2. Chapter No 3
Commercial Bank

3. Objectives Evolution of Banking Functions of commercial Bank
Classification of Banks
Role of commercial Banks in the economic development

4. Origin of the word Bank
There are various views about the origin of the word bank.
One view is that it is derived from an Italian word banque which means a bench.
The other point of view is that it has originated from the German word banc which means a joint stock firm.

5. As regards the growth of modern commercial bank, it can be traced to as early as 600 BC. Crowther in his famous book An Outline Of Money has traced the history of modern commercial banking.

6. According to him, the present day banker has three ANCESTORS
Merchants
Goldsmith
Money Lenders

7. The Merchants
The earliest stage in the growth of banking can be traced to the working of merchants.
These merchants were traders in commodities and those activities were carried on by them from one place to another.
The traders faced many difficulties to carry metallic money with themselves for payment.
The traders with high reputation began to issue receipts which were accepted as titles of money

8. The Goldsmiths
The second stage in the growth of banking is normally traced to earlier goldsmiths.
These goldsmiths received gold and silver for safe custody and issue receipts for the metallic money kept with them.
In this way these receipts became a medium of exchange and a mean of payment.

9. Money Lenders
The third stage in the development of banking arose when the goldsmiths became the money lenders.
The goldsmiths kept a small proportion of the total deposits for meeting the demands of customers for cash and the rest they could easily lend.
The modern commercial banking system actually developed in the nineteenth century.

10. The first central bank was formed in GENEVA in 1578.
Bank of England was established in 1694.
The modern commercial banking system actually developed in the Nineteenth Century.
with the passage of time the scope of commercial banks have greatly increased. They now deal with large number of matters such as obtaining funds, advancing loan to businesses, farmers, households etc…

11. What is a Bank

12. What is a Bank
A Bank is an institution which deals with money…. Commercial banks receives deposits and advances loans to earn maximum profits. “A bank collects money from those who have it spare or who are saving it out of their incomes and advances it to those who requires it. ”Crowther”

14. Definition of a Bank
Oxford Dictionary defines a bank as
"an establishment for custody of money, which it pays out on customer's order
Commercial bank accepts deposits from individuals, firms and companies at a lower rate of interest and gives it at higher rate of interest to those who need them.
The difference between the terms at which it borrows and those at which it lends forms the source of its profit.

15. Characteristics / Features of a Bank
1. Dealing in Money
Bank is a financial institution which deals with other people's money i.e. money given by depositors
2. Individual / Firm / Company A bank may be a person, firm or a company. A banking company means a company which is in the business of banking
3. Acceptance of Deposit A bank accepts money from the people in the form of deposits which are usually repayable on demand or after the expiry of a fixed period. It gives safety to the deposits of its customers

16. Characteristics / Features of a Bank
4. Giving Advances A bank lends out money in the form of loans to those who require it for different purposes. 5. Payment and Withdrawal A bank provides easy payment and withdrawal facility to its customers in the form of cheques and drafts, It also brings bank money in circulation. This money is in the form of cheques, drafts, etc. 6. Agency and Utility Services A bank provides various banking facilities to its customers. They include general utility services and agency services

17. Characteristics / Features of a Bank
7. Profit and Service Orientation A bank is a profit seeking institution having service oriented approach. 8. Ever increasing Functions Banking is an evolutionary concept. There is continuous expansion and diversification as regards the functions, services and activities of a bank. 9. Connecting Link A bank acts as a connecting link between borrowers and lenders of money. Banks collect money from those who have surplus money and give the same to those who are in need of money.

18. Functions of Commercial Banks

19. Secondary Functions Basic Functions Functions the
Functions of Commercial Banks:
Functions
the
Basic
Functions
Secondary
Functions

20. Accepting of deposits and
Functions of commercial banks:
Basic functions:
Accepting of deposits and
Advancing of loans

21. Fixed deposit account. Saving account Current account
Accepting of Deposits
In order to attract the savings from different persons and institutions, the banks maintain the following three types of accounts:
Current account
Saving account
Fixed deposit account.

22. Current Account
On demand deposits, the banks pay no interest. The deposits can be withdrawn at any time in full or in part.
Current account holders receive a cheque book and regular statements containing details of money paid in and paid out.

23. What is “Deposit”
Means a sum of money credited to a current account or to a savings deposit account maintained with a bank. Such deposit will be repaid or transferred to another account

24. Saving Account
The banks pay interest on this types of deposits and advance the facility to withdraw the amount, subject to certain restrictions.

25. The minimum initial deposit should be USD 100 or equivalent.
Saving Account Requirements
The minimum initial deposit should be USD 100 or equivalent.
If balance goes below USD 100 during the entire year then bank will charge $5 per month and will be deducted from the customer account. Penalty of minimum balance is not applicable to staff accounts and salary accounts maintained by employees of different organizations.
The customer will be issued an identity card and he has to produce the same to the bank for taking cash payment from his account.

26. Saving Account Requirements
Interest will be payable once in three 5%. The interest will be calculated on monthly basis.
The cheque book will be issued only with the permission of Branch head. The first cheque book of 10 leaves will be issued free of charges and subsequently issuance of cheque book will be charged $10 per cheque book.

27. Fixed Deposit

28. Fixed or term deposit account
Fixed deposits or term deposits are the deposits kept with the bank for longer period of time.
It is the major source of bank fund.
The rate of interest is higher than that of saving account.
The fixed deposits are kept by the customers to earn profit(interest).The longer the duration for which the amount is kept with the bank, the rate of interest will also be higher.

29. Term deposits To open a fixed deposit the requirements are
The amount for deposit, period of deposit, names in which term deposit can be issued.
The interest is paid on such account at the expiry of period of deposit.
If the customer need and want to withdraw the amount BEFORE MATURITY the bank will pay a lesser amount of interest.
The bank usually do not issue cheque book against fixed deposits, only FDR (fixed deposit receipt) is issued to the customer.

30. Joint Account

31. Joint account
Joint account is a special bank account which is opened in the name of two or more persons.
Usually joint account is opened for companies and firms.
All the parties should be agreed and should sign the application for joint account.
For drawing of the amount all the persons in whose name the account stands should sign the cheque.
A person can be nominated to operate the account.

32. Open Bank Account In 7 Simple Steps - Banking

33. 1. Decide the Type of Bank Account you want to Open
2. Approach any Bank of choice & meet its Bank Officer
3. Fill up Bank Account Opening Form - Proposal Form
4. Give References for Opening your Bank Account
 5. Submit Bank Account Opening Form and Documents
6. Officer will verify your Bank Account Opening Form
7. Deposit initial amount in newly opened Bank Account

34. How to open Account on Bank in Afghanistan
Full name with father’s or husband name
Proper address
Line of activity
Date of Birth
Details of other bank accounts and credit facility if any
Latest photograph
Source of income and Annual income

35. Income tax Personal Account Number (PAN) card details
Family details
Descriptions of assets like House and Vehicle.
While opening the accounts the above details are taken along with the following documents:
Address proof by taking taskara
Identification proof like passport, voter identity card, identity cards issued by employer
Introduction of existing account holder.

36. Schedule of Charges:
If the balance of account goes below USD 500 or its equivalent during the entire year then bank will deduct charge of $5 per month from the account.
Towards the cost of identity card $10 will be deducted during the closure of account. This charge will be deducted from the balance outstanding in the account and rest balance will be paid to customer.
First cheque book of 25 leaves are free of charges and subsequent charge for cheque book of 25 leaves will be $10.

37. Forms of advancing
Loans
Cash Credit
Overdraft
Discounting Bills
Kinds

38. B: Advancing of Loan
Making loans: the lending of money may be in any of the following forms; (i) Loans (ii) Overdraft (iiii) Discounting of Bills (iv) Cash Credit

39. (i) Loans
The commercial banks grant short and long term loans to individuals, firms and companies mostly against securities like guaranties.

40. Loans
The commercial banks grant short & long term loans mostly against securities to
individuals,
Firms
Companies
The amount of loan is credited to the borrowers account, who can withdraw it as per his/her requirements through check or ATM or any other credit instrument.

41. Bank Loan
Approved amount is taken by the borrower in full and not in partial
Interest rate is charged by borrower from the date of transfer of loan in his account
Documents to safe guard the loan
Assets and Liabilities of applicant
Earned profit and earning capacity
Financial position
Purpose and period of loan

42. Overdraft: (O/D) بيش‌ ازاعتبار برات‌ كردن‌،
The bank allow the facility of over drafting to their reliable and well reputed customers…
It is a short term loans, provided by the banks to the current account holders.
Under this system the banks allows the customers to overdraw his/her account up to certain limit.
For example : A person have 20000AFS in bank and the bank allows him/her to over draw up to
Small interest is charged on overdraft.

43. O/D Also Called Running Finance Only allowed to the current account
Short period of time
With draw the amount more than the actual amount in the account
Bank charges and interest charged
Issued against shares, insurance policies etc

44. Introduction of Bill of exchange
When a trader sells goods on credit, he becomes the creditor, and the buyer becomes his debtor. The creditor (i.e., the seller) has to get from the debtor (i.e., the purchaser) the amount of the goods sold on credit on a later date. Very often, the creditor likes to have a written promise from his debtor to pay the amount of the goods on a certain date. For this purpose, the creditor orders his debtor in writing to pay the amount of the goods either to him or to his order or to the bearer of the instrument.

45. Introduction of Bill of exchange
This written order for payment issued by the creditor to his debtor is called a Bill of Exchange. A bill of exchange legally defined as ‘an instrument in writing, containing an unconditional order, signed by the maker, directing a certain person, to pay on demand or at a fixed or determinable future, time, a certain sum of money only, to or to the order of a certain person, or to the bearer of the instrument.’

46. Definition of bill of exchange
A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person to the bearer of the instrument."

47. Discounting Bill of Exchange
A very important function of the modern banks is to
discount bills of exchange…
The bank makes loans to their customers by discounting the bill of exchange.
Discounting bill of exchange refers to making the payment of bill before its maturity.
The discount charged is the earning of the bank

48. Some Advantages of Bill of Exchange are
The holder of the bill can receive the money even before the due date of bill, by discounting the bill with his bank.
The bill can be transferred to another person.
It enables the buyer to purchase the goods without making actual payment. He accept the bill & make payment at a later date

49. Specimen of a Bill of Exchange
Maker: He is the person who draws and signs the promissory note and promises to pay the amount.
Payee: He is the person to whom the amount of the promissory note is payable.
AFN 10,000/ Kabul
October 20, 2009
On demand, I promise to pay Abdullah S/O Abd-ur-Rhman or order a sum of Afn 10,000/- (Afghani Ten Thousand only), for value received.
To, Abdullah Sd./Hakim
Address…………… Stamp
…………………………….

50. Parties to the Bill
There are three parties involved to a bill of exchange.
Drawer: The drawer is the person who draws the bill. He is the person who orders to pay a certain sum of money.
Drawee: Drawee is the person on whom the bill is drawn. He is the person who is ordered to make the payment of the bill.
Payee: Payee is the person to whom the money is directed to be paid. He gets the payment of the bill.

51. Features of Bills of Exchanges
A Bill of Exchange must be in Writing.
It must contain in Order To Pay.
The order to pay must be Unconditional.
It must be Signed by the drawer and Properly Stamped.
The amount payable must be certain.
The payment must be made in money.
The bill payable may be either On Demand or after a Specified Period.
The bill may be payable either to the Bearer or to the Order of Payee.

52. AFN 10,000/ Kabul
October 20, 2009
On demand, I promise to pay Abdullah S/O Abd-ur-Rhman or order a sum of Afn 10,000/- (Afghani Ten Thousand only), for value received.
To, Abdullah Sd./Hakim
Address…………… Stamp
…………………………….

53. (iv) Cash Credit
The banks advance long term loans to the different sectors against the security of goods.
The borrower is permitted to draw within the cash credit limit sanctioned by the bank.
The interest is charged only on the amount of money withdrawn by the borrower.

54. Secondary Functions
The secondary function of a commercial bank are as follows:
Special financial services:
commercial banks are now offering international services in the form of currency exchange, issue of letters of credit, ATMs (Automatic Teller Machine), and Electronic Fund Transfer (EFT).
Purchase or sell of securities:
The bank, if authorized by the customer, purchases or sells securities on behalf of the customer.

55. Secondary Function Execution of customers Instructions:
The customer may order in writing to his bank to make payments of regular installment to an individual or firm by loaning them to his account.
Against such payments the bank charge a small commission.
Acting as Trustee:
If a client directs his bank to act as a trusty in the administration of a business, the bank performs this responsibility for the benefit of its customer.
The bank charge a small fee for providing this services.

56. Secondary Function V. Collections of Cheques:
It Acts a Agents to its customers in the collection and payment of Cheques, Bills and Promissory-Notes.
VI. Collection of Dividends:
The bank provides a very useful service in the collection of Dividends or Interest earned on shares held by its customers.

57. Custodian of Valuable Properties
People can deposit their Valuable Documents, Ornaments, Bonds etc for Safe Custody with banks… Lockers are available for this purpose in the banks.

58. Classification of Banks
We can classify banks on two basis…… A: Classification on the basis functions……… B: Classification on the basis of ownership…

59. A: Classification on Function Basis
The main types of banks are as under:
Central Bank:
The central bank is the head, the leader, and the supervisor of the banking and monetary system of a country.
Almost every country of the world has its own central bank.
Commercial Banks:
Commercial banks are the financial institutions, which perform general banking functions.
They receive deposits, advance loans and create credit.

60. Industrial Banks:
The industrial banks mainly provide, medium and long-term credit to the industries.
These banks are established for industrial development.
Agriculture Banks:
Agricultural banks are set up to provide financial assistance to the agriculturists.
They advances short-term and long-term credit to the formers for purchasing seeds, tractors and introducing modern techniques in forming.

61. 5. Exchange Banks:
Exchange banks mainly deal with international trade. These banks take the responsibility of settlement of foreign exchange and arrange the foreign business.
6. Investment Banks:
These banks provide funds for long-term projects. They can raise their funds by getting deposits or selling share/stocks, issuing bonds or commercial paper.

62. B:Class on the basis of ownership
1: Public sector banks.. These are owned and controlled by the government like …..Afghan mili Bank. 2: Private Sector banks.. These are owned by private people and not the government like …..Kabul Bank.

63. Role of Commercial Banks in the Economic Development of a Country:
The significance of commercial banks in the economic development of a country are as given in brief:
Banks promote capital formation:
The commercial banks encourage savings.
These savings are then available in the businesses which make use of them for productive purposes.
Promotion of trade and industry:
with the growth of commercial banks in the 19th and 20th centuries, the trade and industrial sector expanded.
The use of cheques, bill of exchange, credit card etc. has increased both national and international trade.

64. Role of Commercial Banks in the Economic Development of a Country (cont’d):
Development of Agriculture sector:
The commercial banks advance credit to the agricultural sector which greatly support in rising agricultural productivity and income of the formers.
Investment in new enterprises:
Businessmen normally hesitate to invest in new enterprises. The commercial banks generally provide short and medium term loans to the firms to invest in new enterprises.

65. Role of Commercial Banks in the Economic
Influencing economic activity:
The banks can also influence the economic activity of a country by increasing and decreasing the rate of interest.
Implementation of Monetary policy:
The central bank of a country controls and regulates the volume of credit through the active cooperation of the commercial banking system in the country.
Export promotion cell:
In order to increase the export of a country, the commercial banks provide information about trade and conditions both inside and outside the country to its customers.

66. Any Question?