BANKING INDUSTRY

AN OVERVIEW
•HISTORY
•STRUCTURE
•TYPES OF FIN. INSTITUTIONS /
ROLES

Syed Ghazanfar Ali

 History of Banking
 One of the oldest industries / Profession in the world.
 18th century BC – Temples for Safe Custody (gold & valuables)
• Religious element – Deterrence for thieves
• Constantly guarded - Same
• Egypt and Mesopotamia – Safe Custody but IDLE
• Hammurabi (Babylonian Dynasty) era – Earliest loan records
 4th century BC - Greek and Roman Financiers – more sophisticated
Financial Transactions by Private Entrepreneurs, Temples & Other Public
Bodies – Deposit, loan, exchange, coinage & testing etc.
• Book keeping & Intra-city transactions
• By 2nd Century AD, existence of Banks emerged (debt payment)
• Public notaries and documentation etc.
• Fall or Roman Empire – Church’s prohibition for Usury

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 History of Banking
 Middle Ages (12th – 13th Century)
• Jews took advantage – Europe needed funding
• Others like Knight Templars etc.
 14th to 19th Century
• Double book entry – Lombards of Italy took over from Jews
• Creative accounting to avoid Usury.
• Europe, especially Florence thrived on Banking (Bardi , Peruzzi – lender to the KING)
• King’s (Edward , III) Default (1345) crippling Florentine Banking Dynasties
• Re-emergence of Medicis (Lorenzo the Magnificent) – Renaissance - Early 15 th Century
• Fugger Dynasty (Germany) replacing Medicis – Later 15th Century
(Habsburg, Maximillian – Holy Roman Emperor, Spanish Order of Knighthood)
• Establishment of Banks with State Support 16th Century - Banco Di Rialto in Venice. 1587
• Cheque – Bill of Exchange 16th Century
• National Banks 17th Century (Bank of Sweden 1668, Bank of England 1694)
• Bank Notes – 16th century (Swedish Bank – 1661)
• Bank of England started issuing Bonds for raising funds, clearing agent – 18 th Century
• Rothschild – 19th Century. Funding Enemies / Govts. of Napoleon.
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 History of Banking
 20th Century:
• Developments in Telecommunication and computing
• Federal Reserve Bank 1913.
• With WWI, US became the main lender to the nations instead of London
• Great Depression of 1930s
• WW-II – huge demand of loans – Merger of smaller banks
• Credit insurances – accessible to common people
• Post war Rebuilding along with Industrialization
• Innovations / Structured products
• Plastic money
 21st Century:
• Digital banking
• Crypto currency
• Fin-tech

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 History of Banking
 Bank - Etymology:

• Banca (Italian) or Banque (French) – meaning Bench (Jews of

Lombardy)

• Bankrupt – Banca Rotta, Rumpere (Italian) Rupt (Latin) “to break”

bench destroying (on failure to pay)

• A more European origin is derived from Bauk (German) or Joint

Stock Fund.

• German occupation led to Italianizing of the word to Bank

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Transition of Banking.
Started with small banks.
The run on the banks and bank panics created the need for a Central Bank
which was strong and independent.
Deposit insurances led to lesser of runs but increased the risk that banks
take on their balance sheets.
Then came the era of nation wide banking to reduce costs through
economies of scale. However, led to the argument that banks were
becoming ‘too big to fail’.
Simultaneously, banks expanded their boundaries by entering into fields
which made the lines hazy between banking companies of different
natures.

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Transition of Banking Contd…
 Nowadays focus is on fee income from off balance sheet
items. like focusing on FX transactions, Stand by LCs, Loan
commitments, Securitization, trading in swaps, options and
derivatives, etc.

 Electronic Banking. The advent and high usage of ATMs / online.

 Increased presence for banks, while convenience for users.

 Are also considered low costs from an admin point of view.

 Then came virtual branches. All online methodology with physical

drops at places of convenience.

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What we learn from the History
of Banking ??
Money and banking are near synonyms.
The activities started from simple deposits and safekeeping
of money with individuals to more complexities like lending,
trade, commerce which led to further complexities like
derivatives, swaps, options, etc.
Key principles of Banking however remain to the core:
Integrity, Trust, Knowledge, Good Faith, Without
Negligence.

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Why to study

In everyday life.

Careers in Financial Sectors

As a student of Economics and Finance

As an Specialist (economist, researcher, Regulator etc.)

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Structure of the Banking
Industry

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 Types of Banks / F.Is
 Central Banks (The Regulator) i.e. State Bank of Pakistan
 Commercial Banks (Public / Private; local / foreign)
 Investment Banks.
 Development Banks / Development Finance Institutions (DFIs)
 Cooperative Banks. Societal development.
 Islamic Banks.
 Microfinance Banks
 Specialized Banks (e.g. IDBP, ADBP, SME Bank)
 Specialized F.Is. (e.g. PMRC, PHA, HBFC etc.)

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 Types of Banks / F.Is
Contd….
Specialized Banks.
oIndustrial Banks
oEXIM Banks
oSavings Banks
oMortgage Banks
oConsumer Banks, etc.
oRegional Development Banks. Asian Dev. Bank, African Dev.
Bank, European Bank for Reconstruction & Dev (EBRD) etc.
oIslamic Divisions of Conventional Banks.
oWorld Bank.

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 Types of Banks / F.Is
 Non Banking Financial Institutions (NBFIs)
• Generally governed by SECP
 Types of NBFIs
• Joint Venture DFIs / NBFIs – (an exception - Governed by SBP)
• Leasing Companies
• Investment Banks
• Modarabas
• Mutual Funds
• Insurance
• Mortgage Finance
• Investment Companies
• Others (PMRC, CIRC, Pakistan Housing Finance)

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 Importance of Banks & Financial Institutions
•Money Multiplier Effect (Fractional Reserve Banking)

•Facilitation in Trade / Funding

•Barometer of the Economy
•Structured / Regulated System
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 The forces that shape the industry in
recent times
Banks are the most common facilitators of our lives today.
Banks control most of our monies, savings, investments.
They contribute a considerable portion in the economy of any country.
A recent trend is that most of the banks are consolidating and turning
into mega banks or major financial powerhouses.
Market estimates project that by the end of 2021, the financial services
market is likely to reach $22.5 trillion, growing at a rate of 9.9% from the
previous year.
With global GDP expected to reach $93 trillion in the same year, that
would mean that financial services comprise about 24% of the world's
economy.
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 The forces that shape the industry in
recent times

With globalization comes intense competition.

Banks’ services are converging so that many different banks
now comprise of 1 company.
Last but not the least is that technological innovation has led to
deterioration of many traditional roles.
The sector is expected to grow and shift to mobile and online
banking as Millennials and Generation Z become more
economically powerful.

Banking is necessary, Bank are not – Bill Gates

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Structure of Commercial Banks /
Financial Institutions

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 Typical Organogram
Board of Directors
President
Board Risk Committee
Senior Management Committee (e.g. Man-Com)
Risk Management Committee
Asset Liability Committee (ALCO)
Credit Committee (CC)

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 Functional Organogram
Operations
Financial Control
Treasury & Fund Management
Capital Market Operations
Risk Management
Retail Banking
Corporate & Investment Banking
Commercial Banking
SME Banking & Consumer Banking
Cash Management

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 Functional Organogram
Investment Banking
Trade Department
Financial Institutions
Special Assets Management
Credit Administration
Compliance
Human Resources
Information Technology
Audit and Inspection

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 Functions of Commercial Banks /
F.Is
Front Office Functions:
• Retail Banking
• Checking Accounts / ATMs
• Deposit Mobilization – saving and investment schemes
• Lockers / Safe Custody and other retail banking products (notes, bonds, bills)
• SME / Consumer Banking
• Consumer financing (Credit cards, personal, auto and durables loans etc.)
• Credit / lending to Small & Medium Enterprises / SBP Schemes
• Trade Financing
• Cash Management
• Commercial / Corporate Banking
• Loans and credits / SBP Schemes
• Trade Finance
• Cash Management

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 Functions of Commercial Banks /
F.Is
Front Office Functions:
•• Trade Finance
• Letters of Credit (LCs)
• SBLCs

• Financial Institutions
• Bank to Bank liaison – local and international
• Facilitation on Financing abroad
• Facilitate Trade Finance for Advising / Confirming LCs
• Nostro / Vostro Accounts
• Correspondent Banking

• Deposit Mobilization
• CASA Accounts
• Saving / Investment Schemes

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 Functions of Commercial Banks /
F.Is
Back Office Functions:
• Operations
• Branch Management
• Settlement of front office deals – (Treasury , Capital Market deals)
• Operational Risk etc.
• Credit Admin – Monitoring / Securities Management
• Risk Management & Compliance
• Risk review / ratings
• Compliance
• Special Assets Management
• NPLs
• Legal
• Documentation, litigation etc.

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 Functions of Commercial Banks /
F.Is
Back Office Functions:
• Audit & Inspection
• Internal audit
• Ensuring Compliance
• Preparing for External / SBP Audits
• IT
• IT Infrastructure – Hardware / Software
• Disaster Management
• Remote Access
• Security of Data
• Finance
• Book keeping and recording
• Billing etc.
• HR & Admin

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 Commercial Vs. Corporate
Banking
 Is Commercial & Retail Banking Same?
• Similarities
o Both Cater to Smaller size clients
o Most of services are similar (loans, deposits, investment options etc.)
o More branches / ease of access or reach
• Differences
o Handle direct retail clients / customers
o Some specific products / services (Individual retail products, lockers etc.)
o Public face of the Bank
 Corporate Banking Vs. Commercial Banking
• Corporate Banking usually deals with Multi-nationals / large ticket clients
• Corporation acts as a person instead of an individual
• Most of the services are similar

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Commercial and Corporate
Banking

End of Session One

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