CH3 Types of Banks

Slide 3.
Chapter 3
Types of banking
Casu, Girardone and Molyneux, Introduction to Banking PowerPoints on the Web, 2nd edition © Pearson Education Limited 2015
Slide 3.2
Learning objectives
• To distinguish between traditional and modern

banking
• To understand the differences between commercial and
investment banking
• To understand the differences between private and

corporate banking
• To outline the main aspects of Islamic banking
Slide 3.3
Traditional versus modern banking
The banking business has experienced substantial change over the

last 30 years or so as banks have transformed their operations from
relatively narrow activities to full-service financial firms. Traditional
banking business consisted of taking deposits and making loans and
the majority of their income was derived from lending business.
Slide 3.4
Table 3.1 shows that the nature of the banking business has
changed. Banks are now regarded as full-service financial
firms.
The transformation of banks into full-service financial

institutions has been motivated by the strategic objective of
banks to be able to meet as broad a range of customer
financial service demands as possible.
Slide 3.5
Table 3.1 Traditional versus modern banking

Slide 3.6
1- Commercial banks
Commercial banks are institutions that provide services such as

accepting deposits, providing business loans, and offering basic
investment products. The main function of commercial bank is to accept
deposit from the public for the purpose of lending money to the
borrowers
Commercial banks are the major financial intermediary in any

economy. They are the main providers of credit to the household and
corporate sector and operate the payments mechanism.
Slide 3.7
Table 3.3 illustrates the ranking of the top 15 commercial

banks in the world, as at December 2012, ranked by Tier 1
capital and total assets. Bank of
America is one of the world’s largest financial institutions,
serving individual consumers, small- and middle-market
businesses and large corporations with a full range of
banking, investing and other financial and risk management
products and services
Slide 3.8
Table 3.3 Top 15 commercial banks (December 2012).
Slide 3.9
2- Savings banks: are similar in many respects to commercial

banks although their main difference (typically) relates to their
ownership features – savings banks have traditionally had mutual
ownership, being owned by their ‘members’ or ‘shareholders’, who
are the depositors or borrowers. The main types of savings banks in
the United States are the so-called savings and loan associations.
They represent the second largest deposit-taking group of

financial institutions in the United States.
Slide 3.10
3- credit unions
These are non-profit co-operative institutions that are owned by

their members who pool their savings and lend to each other and
operate on the principle of people helping people, providing its
members credit at competitive rates as well as other financial
services.
Slide 3.11
Table 3.4 Credit unions in the world, 2005–2010 (% changes)
Source: WOCCU (World Council of Credit Unions), and authors’ calculations. Data available at www.woccu.org/publications/statreport
Slide 3.12
4- Corporate banking: relates to banking services provided to

companies, although typically the term refers to services provided
to relatively large firms.
5- Private banking :concerns the high-quality provision of a

range of financial and related services to wealthy clients,
principally individuals and their families.
High net worth individuals (HNWIs) are defined as those with

$1 million or more in investable assets
Slide 3.13
Table 3.5 Top 20 global private banks by assets under management

Source: Scorpio (2012).
Slide 3.14
6- Investment banks : An investment bank is typically a private

company that provides various finance-related and other services to
individuals, corporations, and governments. Investment banks deal
mainly with companies and other large institutions and traditionally
they do not deal with retail customers.
They provide financial and investment advisory services to

wealthy individuals (private banking) and institutions.
Unlike commercial banks and retail banks, investment banks do not

take deposits
Slide 3.15
Table 3.7 Largest investment banks by revenue (2012)
Slide 3.16
7- Islamic banking or Islamic finance (or sharia-compliant

finance is banking or financing activity that complies
with sharia (Islamic law) and its practical application through the
development of Islamic economics.
Islamic Sharia prohibits riba, or usury defined as interest paid on all
loans of money (although some Muslims dispute whether there is a
consensus that interest is equivalent to riba).
Investment in businesses that provide goods or services considered

contrary to Islamic principles (e.g. pork or alcohol)
is also haraam ("sinful and prohibited").
Slide 3.17
Islamic banking is occurring in various parts of the world and is

based on non-interest principles.
Some of the modes of Islamic banking/finance include

Mudarabah (Profit sharing and loss bearing),
Wadiah (safekeeping),
Ijara (leasing).
Murabahah (cost plus),
Slide 3.18
An example of a commonly used profit-sharing arrangement in

Islamic banking is known as Musharakah, which is an
arrangement where a bank and a borrower establish a joint
commercial enterprise and both contribute capital as well as labour
and management as a general rule.
The profit of the enterprise is shared among the partners in

agreed proportions while the loss will have to be shared in strict
proportion of capital contributions.
Slide 3.19
There is a wide variety of Islamic banking products and services

based on profit sharing and other forms of arrangements that enable
financial intermediation without the use of interest. Globally, there
are around 100 Islamic banks and financial institutions working in
the private sector, excluding those in the three countries that have
declared their intention to convert their entire banking sector to
Islamic banking, namely, Pakistan, Iran and Sudan.
Slide 3.20
Figure 3.6 Global Islamic banking assets, 2009–2013


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Slide 3.

• To distinguish between traditional and modern

• To understand the differences between private and

Traditional versus modern banking

The banking business has experienced substantial change over the

The transformation of banks into full-service financial

Table 3.1 Traditional versus modern banking

Commercial banks are institutions that provide services such as

Commercial banks are the major financial intermediary in any

Table 3.3 illustrates the ranking of the top 15 commercial

Table 3.3 Top 15 commercial banks (December 2012).

2- Savings banks: are similar in many respects to commercial

They represent the second largest deposit-taking group of

These are non-profit co-operative institutions that are owned by

Table 3.4 Credit unions in the world, 2005–2010 (% changes)

4- Corporate banking: relates to banking services provided to

5- Private banking :concerns the high-quality provision of a

High net worth individuals (HNWIs) are defined as those with

Table 3.5 Top 20 global private banks by assets under management

6- Investment banks : An investment bank is typically a private

They provide financial and investment advisory services to

Unlike commercial banks and retail banks, investment banks do not

Table 3.7 Largest investment banks by revenue (2012)

7- Islamic banking or Islamic finance (or sharia-compliant

Investment in businesses that provide goods or services considered

Islamic banking is occurring in various parts of the world and is

Some of the modes of Islamic banking/finance include

An example of a commonly used profit-sharing arrangement in

The profit of the enterprise is shared among the partners in

There is a wide variety of Islamic banking products and services

Figure 3.6 Global Islamic banking assets, 2009–2013

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