Modern banking system and the obsolete concept of banking system explain and illustrate in the world wide aspect

1.0 Introduction:

Modern banking operations are basically to ease the movement of goods across the political boundary of countries. Banking system came beside with the enlargement of money as an institution.  As civilization narrowed downward the social distances and mankind learned about the remuneration of exchanging commodities athwart political boundaries, the present day international trade developed.  The business of commodities across countries necessary financial intermediation in the international stage and thus modern banking system was born. The banking system is a crucially important and vital part of the in general economy. By, encouraging saving, and through the allocation of savings to borrowers, the financial system plays a key role in the investment procedure, which is a major determinant of the economy growth and future productive aptitude. Escalation the financial sector is a vital concern for an economy. Efficient banking or sound financial system provide as an effective channel for mobilizing funds from savers to productive segment and thus helps to achieve economic growth. In today’s world no country can afford to do business without whichever in the field of international trade or in international banking. Since international trade is directly correlated to modern banking, quantity of international trade (imports and exports together) is a determinant of the growth of modern banking and the relationship is direct. This research paper discuss about the definition of bank, history of banking system, the structure of modern banking systems and importance of banking system in global aspect.

 

 

2.1 Definition of Bank:

The word ‘Bank’ was perhaps imitative from the word ‘bench[1]‘ as during ancient time Jews used to do money lending business sitting on long benches. A bank[2] can be defined in terms of the economic functions it serves, the services it offers its customers and the legal basis for its existence. According to Geoffrey “A dealer in debts- his own & of others people”. And Sir John Paget “ No person or body, corporate or otherwise, can be a banker who does not (1) take deposit accounts, (2) take current accounts, (3) issues & pay cheques, & (4) collect cheques, crossed & uncrossed, for his customers. Bank is a lawful organization, which recognizes deposits that can be withdrawn on demand. It also lends money to persons and business houses that want it. The actions carried on by banks are called banking activity. ‘Banking’ as an activity engages recognition of deposits and lending or investment of money. It makes possible business activities by providing money and definite services that help in exchange of goods and services. Therefore, banking is a significant supplementary to trade. It not only provides money for the production of goods and services but also assist their exchange between the buyer and seller.

 2.2 History of banking system:

Banking activities were adequately important in Babylonia in the second millennium B.C. that written standards of practice were considered necessary. These standards were part of the Code of Hammurabi the earliest known formal laws. Obviously, these primitive banking transactions were very different in many ways to their modern-day counterparts. Deposits were not of money but of cattle, grain or other crops and eventually precious metals. Nevertheless, some of the basic concepts underlying today’s banking system were present in these ancient arrangements, however. A wide range of deposits was accepted, loans were made, and borrowers paid interest to lenders[3]. Similar banking type arrangements could also be found in ancient Egypt. These arrangements stemmed from the requirement that grain harvests be stored in centralized state warehouses. Depositors could use written orders for the withdrawal of a certain quantity of grain as a means of payment. This system worked so well that it continued to exist even after private banks dealing in coinage and precious metals were established. 

The modern banking is to practices in the Medieval Italian cities of Florence, Venice and Genoa. The Italian bankers made loans to princes, to finance wars and their lavish lifestyles, and to merchants engaged in international trade. In fact, these early banks tended to be set up by trading families as a part of their more general business activities. The Bardi and Peruzzi families were dominant in Florence in the 14th century and established branches in other parts of Europe to facilitate their trading activities[4]. Perhaps the most famous of the medieval Italian banks was the Medici bank, set up by Giovanni Medici in 1397[5]http://people.brandeis.edu/~cecchett/Textbook inserts/A Brief History of Banking.htm – _ftn4. The Medici had a long history as money changers, but it was Giovanni who moved the business from a green-covered table in the market place into the hall of a palace he had built for himself. He expanded the scope of the business and established branches of the bank as far north as London. While the Medici bank extended the usual loans to merchants and royals, it also enjoyed the distinction of being the main banker for the Pope. Papal business earned higher profits for the bank than any of its other activities and was the main driving force behind the establishment of branches in other Italian cities and across Europe.

 During the 17th and 18th centuries the Dutch and British improved upon Italian banking techniques.  A key development often credited to the London goldsmiths around this time was the adoption of fractional reserve banking[6]. By the middle of the 17th century, the civil war had resulted in the demise of the goldsmith’s traditional business of making objects of gold and silver. Forced to find a way to make a living, and have the means to safely store precious metal, they turned to accepting deposits of precious metals for safekeeping. The goldsmith would then issue a receipt for the deposit.  At first, these receipts circulated as form of money. But eventually, the goldsmiths realized that, since not all of the depositors would demand their gold and silver all together, they could issue more receipts than they had metal in their vault.

2.3 The structure of modern banking system:

The banking systems of the world have many similarities, but they also differ, sometimes in relatively material respects. The principal differences are in the particulars of organization and technique. The differences are less because of the growing efficiency of international communication and the development in each country to replicate practices that have been successful elsewhere. Banking systems may be classified in terms of their structure basis. According to structural classification, banking may be classified as (a) Branch Banking (b) Unit Banking (c) Hybrid banking system.

(a) Branch banking
Branch banking system which is carried on through a network of branches in the same town or country under the guidance and control of one single head office. These branches may also be located in outside of the country. The advantages of branch banking system is Large Scale Operation, Economy of Reserves, Remittances of Funds, Spreading Risk Geographically, Parity in the rate of Interest, Investment of Idle Funds, Wise Banking Policy, Foreign Exchange and Superior Management and Personnel Training. The disadvantages are Lose Control and Management, Red Tapism[7], Relationship between Management and the Employees, Late Decision and Concentration of Financial Resources

(b) Unit banking

The oldest kinds of banking, offer all of their services from one office, though a small number of services (taking deposits, cashing checks) may be offered from limited service facilities such as:

  • Drive-up windows.
  • Automated teller machine (ATM).
  •  Retail store point-sale terminals.

Unit banking system the banking operations are conceded through a single office without any branch. Remittances and foreign exchange etc are deal through communication between banks of two places.

(c) Hybrid banking system

A third group of banking systems differs from the unit banking system and also from the branch banking systems. This group is characterized by the continuation of a small number of banks with branches all over the country, holding a significant part of total deposits, along with a relatively large number of smaller banks that are regional or local in emphasis.

2.4 Importance of banking system in global aspect:

Banks make available funds for business as well as personal needs of individuals. They play a major function in the economy of a nation. The overall economic of a country is totally dependent on the efficient banking system. Industrial, agricultural and commercial steps forward of a country are not possible without a good banking system. The importance of banking may be stated as follows:

1. Capital Formation
Economic development depends ahead the division of economic resources from consumption to capital formation. Capital grows out of savings. Banks play the prime role in accumulating capital by collecting the scattered savings of the people.

2. Inexpensive Media of Exchange
Modern Banking provides inexpensive media of exchange. Issuing of currency notes is a great attainment of modern banking. In addition the cheques issued on the banks are regularly used instead of money in transacting business.

3. Development of Trade and Industry
Bank employ their collected funds by advancing loans to commercial and industrial undertakings. In respect of foreign trade also, banks provide a precious service by issuing letter of credit etc.

4. Reservoirs of Funds
Banks acts as the reservoirs of money in the country. In times of economic, crisis the bankers come onward to help the Government by purchasing the Government securities or by advancing loans.

5. Transfer of Funds
Banks facilitate the transfer of funds from one place to another safely and at a very cheap cost through bank drafts, mail transfers, telegraphic transfer, travelers cheque etc.

6. Dealing in Foreign Exchange
Banks deal in foreign exchange by purchasing and selling foreign currencies and by issuing letters of credit. Foreign remittances of funds are possible only through banks.

 

 3.0 Conclusion

To conclude, in modern time there has been a huge decline to the barriers of global contest in the banking industry. Increases in telecommunications and other economic technologies, such as Bloomberg, have permitted banks to widen their reach all over the world, since they no longer have to be near customers to manage both their finances and their risk. The growth in cross-border behavior has also improved the demand for banks that can offer various services across borders to different nationalities. Nevertheless, in spite of these reductions in barriers and growth in cross-border activities, the banking industry is nowhere near as globalize as some other industries. In the enormous majority of nations around globe the market share for foreign owned banks is currently less than a tenth of all market shares for banks in a particular nation. One motive the banking industry has not been entirely globalized is that it is more convenient to have local banks offer loans to small business and individuals. On the other hand for large corporations, it is not as essential in what nation the bank is in, since the corporation’s financial information is accessible around the globe. Al last, without banking system the international trade is not completion its operation.


Bibliography

  1. Hoggson, N. F. (1926) Banking Through the Ages, New York, Dodd, Mead & Company.
  2. Goldthwaite, R. A. (1995) Banks, Places and Entrepreneurs in Renaissance Florence, Aldershot, Hampshire, Great Britain, Variorum
  3. “Banking Origin and Development”. Invest and Income. Retrieved July 26, 2011.
  4. The structure of modern banking systems, Retrieved from, http://www.uv.es/EBRIT/macro/macro_5000_59_13.html#0026, retrieved on 3rd  December, 2011
  5. Unit Banking, Retrieved from,  http://www.uv.es/EBRIT/macro/macro_5000_59_14.html#0027, retrieved on 3rd

 December, 2011

  1. Branch Banking, Retrieved from, http://www.uv.es/EBRIT/macro/macro_5000_59_15.html#0028, retrieved on 3rd

December, 2011

  1. Hybrid Banking, Retrieved from, http://www.uv.es/EBRIT/macro/macro_5000_59_16.html#0029, retrieved on 3rd  December, 2011
  2. Definition of Banking, Retrieved from, http://www.qfinance.com/dictionary/banking-system, retrieved on 3rd December, 2011
  3. Boland, Vincent (2009-06-12). “Modern dilemma for world’s oldest bank”. Financial Times. Retrieved on 3rd December, 2011
  4. “How Banks Make Money”. The Street, Retrieved on 3rd December, 2011


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[1] The word bank was borrowed in Middle English from Middle French banque, from Old Italian banca, from Old High German banc, bank “bench, counter”. Benches were used as desks or exchange counters during the Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths.  One of the oldest items found showing money-changing activity is a silver Greek drachm coin from ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon, and c. 350–325 BC, presented in the British Museum in London. The coin shows a banker’s table (trapeza) laden with coins, a pun on the name of the city. In fact, even today in Modern Greek the word Trapeza (???????) means both a table and a bank.

[2] A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers with capital deficits to customers with capital surpluses. Banking is generally a highly regulated industry, and government restrictions on financial activities by banks have varied over time and location. The current set of global bank capital standards is called Basel II.

 

[3] See, Davies, G. (1994) “A History of Money from Ancient Times to the Present Day”; Cardiff, UK, University of Wales Press.

 

[4] See, Hoggson, N. F. (1926) “Banking Through the Ages”; New York, Dodd, Mead & Company.

 

[5] See, Goldthwaite, R.A. (1995) “Banks, Places and Entrepreneurs in Renaissance Florence”; Aldershot, Hampshire, Great Britain, Variorum.

 

[6] See, Davies, G. (1994) “A History of Money from Ancient Times to the Present Day”; Cardiff, UK, University of Wales Press.

 

[7] Red-Tapism and delay is common due to lack of sufficient authority to branch managers. They are also not allowed to stay for long in one branch, so they do not have the chance of becoming familiar with local needs.

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