This document provides an overview of banking concepts including the functions and types of banks. It defines banking as a service industry that traditionally accepted deposits and issued loans, but now offers many other financial services. The key functions of banks are accepting deposits and granting loans. It also outlines secondary functions such as funds transfers, collections, portfolio management, and more. Different types of banks are described including commercial banks, savings banks, merchant banks, mortgage banks, and others.
This document provides an overview of banking concepts including the functions and types of banks. It defines banking as a service industry that traditionally accepted deposits and issued loans, but now offers many other financial services. The key functions of banks are accepting deposits and granting loans. It also outlines secondary functions such as funds transfers, collections, portfolio management, and more. Different types of banks are described including commercial banks, savings banks, merchant banks, mortgage banks, and others.
This document provides an overview of banking concepts including the functions and types of banks. It defines banking as a service industry that traditionally accepted deposits and issued loans, but now offers many other financial services. The key functions of banks are accepting deposits and granting loans. It also outlines secondary functions such as funds transfers, collections, portfolio management, and more. Different types of banks are described including commercial banks, savings banks, merchant banks, mortgage banks, and others.
This document provides an overview of banking concepts including the functions and types of banks. It defines banking as a service industry that traditionally accepted deposits and issued loans, but now offers many other financial services. The key functions of banks are accepting deposits and granting loans. It also outlines secondary functions such as funds transfers, collections, portfolio management, and more. Different types of banks are described including commercial banks, savings banks, merchant banks, mortgage banks, and others.
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Course title: Bank management
lecturer: Mohamed Hussein Aden(shibiin)
Educational background Master of economics and master of Bank management The term bank apparently owes its origin to the “bank” or bench used by the moneychangers during the middle ages. Historically, some banks were called banks of deposit, and mainly held -deposits of foreign and domestic currencies and arranged payment in foreign trade transactions. Other banks created deposits that acted as a circulating medium of money in a society. One of the earliest banks in this category, the Bank of Venice, was formed when a group of the government’s creditors combined and began using government debt as a means of payment in trade. Define bank, banking and bank management Banking Industry is a service industry. It provides various services to its customers. Traditionally the services were restricted to deposits and loans. Banks started by taking deposits from people who had a surplus of money and lending this money to others who wanted money for different reasons. Banks charged interest from those who borrowed and gave back a portion of the interest earned to those who deposited. The difference in the rate of interest between deposits and lending constituted the major source of revenue for banks. Hence, banking is a service industry, which provides services to those who want to lend, borrow, or invest. Distinction bank and banking Bank is an organization or a company like any other company, which sells and buys goods and services in the market. The main difference between other companies and banks is that, other companies are trading goods and services for money, but in the case of bank the trading item itself is MONEY, instead of tangible goods or intangible services. How a bank works can simply be explained as accepting deposits from customers by paying interest to their deposits, while lending this money deposited to required parties for an interest rate, which is higher than that paid to depositors. The oxford dictionary defines bank as “an organization offering financial services, especially loans and safe keeping of customers money”. Banking is the business activity of a bank. Simply, any activity carried out by a bank for business purposes is called banking. Accepting savings, Lending money, leasing properties to needy people, paying for cheques, providing mortgage facilities, acting on to standing orders, statement of instructions, providing safety locker facilities for valuable things, providing over draft facilities to current account holders acting as institutional investors in financial market, issuing ‘letter of credit’ in the business of import and export, act as money changer, issuing travelers’ cheques are some of the activities carried out by modern banks in the banking industry. Nowadays, banking can be done via the internet, which is called on line banking. Bank management: Bank management governs various concerns associated with banks in order to maximize profits and minimize risks. This is a basic tutorial that explains the methodologies applied in the rapidly growing area of bank management in commercial Indian banks. What factors or qualities to be considered of testing the efficiency of an ideal bank? Efficient and effective utilization of resources are key objectives of every banker. These topics have always been important in banking, but a number of recent events are helping to bring even greater emphasis to banking efficiency. Increasing competition for financial services, technological innovation, and banking consolidation, for example, are all focusing more attention on controlling costs in banking and providing services and products efficiently. Increasing competition from nonbank institutions and from banks expanding into new markets is putting strong pressure on banks to improve their earnings and to control costs. Efficiency is clearly a critical factor in remaining competitive, and a number of recent statistical studies have shown that the most efficient banks have substantial cost and competitive advantages over those with average or below average efficiency. Technological innovation, in the form of improvements in communications and data processing, is also bringing added emphasis to efficiency. Such improvements are giving banks and other financial institutions opportunities to dramatically raise productivity and begin delivering many services through electronic means. Even the smallest banks are automating more and more of their operations, and banks and nonbank firms of all sizes are finding cost-effective ways to introduce new products and compete more directly with each other. Much of the consolidation movement is also being spurred by the hope of increasing efficiency. What do the banks do( functions of bank) Important Functions of Bank There are two types of functions of banks: 1.Primary functions – being primary are also called banking functions. 2.Secondary Functions Both the types of functions of bank are explained below in detail: Primary Functions of Bank • All banks have to perform two major primary functions namely: A. Accepting of deposits B. Granting of loans and advances Accepting of Deposits A very basic yet important function of all the commercial banks is mobilizing public funds, providing safe custody of savings and interest on the savings to depositors. Bank accepts different types of deposits from the public such as: Saving Deposits: encourages saving habits among the public. It is suitable for salary and wage earners. The rate of interest is low. Fixed Deposits: Also known as Term Deposits. Money is deposited for a fixed tenure. No withdrawal money during this period allowed. Current Deposits: are opened by businessmen. The account holders get overdraft facility on this account. These deposits act as a short term loan to meet urgent needs. Bank charges a high-interest rate along with the charges for overdraft facility in order to maintain a reserve for unknown demands for the overdraft. Recurring Deposits: A certain sum of money is deposited in the bank at a regular interval. Money can be withdrawn only after the expiry of a certain period. A higher rate of interest is paid on recurring deposits as it provides a benefit of compounded rate of interest and enables depositors to collect a big sum of money. This type of account is operated by salaried persons and petty traders. Secondary Functions of Bank Like Primary Functions of Bank, the secondary functions are also classified into two parts: 1.Agency functions 2.Utility Functions Agency Functions of Bank Banks are the agents for its customers, hence it has to perform various agency functions as mentioned below: Transfer of Funds: Transferring of funds from one branch/place to another. Periodic Collections: collecting dividend, salary, pension, and similar periodic collections on the clients’ behalf. Periodic Payments: making periodic payments of rents, electricity bills, etc on behalf of the client. Collection of Cheques: Like collecting money from the bills of exchanges, the bank collects the money of the cheques through the clearing section of its customers. Portfolio Management: banks manage the portfolio of their clients. It undertakes the activity to purchase and sell the shares and debentures of the clients and debits or credits the account. Utility Functions of Bank • Issuing letters of credit, traveller’scheque, etc. • Undertaking safe custody of valuables, important documents and securities by providing safe deposit vaults or lockers. • Providing customers with facilities of foreign exchange dealings • Underwriting of shares and debentures • Dealing in foreign exchanges • Social Welfare programmes • Project reports • Standing guarantee on behalf of its customers, etc. Types of banks and their functions Primarily all banks gather temporarily idle money for the purpose of lending to others and investments which bring gain in the form of return, profit and dividends etc. However, due to the variety of resources of money and the diversity in lending and investment operations, banks have been placed in various categories. such as commercial banks, savings banks, merchant banks, mortgage banks, consumer banks, investment banks, development banks, cooperative banks, exim banks and central banks etc. Commercial Banks The commercial banks receive deposits from the general public which are repayable on demand upon written orders of the depositors. As their most distinctive feature the commercial banks maintain chequing accounts for the constituents. The commercial banks are also distinguished for providing short term finance to trade, commerce and industry to enable these sectors to expand their productive activities. Merchant Banks Merchant banks are those which have been mainly financing the domestic and international trade in United Kingdom. During the late eighteenth and early nineteenth centuries the trade between countries was financed by bills of exchange by well reputed merchant houses for which they would charge a commission for their service. Savings Banks The basic purpose of these banks is to inculcate the habit of savings in the people. The savings bank deposits are not repayable upon only the written orders of the depositor but the depositor Mortgage Banks These banks mainly deal in loans for the acquisition or construction of real estate against the security of mortgages. Quite a few such banks are operating in developed part of the world. Savings, and Loans associations and farm-loan associations are some of the well-known forms of the mortgage banks. Consumer Banks These banks provide finance for purchasing consumption goods for the use of the borrowers. Consumer finance companies, sales finance companies and credit unions are some of the popular forms of consumer banks. Investment Banks The investment banks assist business houses and the governmental bodies to raise money through the sale of stocks and bonds for usually long term purposes. These banks perform the usual functions of raising deposits of idle money from the public and finance the business houses and other bodies. Development Banks These banks have been established to provide long term development finance to the trade, commerce, and industry. Generally government owned banks, established under a specially promulgated law. Agricultural Development Bank and Industrial Development Bank are every well-known development banks. Cooperative Banks These are the banks established and registered as a cooperative venture to provide banking facilities to the members of the cooperative. The Federal Bank of Cooperatives is well known such bank. Exim Banks These are the banks which provide finance for promotion of imports and exports to trade, commerce and industry, these bank arc contributing greatly towards the expansion of international trade of developed countries, where they function mainly in private sector Central Banks Central banks occupy unique position in the banking structure of a country because they have been entrusted with the responsibility of controlling the money supply, interest rates and financial market of the country for the purpose of economic development. Bank of England and Federal Reserve Bank of U.S.A. are well known central banks. Role of Bank in the economic development Banks are one of the most important parts of any country in this modern time money and its necessity is very important. Developed financial system of the country can ensure scope for attaining economic development. Modern bank provides valuable services to a country . To a attain development there should be a good financial system to support not only the economic but also the society. So a modern bank plays a vital role in the so economic matters of the country. Some of the role of banks in the development of a country briefly mentioned below. 1. Promote saving habits among people: bank attracts depositors by introducing attractive deposit schemes and providing rewards or return in the form of interest. 2. collection of saving: banking system collects small saving from various part of an economy and mobilizes it in business sector. 3. Capital formation and promoting industries: capital is one of the most important parts of any business and industry. It is the life blood of business. Banks are helpful to increase capital formation by collecting deposits from depositors. 4. Easiness of trade and commerce functions : this modern era trade and commerce plays vital role between any countries. So, the money transaction should be user friendly. A modern bank helps its customers to sent funds to any where and receive funds from anywhere of the world. 5. Money mobilization: the main role of the bank is to mobilize the money market. Bank accepts the saving money of public utilizes it as loan, overdraft, cash credit 6. Implementation of monetary policy: banking system helps to develop the money market. Banks are creators as well as distributors of money 7. Remittance of money: the bank helps to transfer the money from one place to an other and from one country to an other country. 8. Promotion of trade and industry: banks systems encourage specialization and accelerate the pace of industrialization by bringing revolution in the internal and external trade. 9. Agricultural development: agricultural sector is one of the integral parts of any economy food self sufficiency is major challenge and goal of any country. 10. Employment opportunities: banking system increases the economic activities and promotes employment opportunities by providing loans to business entrepreurs and farmers in different forms. Banks also helps investing in various business sector. 11. Regional development: banking system transfers surplus from the developed regions to the less developed nations. 12. Balanced development: A balanced development in the economy is achieved in different sectors and regions through the resources of bank funds. It helps a country spread banking activities in rural and semi urban areas. Part One is end Thank you