In this chapter, the reader will learn the process of evolution of banking and its contribution to thegrowth of world commerce. The chapter will provide the rationale for banking and its supervision. Abrief mention has been made of the high level segmentation of banking, which will be explored further in the next chapters. The chapter ends with the description of typical financial statements in abank. The description of the terms in a financial statement has been kept to a level suitable for anintroductory course.
Evolution of Banking
1.1 What is banking?
Traditionally banking is defined as the process of accepting deposits from surplus units inthe economic system (lenders) with the objective of lending these funds to the deficit unitsin the economic system (borrowers).A simple form of banking was practiced by the ancient temples of Egypt, Babylonia, andGreece, which loaned at high rates of interest the gold and silver deposited for safekeeping.Private banking existed by 600 B.C. and was considerably developed by the Greeks, Romans,and Byzantines. Medieval banking was dominated by the Jews and Levantines because of the strictures of the Christian Church against interest and because many other occupationswere largely closed to Jews. The forerunners of modern banks were frequently chartered fora specific purpose, e.g., the Bank of Venice (1171) and the Bank of England (1694), inconnection with loans to the government; the Bank of Amsterdam (1609), to receivedeposits of gold and silver.Banking developed rapidly throughout the 18th and 19th centuries, accompanying theexpansion of industry and trade, with each nation evolving the distinctive forms peculiar toits economic and social life. Over a period of time banking has undergone lot of changes andnow banking is not restricted to only taking deposits and lending. Though deposit taking andlending still remains the core banking activity, now banking includesservices like
wealth management services for ultra rich high net worth individuals, housingfinance, mergers and acquisitions advisory services, leasing, trade finance, automobilefinance, education finance
, and the list goes on. The following section describes howbanking has developed over all these years since its inception.
1.2 History of Banking
Banking is one of the most important services in financial sector. It also provides fuel foreconomic growth of a country. It offers safety and liquidity for the investors, both on shortand long term basis, offering comparatively a fair return for them. Banks are the principalsource of credit for dealers, households, small businesses like retail traders and largebusiness houses. Efficiency of a bank depends on their ability to satisfy their investors byoffering comparatively a better interest rate to depositors and at the same time offeringcredit to their borrowers comparatively at cheaper interest rates. With a narrow interestrate spread (difference between borrowing and lending rate), they should make profit also.Looking into the present profile of a bank, it has grown up phenomenally offering largenumber of products other than the rational functions of accepting deposits and lendingfunds. It is worth analyzing the historic background of evolution of banking services.