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1. CHAPTER ONE
AN OVER VIEW OF BANKS AND THEIR
FUNCTION
EVOLUTION OF BANKING
1.1 Historical Background of Banking
• The origin of banking can be traced back to around
2000 BC by Babylonians who was performing the
safe keeping and saving functions in its oldest form.
• In ancient Greece and Rome, the practice of safe
keeping of gold’s and coin at temples and granting
loans for public and private purpose on interest was
prevalent.
• Traces of credit by compensations and by transfer
orders were found in Assyria, Phoenicia and Egypt
before the system attained full development in Greece
and Rome.

2. • In England, banking had its origin with the
London goldsmiths who in the 17th century
began to accept deposits from merchants and
others for safe keeping of money and other
valuables.
• Bank of England was established in 1964 after
the goldsmiths as safe keepers were ruined in the
1640’s by the then ruler Charles II.
• The bank of Venice, established in 1157, is
supposed to be the first bank founded as a public
enterprise.
• There were other banks emerged in the Italian
cities perhaps a little before AD 1200.

3. • As early as 1349 the drapers of Barcelona
carried on the business of banking.
• They were required to give sufficient
security before they commence this business
i.e., they were under regulation.
• During 1401 a public bank was established
in Barcelona.
• It was used to exchange money, receive
deposits, and discount bills of exchange for
both the citizens and for the foreigners.

4. • During 1407 the bank of Genoa (in
Italy) was established.
• In 1609 the bank of Amsterdam was
established to meet the needs of the
merchants of the city.
• It accepts all kinds of specie/coins on
deposits.

5. 1.2 Commercial Banks
• They perform all kinds of banking business.
• They generally finance trade and commerce.
• They usually accept short-term deposits and
advance short-term loans to the business person
and traders and avoid medium term and long term
loans.
1.3 Functions of Commercial Banks
 Accepting Deposits
 Advancing loans
 Agency services

6. • The bank offers the following agency services.
• Collection and payment of credit instruments
A. Purchasing and sale of securities on behalf of
customers
B. Collection of dividends on shares on behalf of
his customer
C. Income tax consultancy
D. Acting as trustee and executor
E. Acting as representative and correspondent
F. Remittance of funds

7. • The bank can also provide the following
general service functions to customers
1. Traveler’s cheques
2. Safe custody of valuables and securities
3. Letters of credit facilities
1.4 The Role of Commercial Banks in
Economic Development
 Mobilizing savings for capital formation
 Financing Industry

8. • Financing Trade
• Financing Agriculture
• Financing consumers to acquire durable goods
• Financing service rendering enterprises
• Co-operate with the central bank to implement
monetary policy
1.5 Meaning and Development of Central Banking
• Central banking is the apex of banking system.
• It plays an active role in implementing government’s
economic policy in the country
• Today, central bank is the central arch of the monetary
and fiscal framework in every country.
• It was recent development being essentially a product
of the nineteenth century.

9. • The following cases can be considered here:
• Riksbank of Sweden – established in 1668
• Bank of England – established in 1694 – serve as a central bank in
1844
• Bank of France – established in 1800
• Reichs bank of Germany – established in 1876
• Bank of Netherlands – established in 1814 – on the ruins of old
bank of Amsterdam
• National bank of Austria – established in 1817 – reorganized as the
bank of Austria-Hungary in 1877
• The bank of Norway – established in 1817
• The national bank of Denmark - established in 1818
• The national bank of Belgium - established in 1850
• The bank of Spain - established in 1856
• The bank of Russia - established in 1860

10. • The bank of Japan - established in 1882
• The bank of Italy - established in 1893
• The Swiss national bank - established in
1907
• National bank of Ethiopia - established in
1942 National & Commercial Bank
proclamation, August 1942
• The Federal Reserve system in America
established in 1913
• The bank of Canada established in 1934

11. • In the 19 century Central Banks of many other countries were
established.
• They were empowered to issue notes with special principles
and powers. They became bankers and advisers of their
respective governments
• In 1920, The International Financial Conference held at
Brussels resolved that “All those countries which had not yet
established a central bank should proceed to do so as soon as
possible, not only with a view to facilitating the restoration
and maintenance of stability in their monetary and banking
systems but also in the interest of world cooperation.”
• Hence, a number of Central Banks were added to the list of
central banks in the world and there is no independent
country with out a central bank.
• The central banks of these countries establish an effective
relationship with IMF matters relating to foreign exchange.

12. 1.6. Nature and Function of Central Bank
• A Central Bank may be defined as that
central monetary institution which is
charged with performing the duties of
bankers’ bank, fiscal agent for the
government and managing the monetary
system of the country.

13. 1.7 Difference between Central Bank and
Commercial Bank
• The Central Bank is the apex institution of the
monetary and banking structure of the country.
• The commercial bank is one of the organs of the
money market.
• The Central Bank is a non-profit institution which
implements the economic policies of the
government. But the commercial bank is a profit-
making institution.
• The Central Bank is owned by the government,
whereas the commercial bank is owned by
shareholders.

14. • The Central Bank is a banker to the
government and does not engage itself in
ordinary banking activities. The
commercial bank is a banker to the
general public.
• The Central Bank has the monopoly of
note issue, while the commercial bank
can issue only cheques. The notes are
legal tender. But the cheques have the
nature of near money.
• The Central Bank is the banker’s bank.

15. • However , there are many Commercial Banks with
hundreds of branches within and outside the
country.
• The Central Bank is the custodian of the foreign
currency reserves of the country while the
Commercial Bank is the dealer of foreign
currencies.
• The chief executive of the central bank is
designated as “Governor” whereas the chief
executive of a Commercial Bank is called
“chairman” or “president” or “managing director”.
• The Central Bank helps the expansion of
Commercial Banks whereas Commercial Bank
facilitates the expansion of industries by
underwriting shares and debentures and by meeting
financial requirements

16. • The Central Bank controls credit
• The Commercial Bank creates credit to
meet the requirements of business.
• Every country has only one Central Bank
with its offices at important centers of the
country.
Functions of a Central Bank
• According to De Kock, and as accepted by
the majority of economists the functions of
a Central Bank are:

17. Bank of Issue/Regulator of Currency
• It is the monopoly of bank note issue. Notes issued by it circulate
as legal tender money. The reasons for granting the exclusive
monopoly of note issue to the central bank are:
• for credit control purpose
• to impart the notes a distinctive prestige i.e., it brings stability
in the monetary system and creates confidence among the
public.
• to ensure uniformity in the notes issued which helps in
facilitating exchange and trade within the country.
• to make it easy for the state to supervise and control the
irregularities and malpractices committed by the central bank
in issuing notes.
• to restrict or expand the supply of cash
• to control the banking system by being the ultimate source of
cash.

18. 1.8 Role of Central Bank in a Developing Economy
• It aims at the promotion and maintenance of a rising
level of production, employment, and real income in
the country.
They perform the following functions towards this
end.
• Creation and expansion of financial institutions
• Proper adjustment between demand for and supply of
money
• Creating a suitable interest rate policy
• Debt management
• Credit control
• Open market operations

19. Types of banks
1. Commercial Banks
2. Industrial Banks
3. Agricultural Banks
4. Co-operative Banks
5. Savings Banks
6. Central Banks
7. Indigenous Banks

20. THE END OF CHAPTER ONE
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