Banking Institutions | Types And Forms Of Banking
Banking – though no adequate documentation exist prior to the 13thh century, the Banking Institutions is known to have longer history. Originally the term bank was used to describe an individual or organization engaged in the business of exchanging one currency for another (in essence money changers). Many of the early banks dealt primarily in coin and bullion, much of their business being concerned with money changing and the supply of lawful foreign domestic coin of the correct bankers whose transactions involved both goods and bills of exchange, which provided for remittance of money and the payment of accounts at a distance, without shipping of actual coins.
This was evidently possible due to the fact that most of these merchants were owners of international business as well as firms, not only that they had assets at other locations on their large trading routes across the medieval Europe. Acceptance of deposits constituted another banking activity serve by the early banks. The deposit referred to either money deposit or valuable for safe keeping or for the purposes of transfer to another party or to the deposit of money in current account. In deed, remember the activities of the early goldsmiths.
Arising from the above experience, an institutional orientation is adopted today in explaining the concept of Banking Institutions. A bank is seen these days as an institution, which deals in money or is a place where surplus funds holders or savers keep their cash balance in form of deposits. Thus banks draw these surplus funds from the people who do not need them immediately and loan to those who require them for productive purposes.
In a formal sense we would say, that Banking Institutions borrow or receive deposits from the firms, individuals and sometimes governments and on the basis of these resources, either make loans to others or purchase securities, which are normally listed as investments. Generally, the banks cover their expenses and earn profits by borrowing at one rate of interest and lending at a higher rate of interest. Commissions are also charged for some services rendered.
Kinds (Types) Of Banking Institutions
The primary business of a bank, from the foregoing is receiving deposits and to advance loans, but this work can be understood in various ways. Essentially the characteristics of banking business can be most readily appreciated with the framework of its balance sheet. That not withstanding, banks can specialize either in mobilizing deposits or in lending to different sector for different periods.
For that reason we can classify Banking Institutions or banks into commercial banks, central bank, merchant banks, developmental bank, savings, corporative and very recently in Nigeria economy the Peoples and Community banks. Now Nigerian Agricultural and Rural Development bank (NARDB). Commercial banks are the most common, the receive deposits from the public and give out loans especially of the short-term duration. They permit the withdrawal and/or transfer of deposit by their owners though the checking process.
The main function of the central bank is to supervise the working of the commercial banks and to protect the interest of the depositors or the depositing public as well as acting as economic adviser and agent to the Federal Government. It acts as the lender of last resort and has to issue currency note to the country’s economy.
Some countries have savings bank, for example, the defunct post office and later Federal Saving Bank Of Nigeria, there are also savings and loans associations or groups. Their main function is that of collecting saving of eh small savers in the form of a savings account thus promoting the savings habit among the lower income group while providing them with decent rate of interest.
Co-operative banks are usually organized among cooperatives who may be farmers, artisans and others whose aim is to promote thrift among members and also to lend to them. Development banks are set up to provide long term credit to industrialists, investors of various kinds for development purposes, against some collateral or some security. These banks, together with merchant and investment banks receive deposits usually for long period and provide long term capital to industrial, agricultural, real estate and other ventures by means of terms loans or through subscribing to their equity capital.
Forms Of Banking (Banking Institutions)
In line with the discussion on the kinds of banking institutions, we may add that, often economist distinguish between three types or forms of banking depending on the functions performed by these banks these classes includes deposit banking, investment banking and mixed banking.
Deposit banking which can otherwise be called commercial banking refers to the function by which banks attract deposit from the public and lend to them to traders, industrialists, and others for short periods like 12 months (one year), by way of advances, overdraft, discounting of bills with a view to meeting their financial requirements or working capital.
This is in contrast to the practice where in countries Germany for instance banks provided long term finance for industry and were referred to industrial or investment banking. The philosophy behind this was that banks should play the role in the industrialization role of the country by helping to float new companies and financing exiting ones.
The banking system which combines deposit banking with investment banking is known as mixed banking. The essence of this is that banks engage in attracting deposits from the general public and in providing short term, medium term, and long term finance to industries.
Deposit banking originated from England, investment banking was from Germany and over the time both countries and other began practicing mixed banking. Mixed banking seems to be very popular among many countries today.
Commercial Banking And The Functions
Broadly speaking, the three principle functions can be identified for commercial banks. These includes;
- Receiving deposit from the public
- Advancing loans and
- Discounting bills
Apart from these, there are other – more or less unclassified.
Receiving Deposit From The Public
An important function of the commercial bank is that of attracting deposit from the public. This is so because banks depend a great deal on the funds deposited with them by the public. Those with cash balance but who want them in a safe place, deposit same with the bank, who want to keep them in a safe place, deposit same with the bank, who not only protects these deposit but also provides the depositors with a convenient methods of transferring these funds through the use of cheques.
Commercial banks accept deposit from every class and from every source and in all cases it undertakes to repay the money either in part or in full in legal tender money. There are three kinds of Demand Deposit, savings and time of fixed deposits.
Demand deposit are those which can be withdrawn by the depositor at any time by means of cheques. No interest are usually paid on these deposits, but banks in fact imposes a small charge on the customers with current accounts.
Note that in Nigeria as in some other very few countries, the banks are compelled for other national economic reason to pay limited interest on demand deposit account, demand deposit. Demand deposit may arise in two ways, either by cash brought in by investors or by borrowing from a bank using the amount to create a demand deposit for the Banking Institutions with it. Demand deposit from a significant portion of the circulating medium of exchange.
Savings deposit are those deposit on which the bank pays a certain percentage of interest to the depositors. These depositors can be withdrawn subject to certain restrictors regarding the amount to be withdrawn or no the frequency of withdrawals. Morden banks not rigidly enforced these restrictions or limitations.
Fixed deposit refers to those deposits which can be withdrawn only at the expiry of the period for which they have been entrusted to the bank or after giving due notice. On such deposits, the bank pays a higher rate of interest hence their attraction to big time or large sum depositors.
Making Loans And Advances
Lending is the second major function of the commercial bank and one which places a great deal of responsibility on them since they deal in other people’s funds. Direct loans and advances are given to all types of persons particularly to business man and investors against personal security, gold, silver and other movable and immovable assets. The most common way of lending is by over drafting facilities, which is allowing the borrowers to overdraw facilities, which is allowing the borrower to overdraw his current account.
It should be noted that the bank does not merely lend funds actually deposited with it by customers, the bank can itself create deposit and thus make advances considerable in excess of the sum deposited with it. Note also that by choosing those who should be allowed to borrow on the basis of sound economic analysis is feasibility and viability of the project s and after taking precaution as to security, the commercial banks helps in the development of those industries and occupation, which performs the most useful services to the community.
Discounting Of Bills In Banking Institutions
Discounting of bill according to Banking Institution means in practice lending for short periods. A business man who does not wish to lock up large funds in trade credits may for instance draw a bill of exchange on his debtor and after it has been accepted by or on behalf of the debtor, he may get it discounted by his banker.
This gives the business man immediate possession of the money due to him in less interest and commissions due to the bank. It will be with these bills till maturity when they realize the face values. These bills in times of distress can also be discounted for the commercial banks by the central bank. The bankers regard discounting bills as a very good investment because of the profit potentials it gives and their high marketability.
Other Functions Of Commercial Banks includes the following;
Making Payments On Behalf Of Their Customers
This is achieved though the chequing system. Under this system , depositors are allowed the right to withdraw from the deposit any amount at their convenience or draw cheques in favour of their customers in payments for their purchase and other obligations. Again through the checking system, commercial banks provide facilities for transfer of funds from one individual to another and from one part of the country to another. This is done by cheques or through banks drafts. Any amount of money can be transferred cheaply by these methods. With the aid of computers today the banking industry is responsible to maintain an efficient payments mechanism which has increased greatly.
Today it is possible for a bank to make automatic transfer of fund either from the chequing account to the life insurance account of a customer if the letter so authorizes or to the account of the electric or telecommunication companies.
It is also possible for salary payments to be transferred to the account of the employers without the employers probably writing hundreds of cheques monthly sort of payroll book keeping for the firm.