Chapter -1 Introduction to Banking Business

Contents Meaning of Bank Origin and necessity of bank and financial institutions An overview of Nepalese financial system Distinguish between banking and other business.

Meaning of Bank A bank is an establishment authorized by a government to accept deposits, pay interest, clear checks, make loans, act as an intermediary in financial transactions, and provide other financial services to its customers. A bank buys credit from its customers and sells its own credit to them Banks are the principle source of credit for millions of households (individuals and families), for most local units of government (school, districts, cities, counties, etc.)and for small local businesses ranging from grocery stores to automobiles dealers. Banks are financial service firms, producing and selling professional management of public’s fund as well as performing many other roles in the economy The definition and the meaning of bank can be complicated also because many nonbanking institutions now perform many of the functions similar to the banks.

Continue…….. In addition, laws of different countries define bank differently, which changes with the time. For instance, in the United States, a “bank” is defined by federal and state laws and by the banking regulators. The legal definition of bank is of more important because other types of financial institutions offer the same or similar services but are not subjected to the same regulation as banks. “Bank is an Organization whose principal operations are concerned with the accumulation of the temporarily idle money of the general public for the purpose of advancing to other for expenditure.” -Kent “Banks are those financial institutions that offer the widest range of financial services-especially credit, savings, and payment services- and perform the widest range of financial functions of any business firm in the economy.” -Peter S. Rose

Origin of Bank Linguistics (the science of language) and etymology (the study of the origin of words) tell us the French Word banque and the Italian word banca were used centuries ago to refer to a “bench “ or “money changer’s table.” They were money changers, situated usually at a table in the commercial district, aiding travelers by exchanging foreign coins for local money or replacing commercial notes for cash for a fee. There was no such word as ‘banking’ before 1640, although the practice of safe- keeping and savings flourished in the temple of Babylon as early as 2000 B.C. Chanakya in his Arthashastra written in about 300 B.C. mentioned about the existence of powerful guilds of merchant bankers who received deposits, and advanced loans and issued hundis (letters of transfer). The Jain scriptures mention the names of two bankers who built the famous Dilware Temples of Mount Abu during 1197 and 1247 A.D.

Continue…. The first bank called the ‘Bank of Venice’ was established in Venice, Italy in 1157 to finance the monarch in his wars. The bankers of Lombardy were famous in England. But modern banking began with the English goldsmiths only after 1640. In England, money changing became an important function of bankers during the reign of Edward III. Goldsmiths of England prepared the ground for modern banking in England during the period of Queen Elizabeth. The Lombards, migrated from Italy to England and other parts of Europe, contributed towards the development and expansion of the modern banking. Thus, The history of modern banks begins from Bank of Venice established in 1157 AD, Bank of Barcelona established in 1401, Bank of Genoa established in 1407, Bank of Asterdam established in 1609 and Bank of England , which was established in 1694. Modern banking may correctly attributed to the merchants, the goldsmiths and the money lenders.

Necessity of Bank and Financial Institutions Capital Formation Optimum Utilization of Resources Encouragement to Entrepreneurial Innovations Monetization of Economy Influencing Economic Activity Promotion of Growth and Stability Implementation of Monetary Policy Promotion of Trade and Industry Encouragement to Right Type of Industries Regional Development Development of Agricultural and Other Neglected Sectors Replacement of Informal Lending

Financial System Financial market Financial institutions Financial assets (instruments)

An Overview of Nepalese Financial System The history of modern financial system of Nepal began in 1937 with the establishment of Nepal Bank Limited as the first commercial bank of the country. NRB was established in 1956 under the NRB Act 1955. Establishment of the NRB as a central bank of Nepal was another major step in the development Nepalese financial system during the formulating phase of the first five year Development Plan mid-1950s. The government established the Nepal Industrial Development Corporation (NIDC) in 1959 under the Nepal Industrial Development Corporation Act 1959. The employment provident fund was established in 1962 under the Employees Provident Fund Act to collect provident fund of Government Employees

Continue…. The government established Co-operative Bank under the Co-operative Bank Act 1964 to provide agricultural credit to farmers and primary cooperative societies in 1964 and the Land Reform and Saving Corporation (LRSC) in 1966. The cooperative bank and the Land Reform Savings Corporation were later merged with the Agriculture Development Bank (ADB/N). The Credit Guarantee Corporation was established in 1974 to provide credit guarantee services to small/priority sector credits extended by NBL and RBB. The Securities Marketing Center, which was established in 1977, was converted into the Securities Exchange Center in 1984. It was later converted into the Nepal Stock Exchange Limited (NEPSE) in 1992 to develop capital market in Nepal.

Continue…. After mid-eighties, financial liberalization policy played a crucial role for the establishment and development of several commercial banks (both foreign joint ventures and private commercial banks) and financial institutions. The policy further led to the amendment of the commercial bank act in 1974, the enactment of the Finance Company Act, 1985 and the Development Bank Act, 1992. Nabil bank was established as the first joint venture bank in 1984. After establishment of Nabil Bank as a private commercial bank, there has been a huge public attraction towards the opening of banking institutions in Nepal. After national political change of 2047 B.S., the pace of liberalization was further enhanced, economic activities widened up, international trade gradually increased. Due to this reason number of financial institutions gradually increased.

Continue……. During the decade of 2050(B.S.), new political conflict came in to existence in the country. As a result several economic activities were adversely affected. Despite the prevailing conflict scenario, number of banks and financial institutions kept on increasing. Banking and financial sector continued its pace of growth Source: Sapkota and Rawal (2016)

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Distinguish Between Banking and Other Business  Confidence in the institution  Banks have to satisfy both their depositors and borrowers Depository Accounts:  As a customer, when you are on the deposit side of the equation, you’re looking for the highest interest rate possible. Borrowing Vehicles:  When you’re borrowing money from a bank, you want to keep the interest and fees charged as low as possible.   Regulation and compliance is a staple in the banking industry