receive information, as well as to attend and speak at meetings.
Each member has one vote, regardless of how much money they have
invested or borrowed or how many accounts they may have. Each building
society has a board of directors who run the society and who are responsible
for setting its strategy.
Building societies are different from banks, which are companies (normally
listed on the stock market) and are therefore owned by, and run for, their
shareholders. Societies, which are not companies, are not driven by external
shareholder pressure to maximize profits to pay away as dividends. This
normally enables them to run on lower costs and offer cheaper mortgages
and better rates of interest on savings than their competitors.
The other major difference between building societies and banks is that there
is a limit on the proportion of their funds that building societies can raise
from the wholesale money markets. It is illegal for a building society to raise
more than 50% of its funds from the wholesale markets. The average
proportion of funds raised by building societies from the wholesale markets
is around 20%.
v. Credit Unions:
Credit unions are another type of mutual deposit institution that is growing
in importance in a number of countries. These are non-profit co-operative
institutions that are owned by their members who pool their savings and lend
to each other. They are usually regulated differently from banks. Many of
their staff are part-time.
vi. Finance houses:
Finance companies provide finance to individuals (and also companies) by
making consumer, commercial and other types of loans. They differ from
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banks because they typically do not take deposits and raise funds by issuing
money market (such as commercial paper) and capital market (stocks and
bonds) instruments.
All major retail firms and motor companies have their own finance house
subsidiaries. For example, General Motors’ finance house used to fund car
purchase is known as GMAC Financial Services. A distinction is usually
made between sales finance institutions (loans made by a retailer or car firm
to fund purchases), personal credit institutions (that make loans to ‘non-
prime’ or high-risk customers who usually cannot obtain bank credit) and
business credit finance houses that use factoring (purchasing accounts
receivables) and leasing to finance business activity.

QUESTION NO. 2
What do you understand about Microfinance Institutions Ordinance 2001 as
amended up to 1st July 2007 and what are its functions and Powers?
ANSWER.
INTRODUCTION:
Microfinance is an economic development tool whose objective is to assist the
poor to work their way out of poverty. It covers a range of services which include,
in addition to the provision of credit, many other services such as savings,
insurance, money transfer, counselling, etc. in other words microfinance serves as
tool for providing financial services to the low-income population, which do not
have access to the mainstream financial services.
MICROFINANCE INSTITUTIONAL ORIDINANCE, 2001:
Microfinance institutional Ordinance, 2001 is promulgated to regulate the
establishment, business, and operations of microfinance institutions. The basic
purpose of the ordinance is to promote the establishment of microfinance
institutions for providing organizational, financial, and infrastructural support to
poor persons, particularly poor women, for mitigating poverty and promoting
social welfare and economic justice through community building and social
mobilization and to provide for matters connected therewith or ancillary thereto.
Microfinance institutional ordinance 2001 regulate microfinance institutions to
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protect the depositors and customers and to safeguard these institutions against
political and other outside interference.
FUNCTIONS AND POWERS OF MICROFINANCE INSTITUTION:
1. A microfinance institution shall, in accordance with prudential regulations and
subject to the terms and conditions of the license issued by the State bank, render
assistance to micro-enterprises and provide microfinance services in a sustainable
manner to poor persons, preferably poor women, with a view to alleviating
poverty.
2. Without prejudice to the generality of the foregoing provisions, the powers and
functions of microfinance institutions shall be: -
i. to provide financing facilities, with or without collateral security, in cash or
in kind, for such terms and subject to such conditions as may be prescribed,
to poor persons for all types of economic activities including housing, but
excluding business in foreign exchange transactions, except to receive
remittances from abroad payable only in Pakistan Rupees to beneficiaries in
Pakistan subject to rules and regulations and authorization issued by State
Bank of Pakistan from time to time.
ii. To accept deposits.
iii. To accept pledges, mortgages, hypothecations, or assignments to it of any
kind of movable or immovable property for the purpose of securing loans
and advances made by it.
iv. To undertake the management, control and supervision of any Organization,
enterprise, scheme, trust fund or endowment fund for the benefit and
advancement of poor persons.
v. To buy, sell and supply on credit to poor persons industrial and agricultural
inputs, livestock, machinery, and industrial raw materials, and to act as agent
for any Organization for the sale of such goods or livestock.
vi. to invest in shares of anybody corporate, the objective of which is to provide
microfinance services and technical, vocational, education, business
development and allied services to the poor and micro enterprises.
vii. To provide storage and safe custody facilities.
viii. To carry out survey and research, and to issue publication and maintain
statistics relating to the improvement of economic condition of poor persons.
a. To provide professional advice to poor persons regarding investments
in small business and such cottage industries as may be prescribed.
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ix. To encourage investments in such cottage industries and income generating

projects for poor persons as may be prescribed.
x. To provide services and facilities to customers to hedge various risks
relating to microfinance activities.
xi. To render managerial, marketing, technical and administrative advice to
customers and assisting them in obtaining services in such fields.
xii. To borrow and raise money and open bank accounts.
xiii. to purchase, take on lease, or otherwise acquire, sell, exchange, surrender,
lease, mortgage, dispose of and deal in any movable and immovable
property and rights of all kinds for and on behalf of its customers for the
purpose of promoting development opportunities, building of assets,
resource allocation, promotion of markets, and adoption of better technology
for economic growth and development.
xiv. To establish subsidiaries, whether wholly or partly owned, and to appoint
agents in various locations for various activities which it may consider
necessary for the proper discharge of its functions.
xv. To pay, receive, collect, and remit money and securities within the country.
xvi. To acquire, maintain and transfer all movable and immovable property
including residential premises, for carrying on its business.
xvii. To open account or make any agency arrangement with, and to act as agent
or correspondent of, any bank or financial institution.
xviii. To invest its surplus funds in Government 8 and such other marketable
securities as State Bank may from time to time notify.
xix. To impose and receive fees, charges, profits or return for its services.
xx. To mobilize and provide financial and technical assistance and training to
micro enterprises.
xxi. To undertake mobile banking to expedite transactions and reduce costs.
xxii. To establish trust and endowment funds.
xxiii. to receive grants from the government and any other sources permitted by
the State Bank; and
xxiv. To generally do and perform all such acts, deeds and things as may be
necessary, incidental, or conducive to the fulfillment of their functions and
the attainment of their objectives.
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CONCLUSION:
Microfinance is the provision of savings accounts, loans, insurance, money
transfers and other banking services to customers that lack access to traditional
financial services, usually because of poverty. Making small loans to individuals
who lack the necessary resources to secure traditional credit is known as
microcredit.