Money & Banking

Commercial Banks
 Presented By
• Tarfeeha Majeed (BB-21-09)
• Fabeha Naqvi (BB-21-14)
• Areesha Rehman (BB-21-15)
• Mahnoor Malik (BB-21-16)
• Amna Tariq (BB-21-29)
• Eisha Khan (BB-21-70)
TARFEEHA MAJEED
(BB-21-09)
 What is Banking
Banking refers to the business activity that involves range of
services like:
 Deposit services
 Lending services
 Transaction services
 Insurance services
 Other financial services
 History and Evolution of Banking

 Various views about origin of

word ‘Bank’ are:
 It is derived from Italian word,
‘banque’ which means bench.
 Other is that it is derived from
German word, ‘banc’ which
means joint stock firm.
History and Evolution of Banking
 According to Crowther in his
famous book, ‘An Outline of
Money’ , the present day
banker has 3 ancestors:
 The Merchants
 The Goldsmiths
 The Money lender
 History and Evolution of Banking
 Due to over draft facilities there was too much confusion in banking
system.
 Money lender/ gold smith, in order to earn profits, could not keep
adequate reserves for meeting the demands of costumers for cash.
 The failure to return money caused widespread distress among
people.
 To create confidence among people steps were taken to regulate
banking systems.
 Development of Banks
 The first central bank was
formed in Geneva in 1578.
 Bank of England was
established in 1694.
 The modern commercial
banking system was actually
developed in the nineteenth
century.
 Role of banking in economic development of
Pakistan
 Financial Intermediation
 Credit provision
 Facilitating trade and commerce
 Infrastructure development
 Encouraging saving and investments
 Financial Inclusion
 Risk Management
AMNA TARIQ
(BB-21-29)
 Classification of Banks in Pakistan
Classification Based on Functions
1) Central Bank
The primary function of the central bank is to regulate the flow of
money and credit to promote efficiency, stability and growth in the
country. For example, State Bank of Pakistan
2) Commercial Banks
Engaged in routine banking, collecting surplus money, providing loans,
and creating money. They are considered the lifeblood of the economic
society. For example, Muslim Commercial Bank, United Bank Limited,
Habib Bank Limited
 Classification Based on Functions
3) Exchange Banks
Deals with international trade, settles foreign exchange, and arranges
foreign business. Nationalized commercial banks in Pakistan engage in
exchange banking.
4) Saving Banks
Collects and keeps small savings of the public, invests in government
securities. The saving banks invest the funds in the safest government
securities. For example, Post offices and saving centers in Pakistan
Classification Based on Functions
5) Agricultural Banks
Provides financial assistance to
agriculturists, offers short-term and
medium-term credits. For example,
Agricultural Development Bank of Pakistan
(established in 1981)
6) Industrial Banks
Provides medium and long-term credit to
industries. For example, Industrial
Development Bank (IDBP), Pakistan
Industrial Credit and Investment
Corporation (PICIC)
 Classification Based on Ownership
a) Public Sector Banks
Owned and controlled by the
government. For example, National
Bank, Bank of Punjab
b) Private Sector Banks
Owned by corporations or private
entities. For example, MCB, ABL, UBL
c) Cooperative Banks
Established to provide short and
medium-term loans for rural
development.
 Classification Based on Domicile
a) Domestic Banks
Registered and incorporated within Pakistan.
b) Foreign Banks
Origin and head offices in a foreign country.
 What is a Commercial Bank?
A financial institution dealing with money and credit. It is Organized for
profit by accepting deposits at lower rates and lending at higher rates.
Quotes:
Crowther: "A bank collects money from those who have it spare and
lends money to those who require it."
Mr. Parking: "A bank takes deposits from households and firms and
makes loans to other households and firms."
 Basic Functions of a Commercial Bank
1) Accepting of Deposits
Here the types of accounts include,
• Current Account: For businesses and traders and with no interest
• Saving Account: For individuals with interest
• Fixed Deposit Account: For a specific period with higher interest rates.
2) Making Loans
Here the types of loans include,
• Loans: Short and long term against securities.
• Cash Credit: Long term loans against security of goods.
• Overdraft: Short term financing with a credit limit.
• Discounting of Bills: Making payment of bills before maturity at a discount.
 Secondary Functions of Commercial bank
Services Offered:
 Currency exchange
 Letters of credit
 Banker's acceptances
 ATMs (Automated Teller Machine)
Agency Functions
Services Provided:
 Collection of Cheques
 Collection of Dividends
 Purchase or Sale of Securities
 Acting as Trustee or Executor
 Test of Efficiency of a Good Bank

Efficiency of a Bank
Judged by how it manages assets
and liabilities to earn the highest
possible profit. In technical terms,
efficiency is judged from its
Portfolio Management.
Main Concerns and Features of an Efficient Bank
 Liquidity Management
Relative ease and speed of converting assets
into cash. It helps to maintain confidence of
depositors.
 Asset Management
Minimize risk of default by investing in low-
risk assets and diversifying loan advances.
 Liability Management
Acquire funds from money markets at low
cost, not solely depending on current
deposits.
 Features of an Efficient Bank

 Safety: Ensure the safety of assets and

deposits.
 Greater Liquidity: Balance liquidity needs
with profitability.
 Depositor Confidence: Maintain trust and
confidence of depositors.
 Maximum Profitability: Strive for the
highest possible profit without
compromising safety and liquidity.
AREESHA REHMAN
(BB-21-15)
 What is Credit ?
The term credit is derived from a Latin word CREDO that means I trust
you . Credit is generally defined as
“ An exchange which is complete after the expiry of a certain period of
time after payment”.
It is the right to receive the payment or can also be known as an
obligation to make payment in future time on account of an immediate
transfer Hof good .
 FUNCTIONS OF CREDIT
The main functions that arrive from the use of credit are as;
 Economy in the use of metals
 Provision of working capital
 Case of young firm
 Large scale production
 Purchase of good
 International payments
 DANGERS OF CREDIT
Over issue of credit: Expansion of credit beyond safe limits results in over-
investments, over-production and the rise in prices.
Bad debts : if someone fails to return back the loan to the credit institutions due
to their negligence ,it creates panic in the monetary circles.
Borrowing by government: the government may spend borrowed money for
their luxuries resulting in the citizens to lose their confidence in the state.
Monopolistic Exploitation: if a large amount of money is placed at the disposal
of any individuals , there is a danger they might create monopoly.
 CASH RESERVE OF BANK
Bank
A bank is an “ institution which accepts
deposits of money and repays cash to
depositors on demand ” . It is also known
as an profit making institution.
Cash Reserve
Cash reserve is the liquid form of an asset
that is to be kept by the bank and the
central Bank of the country in order to
meet the demands of the customers.
CASH RESERVE OF BANK

Cash reserve of the bank includes

three items ;
1.Cash in hand
2.Cash kept with the central bank
of the country
3.Cash kept with other banks
 FACTORS WHICH GOVERN CASH RESERVE
o Nature and size of deposit: The bank has to keep larger reserves if the deposits
are larger and vice versa .
o Habits of customers : if the customers make deposits by use of cheques then
smaller reserves are required and vice versa.
o Area of operation : The ratio of cash reserve also depends upon the area where
the bank is situated .
o Banking facilities : If the banking system is well established , there will be a
larger inflow and outflow of funds mostly through cash , resulting in lower
reserves .
o Political conditions: Political stability results in less cash reserves . The banks
keep higher reserves in case of economic instability.
FABEHA NAQVI
(BB-21-14)
 DO BANKS CREATE CREDIT?
Credit creation by commercial banks
• Creation of credit is one of the
important functions of commercial
banks.
• Credit creation is the multiple
expansion of banks demand deposit.
• This tendency on the part of the
commercial banks to make loans
several times of the excess cash
reserves kept by the banks is called
creation of credit.
LIMITS TO CREDIT CREATION

• Cash Drain
• Transfer of deposits to non bank
financial institutions
• Willingness to borrow
• Different types of loans
 IMPORTANCE OF COMMERCIAL BANKS
Commercial banks play several crucial roles in the
economy:
• Intermediation
• Credit Creation
• Payment Services
• Financial Intermediation
• Stabilizing the Financial System
• Economic Growth
MAHNOOR MALIK
(BB-21-16)
 Growth of Banking in Pakistan
 At time of partition, the total commercial banks were 38 (2
Pakistani, 29 Indian, 7 exchange)
 Total deposits of Pakistani Banks stood at 800 Million
 Effects of partition on Banking
 What are Scheduled and Non-Scheduled Banks
 Scheduled (from 619-213) and Non-Scheduled Banks (from
411-106)
 Steps to Restore Normal Banking Facilities

 Safety for Non-Muslim Banks and Staff

 Police Protection
 Financial help for Banks
 Establishment of SBP
 Currency issuance
 Banking Regulation
 Monetary Policy
 Promotion of Savings
 Commercial Banking in Pakistan
A commercial bank is a kind of financial institution that carries all the operations
related to deposit and withdrawal of money for the general public, providing loans
for investment, and other such activities. These banks are profit-making institutions
and do business only to make a profit. Commercial Banking in Pakistan is targeted
at Medium sized businesses with annual sales ranging from PKR 800 million to PKR
6.0 billion.
Classification of Commercial Banks
Schedule
On the basis
of size
Non-Schedule
Types of
Commercial Pakistani Joint
Banks Stock Bank
On the basis
of Nationality Foreign Joint
of Stock Bank
Shareholder
Indian Banks
Pakistani Commercial Banks
At the time of partition, there were only 2 commercial banks;
 Habib Bank (Strong presence in Karachi, Lahore and Bombay)
 Australasia Bank (Branches in Karachi, Lahore and Kolkata)
Examples of Commercial Banks in Pakistan
 National Bank of Pakistan (NBP)
 Bank Al Falah
 National Bank of Pakistan (NBP)
The National Bank of Pakistan (NBP) is a big bank in Pakistan that provides lots of
banking services to people and businesses. It’s called a commercial bank because it
mainly focuses on making money by offering services like loans, savings accounts,
and other financial products to its customers.
Here's why it's called a commercial bank and what it does:
 Services for Everyone
 Help for Businesses
 Making Money
 Investments
 Supporting the Economy
 Bank Al Falah
Bank Al-Falah is one of the prominent banks in Pakistan. It is considered a
commercial bank. Here’s why;
 Services Offered
 Profit-Oriented
 Customer Focus
 Investment Activities
They also provide things like savings accounts, loans, credit cards, and investment
options. Bank Al-Falah also uses technology to make banking easier, with online
platforms and mobile apps. They care about their customers and try to help
communities through things like education and healthcare initiatives.
 Role of Commercial Banks in Economic Development
of Pakistan
 Saving mobilization
 Facilitating Trade activities
 Creating climate for capital formation
 Assisting in development
 Making capital available for investment
 Less reliance on foreign capital
 Loan to agricultural sector
 Challenges faced by Commercial Banking in
Pakistan

 Change in market needs

 Service to customers
 Regulatory challenge
 Consumer banking
 Challenge to new banks in private sectors
 Products of Commercial Banks
Commercial banks offer a variety of products and services to meet the financial
needs of individuals, businesses, and organizations. Here are some common
products offered by commercial banks:
o Savings Accounts
o Checking Accounts
o Certificates of Deposit (CDs)
o Loans
o Credit Cards
o Investment Products
o Online Banking Services
o Merchant Services
o Cash Management Services
o Treasury Services
EISHA KHAN
(BB-21-70)
 Nationalization of Banks

A nationalized bank refers to a bank

that has been taken over or brought
under the ownership and control of
the government. In this case, the
government becomes the majority
or sole shareholder of the bank,
allowing it to influence and manage
the bank's operations and policies.
 Nationalization of Banks
The People's Party government led by late M Zulfiqar Ali Bhutto
nationalized all the banks under the Nationalization of Banks Act, 1974.
The financially weaker banks were merged with those banks who had
strong footings. As a result following banks were formed
Five major banking companies were formed:
(1) National Bank of Pakistan
(2) Habib Bank Limited
(3) United Bank Limited
(4) Muslim Commercial Bank Limited
(5)Allied Bank of Pakistan Limited.
 Merits and Demerits of Nationalization
The main arguments for and against nationalization of banks are as,
1. Creation of industrial and business monopolies
2. air Distribution of Credit
3. Financing of agriculture sector
4. Credit needs of small industrialists
5. Mobilization of resources
6. Service motive
7. Commercial approach
8. Level of efficiency
9. Holding of price line
10.Rate of economic growth
 PRIVATIZATION OF NATIONALIZED BANKS

Meaning of Privatization
Privatization is the general process of
involving, the private sector in the
ownership or operation of a state owned
enterprise.
For instance, in the United Kingdom, the
privatization of British Telecom (BT) in
the 1980s allowed the company to
become privately owned and operated.
 Why privatization of banks?
 The Government of Pakistan is not at all satisfied with the
performance of nationalized banks.
 The complaint about the services like delaying home remittances,
despatch of cheques, drafts, inefficient counter services, overstaffing,
bad debts, militant unionism of the banks, number of bad debts, etc.,
are on the increase.
 One reason is to introduce market competition and improve efficiency
in the banking sector. By allowing private ownership, banks can
operate with more flexibility and respond to market demands more
effectively.
 Process of Privatization
The process of privatization can vary depending on the specific country
and industry.

 First, the government typically initiates the privatization process by

identifying the entity or industry to be privatized.
 Next, the government formulates a plan for privatization, which
includes determining the method of privatization, such as selling
shares through an initial public offering (IPO) or conducting a direct
sale to private investors.
Process of Privatization
Once the plan is in place, the government
starts the process of divesting its ownership
in the entity. This can involve conducting a
valuation of the entity to determine its
worth and setting a sale price.
After receiving bids or expressions of
interest, the government evaluates the
offers and selects the preferred buyer(s).
Finally, once the sale is complete, the
ownership and control of the entity transfer
to the private buyer(s).
 Process of Privatization

Throughout the process, the

government may also need to
address any legal or regulatory
considerations, ensure
transparency, and manage any
potential impact on employees
or stakeholders.
 Conclusion
In conclusion, commercial banks play a vital role in our economy. They
provide a safe place to keep our money, offer loans and credit to
individuals and businesses, and make it easy for us to make payments
and transfers. They also provide financial advice and contribute to the
stability of the financial system. So, commercial banks are pretty
important in keeping our financial lives running smoothly.
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