In economics one of the most discussed topic is money and banks are primary source of money circulation in the country.
Different economists defined banks as follows:
According to Prof. Reynolds “Banks deal in money. It is more correct to say that banks are involved in the exchange of loans”. Definition by Prof. Crowther “A bank deals in loans, receives people’s deposits, and provides loans to the needy people. As the people accept receipts issued by the banks without any hesitation, the bank also creates money”.
Forms of Banks:
Any country may have the following types of banks:
The initial and most crucial form of bank is central bank. Its function is to strengthen the financial system of the country. It controls the economic system of the country and tries to avoid the problems such as inflation and deflation. This bank controls all the commercial banks of a country. Every country has its own central bank. For example: America has “Federal Reserve System”, England has “Bank of England” and Pakistan has “State Bank of Pakistan” etc. Central bank is also known as Bank of banks.
Professor De-Cock defines the central bank in these words “The first objective of the central bank is to issue notes, and to keep the value of money stable. Earning profit is second priority”.
After central bank, commercial banks are developed to earn profit. These banks work on the people money. People deposit their money in these banks and bank give the same deposits to traders and other needy people as loan and earn interest on it. Commercial banks also play an important role in the development of the country. Commercial banks are of two types:
- Scheduled Banks
- Non-scheduled Banks
These are the banks which are properly authorized by the central bank of a country to work. These banks must deposit some money as safe investment in the central bank, so that at the time of need they can get help from central bank. For these banks minimum limit of capital is fixed. These banks are not completely under the control of central bank but they are bound to work according to the rules of central bank.
These banks work without the permission of central bank they do not deposit any amount as capital in central bank. For these banks minimum amount of capital is not fixed, they can start working with any amount of money. Central bank is not bound to help them at the time of need.
These banks have the responsibility for the development of agricultural sector. The first objective of these banks is to give short term and long term loans to farmers, so that they can purchase fertilizers, seeds and machinery equipments needed for cultivation process. These banks give easy loans to farmers and also guide them for better cultivation.
These banks are commercial banks but they are limited to work for industrial sector. These banks collect deposits from ordinary people but advances loans only to industrialists. Their most important objective is to make developments in the industrial sector.
Foreign Exchange Banks:
These banks usually work for foreign payments in international trade. These banks deal in foreign currency. For example: American Express, National and Gridlays bank are foreign exchange banks.
Most of the money of these banks is collected on the basis of self-help. They function by mutual help and usually they are not authorized by the central banks of the country. They encourage savings among the rural or uneducated areas of a country.
other commercial banks these banks do not make their own investments from the money which people deposits in them. They collect money from people and give it to the government of a country. Government make investments from this money.To collect deposits from people these bank initiate different schemes.
These banks advances loans to people after mortgaging their property, machinery used in factories or some other precious things until the amount of loan is paid back by the relative person. Usually non- scheduled banks are involved in such kind of business.