Emergence of Banking concept in the world and its background – explain and illustrate in the world wide aspect

Emergence of Banking concept in the world and its background – explain and illustrate in the world wide aspect.

A. Introduction

Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector acts as the backbone of modern business. Development of any country mainly depends upon the banking system. The financial sector plays a very vital role in the development of any country or nation. The banking sectors, as a major player in the financial system, is a major concern to all and sundry in a country most importantly the government through its agencies like the central bank and the ministry of finance. Banking could mean different things to different people. Scholars, bank professionals and even laymen had defined the concept and lots are still going on to capture what banking denotes in the present time taking into consideration the changing world environment.

B. Banking Concept

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 that have capital deficits to customers with capital surpluses.

Due to their critical status within the financial system and the economygenerally, banks are highly regulated in most countries. Most banks operate under a system known as fractional reserve banking where they hold only a small reserve of the funds deposited and lend out the rest for profit. They are generally subject to minimum capital requirements which are based on an international set of capital standards, known as the Basel Accords. The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy, which has been operating continuously since 1472.

C. History Of Banking

The History of Banking begins with the first prototype banks of merchants of the ancient world, which made grain loans to farmers and traders who carried goods between cities. This began around 2000 BC in Assyria and Babylonia. Later, in ancient Greece and during the Roman Empire, lenders based in temples made loans and added two important innovations: they accepted deposits and changed money. Archaeology from this period in ancient China and India also shows evidence of money lending activity.

Banking, in the modern sense of the word, can be traced to medieval and early Renaissance Italy, to the rich cities in the north such as Florence, Venice and Genoa. The Bardi and Peruzzi families dominated banking in 14th century Florence, establishing branches in many other parts of Europe. Perhaps the most famous Italian bank was the Medici bank, established by Giovanni Medici in 1397.

The development of banking spread from northern Italy through Europe and a number of important innovations took place in Amsterdam during the Dutch Republic in the 16th century and in London in the 17th century. During the 20th century, developments in telecommunications and computing caused major changes to banks operations and let banks dramatically increase in size and geographic spread. The Late-2000s financial crisis caused many bank failures, including of some of the world’s largest banks, and much debate about bank regulation.

History of Banking depends on:

· Monetary and

· Structural

I. Monetary

The history of banking depends on the history of money—and on grain-money and food cattle-money used from at least 9000 BC, two of the earliest things understood as available to barter (Davies), Anatolian obsidian as a raw material for stone-age tools being distributed as early as 12,500 B.C., with organized trade occurring in the 9th millennia.(Cauvin;Chataigner 1998) In Sardinia one of the four main sites for sourcing the material deposits of obsidian within the Mediterranean, trade of this were replaced in the 3rd millennia by trade in copper and silver. The society adapted from relating from one fixed material as valued deposits available for trade to another.

The possibility of stable economic relations was much improved with the change from the reliance on hunting and gathering of foods to agricultural practice, during periods dated as beginning sometime after 12,000 BC, at approximately 10,000 years ago in the Fertile Crescent, in northern China about 9,500 years ago, about 5,500 years ago in Mexico and approximately 4,500 in the eastern parts of the United States of the continent of the place now know as northern America.

II. Structural

By the fifth millennium B.C. the settlements of Sumer such as Eridu were formed around a central temple. In the fifth millennium people begin to build and live in the civilization of cities, providing a structure for the construction of institutions and establishments. Soon people needed safe places to store their gold, the then safest places were the workshops of ironsmiths or simply ironworkers who make strong iron gates and people thought that they were safe places they used to store their gold in those workshops. The owner of the place in return gave then a receipt “I promise to pay the bearer a sum of (whatever amount of gold deposited) and that is how the paper currency came about.” Tell Brak and Uruk were two early urban settlements.

D. Globalization in the Banking Industry

In modern time there has been a huge reduction to the barriers of global competition in the banking industry. Increases in telecommunications and other financial technologies, such as Bloomberg, have allowed banks to extend their reach all over the world, since they no longer have to be near customers to manage both their finances and their risk.[1] The growth in cross-border activities has also increased the demand for banks that can provide various services across borders to different nationalities. However, despite these reductions in barriers and growth in cross-border activities, the banking industry is nowhere near as globalized as some other industries.

In the USA, for instance, very few banks even worry about the Riegle-Neal Act, which promotes more efficient interstate banking. In the vast 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.[2] One reason the banking industry has not been fully globalized is that it is more convenient to have local banks provide loans to small business and individuals. On the other hand for large corporations, it is not as important in what nation the bank is in, since the corporation’s financial information is available around the globe.

E. Banking Law

Banking law is not a discrete area of law like contract or torts. It conveniently describes, however, the collection of legal principles which impact on banking transactions and on the banker-customer relationship. In that sense, the activity of banking is the location at which a diverse range of legal principles intersect which we call banking law. Those legal principles are drawn from a range of sources, including common law, the Law Merchant, equity and statute. In addition, for banks that subscribe to it, the Code of Banking Practice is a legally enforceable set of principles and rules incorporated into the contract between the bank and its retail customers.

  • Relevant legislation includes:

Banking Act 1959 (Cth)

Reserve Bank Act 1959 (Cth)

Australian Prudential Regulation Authority Act 1998 (Cth)

Australian Securities and Investments Commission Act 2001 (Cth), which contains in Division 2 the unconscionable conduct and consumer protection provisions in relation to financial services providers that are no longer in the Trade Practices Act

Corporations Act 2001 (Cth), in particular Pt 7

Privacy Act 1988 (Cth), in particular the credit information provisions in Part IIIA

Consumer Credit Code, usually referred to as the Uniform Consumer Credit Code

Cheques Act 1986 (Cth)

• State Fair Trading Acts, e.g. Fair Trading Act 1999 (Vic)

F. History Of Banking Law

It might be thought easier to start with a definition of ‘bank’ but this is also a fraught task. Weaver & Craigie’s description of the search for a definition of a ‘bank’ in statute and case law, illustrates the difficulty of the task and the amount of judicial and legislative energy that has been given to it. Much of the difficulty has arisen from the circularity of the traditional definition, a bank is a person or body authorized to carry on or recognized as carrying on the business of banking. What constitutes the business of banking is the vexed question. It is an important one, however, because depending on whether a person or body is classed as a bank it will have a range of additional rights and obligations. Before setting out relevant Australian definitions, it is worth a short digression into history.

The modern term ‘bank’ comes from the ‘banco’ or merchant’s bench in the marketplaces of medieval Italy: money dealing was conducted from a portable bench, which would be publicly broken in the event of failure of the merchant’s business – the origins of the concept of bankruptcy. But banking as an activity is much older.

In ancient times the temple was likely to be the location of much of what we would recognized as banking business. In Mesopotamia, money could be borrowed at interest from the temple; in Greece, sanctuaries and temples were often the store house or place of safe custody for bullion and valuables; and in Jerusalem money-changers located in the temple precinct would exchange currency and allow interest on deposits with them. The code of laws devised by Hammurabi, King of Babylon, between 2084BC and 2081 BC included references to charging interest on loans and a right of privacy in lending transactions.

These early examples include some of the ingredients of what have come to be regarded as the key characteristics of banking: taking money on deposit and lending. And the location within temples and their precincts would have provided another important ingredient – an air of security.

Recognizable ‘bankers’ appeared again in the middle ages, financing trade and wars, including the crusades, although as Tyree notes,

“It was not until comparatively modern times that the deposit of funds by the wider community with a banker who was then expected to use the funds at his or her discretion for commercial lending was established.”

The historically close association of banking with trade means that the Law Merchant – a body of rules reflecting the custom of merchants which was once administered separately from the common law – is an additional historical source of what is now included in banking law.

G. ‘Banking Business’ Under The Banking Act

Under section 5(1) ‘banking business’ means:

(a) A business that consists of banking within the meaning of paragraph 51 (xiii) of the Constitution; or

(b) A business that is carried on by a corporation to which paragraph 51(xx) of the Constitution applies and that consists, to any extent of

I. both taking money on deposit (other than as part-payment for goods or services) and making advances of money; or

II. Other financial activities prescribed by the regulations for the purposes of this definition.

A noticeable omission from the definition of banking business was the involvement of banks in the Australian payments system under which payments are made or funds transferred by such mechanisms as the collection and payment of cheques, direct credits and debits, debit and credit card payments and high value payments.

This omission was partly rectified when two further activities were prescribed by the regulations to be ‘Banking Business’. By the 2001 amendments, the provision of a purchased payment facility (PPF) is banking business if APRA determines that:

· the purchaser may demand payment from the holder of stored value, in Australian currency of all or part of the balance held; and

· the facility permits a relatively wide class of payments to be made by a relatively wide class of payers

By the 2003 amendments, the acquiring and issuing of credit cards by participants in a designated credit card scheme (such as MasterCard and VISA) became prescribed activities and so fall within the definition of ‘Banking Business’.

H. The Code Of Banking Practice- Dispute Resolution Framework

The dispute resolution framework described in clauses 35 – 37 of the Code of Banking Practice is an important part of the structure of the revised Code. It mirrors the dispute resolution requirements mandated by the 2001 amendments to the Corporations Act, in sections 912A. Lawyers therefore need to be aware that even if a bank or other financial services provider has not adopted the revised Code, it will still have similar dispute resolution obligations to those set out in the revised Code.

The ASIC approval policy, contained in Policy Statement 139, requires an approved scheme to be:

· Accessible,

· Independent,

· Fair,

· Accountable,

· Efficient and

· Effective.

I. Conclusion

Today’s banking is re-defined and re-engineered with the use of different Information Technology usage and there is no doubt that the future of banking will offer more sophisticated services with new technologies to the customers with the continuous product and process innovations. Thus, there is a pattern transfer from the seller’s market to buyer’s market in the industry and finally it affected at the bankers level to change their approach from

· “Traditional banking to convenience banking” and

· “Group banking to class banking”.

· Recent changes in banking also user-friendliness that helps any single person’s higher degree of involvement into banking transaction. The shift has also increased the degree of accessibility of a common man to bank for his variety of needs and requirements.

[1] A Study of Bank Nationality and Reach in 20 European Nationsfrom:- www.eu-financial-system.org/fileadmin/content/Dokumente_Events/launching_workshop/Ongena.pdf [Accessed 15 July 2012]

[2] A Study of Bank Nationality and Reach in 20 European Nationsfrom:- www.eu-financial-system.org/fileadmin/content/Dokumente_Events/launching_workshop/Ongena.pdf [Accessed 15 July 2012]