Name: Shafiqullah

Registration number: su-17-01-021-001

Assignment 2 : International Banking.

Question. Write a comprehensive note on the Historical Development of the

Banking System, Financial Innovation and the Evolution of the Banking Industry
in Pakistan.

Answer.

"Origin & Evolution of Banking"

• It has not so far been decided as to how the word ‘Bank’ originated.

• Some authors are of the opinion that this word is derived from the words
‘Bancus’ or ‘Banque’ which means a bench.

• This origin is contributed to the fact that the Jews transacted the business
of money exchange on benches in the market place.

• 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’.

"Early growth in banking "

• Banking is as old as human society.

• Around 3400 BC they were Sumerians (Iraq) who carried on some activities
which are considered as banking activities.
• Later Babylonians (Iraq) further enlarged these activities. They contributed
in the areas of credit, specifically in agriculture credit.

• They used temples as banks.

• In the following era Greeks also carried banking activities.

• Greeks also used temples for banking activities where people not only
deposited their money and valuables for safety and security, but also
borrowed money from there.

• Business of exchanging money and making remittances between various

cities were also carried out under the Greek system.

• Then Romans regulated the conduct of private banks.

• Utmost confidence of the people was created in them because the banking
business was mostly done by individuals.

• Fall of Roman empire had adverse effects on banking and financial

activities.

• Then European countries took over and they established cities of Venice,
Florence and Genoa as center of trades and commerce.

"Modern banking"

• Banking in its modern form and structure started in Britain.

• Lombardy (Italy) merchants came to England in the fourteenth century and

settled in the parts of the city of London now called Lombard street.

• They dealt with not only keeping the money in safe custody from general
public but also changed money for travelers or merchants.

• They also developed important banking facility of documentary credits.

• Then this business was taken over by Goldsmiths.

• Since these goldsmiths required strong safes for the purpose of their own
business, they introduced necessary facilities of safe keeping of 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.

• Over a period of time these goldsmiths discovered that large sums of

money were left in their custody for longer periods: therefore they started
the use of this cash to advance loans to other persons for a fixed period and
at high interest rates.

• They also encouraged cash deposits by their customers by offering them a

part of their profits earned on the money.

• However, this banking setup faced great crises when Charles 2 borrowed
huge sums and later refused to return.

• Hence! Goldsmiths formed a corporation named Bank of England. This bank

lent a handsome amount to William 3 which in return allowed a number of
privileges (issue of bank notes) to the bank.

• This was later withdrawn by passing an act and given to the other private
banks of London which accepted money on deposits repayable by checks.

"History of Banking industry in Pakistan"

• At the time of independence there were 487 offices of scheduled banks in

the territories now comprising Pakistan.
• In accordance with the Indian Independence Act of 1947, an expert
committee recommended that the Reserve Bank of India should continue
to function in Pakistan until 30th September 1948.
• It was also decided that Indian notes would continue to be legal tender in
Pakistan till 30th September, 1948.
• After the announcement of independence plan in June 1947, the hindus
residing in the territories now comprising Pakistan started transferring their
assets to India.
• The Banks having there registered offices in Pakistan transferred them to
India.
• By 30th June 1948 the number of scheduled banks in Pakistan declined from
487 to only 195.
• 19 non Indian foreign banks with a status of small branch offices and
engaged only in export of agricultural crops.
• Only 2 Pakistani institutions i-e Habib Bank and the Australasia Bank.
• Decided to advance the date from 30th September 1948 to 30th June 1948
up to which the Reserve Bank of India could serve as the monetary
authority in Pakistan.
• Quaid-e-Azam Muhammad Ali Jinnah inaugurated the State Bank of
Pakistan on 1st July 1948.
• First Pakistani notes were issued in October 1948 in the denomination of Rs
5, 10 and 100.
• State Bank provided every help and encouragement to Habib Bank to
expand its network of branches.
• Recommended government to establish a new bank which could serve as
an agent of the State Bank.
• As a result National Bank came into being in 1949, which took over the
agency function from the Imperial bank of India.
• After the outbreak of Korean war in 1950, Industrial development finance
corporation was set up in 1952.
• Agricultural development bank was set up, which effected the devaluation
of money during 1955-56.
• Functions of State bank were broadened by SBP act,1956 ( for credit facility
to agriculture).
• Pakistan industrial credit and investment corporation.
• Commerce Bank Limited and Standard Bank Limited.
• By June 1965, the number of scheduled banks stood at 36.

"Nationalization of Banks"
• Nationalization act 1974.
• Mergers were there.
– Habib(overseas)Bank and Standard Bank merged with HBL.
– Bank of Bahawalpur, Eastern Merchantile Bank & Eastern Bank
Corporation merged with NBP
– The commerce and Union Bank were merged with UBL
– Premiere Bank merged with MCB.
– Australasia Bank was given new name of ABL.

" Problems of Nationalization"

• Bureaucratic attitude
– Government owned banks
– Can't be done
– Come tomorrow
– Bring the following documents
– Slow way doing things
– Unnecessary intervention of trade unions.
– Rewards not linked with performance
• Lending on political basis
• Enlarged role of governments.

"Financial sector reforms"

• Reforms process begin in 1990
• 1997 reform process got momentum.
• Amendments in Banks Nationalization act 1974. empowered the federal
govt. to sell all or part of share capital of NCB’S.
• New banking companies in private sector.
• Ten new banks were permitted to commence their business.
• Golden shake hand scheme was introduced by the banks
• Prudential regulations came into existence.
• Computerization of all record.
• Onsite and offsite inspection by SBP.

"Present scenario of Banking industry"

• Healthy competition
• Improved management and control
• Excellent provision of services to general pubic
• Increased profitability of Banks.
• Decrease in nonperforming loans
• Implementation of latest technology.
Rewards linked with performance.

"Types of banks"
• Commercial banks
• Merchant banks
• Savings banks
• Mortgage banks
• Consumer banks
• Investment banks
• Central banks

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"Thank YOU"