ACKNOWLEDGEMENT
First of all we will like to thank Almighty Allah who enabled us to complete this project successfully.
Secondly we will like to thanks our respected teachers Ms. Sadia Tassadaque who helped us right from the first step till the last one. Her gaudiness, encouragement, and criticism during our project made our project complete and successful.
Finally we wish to record deepest obligations to our parents and families for their prayers and unfailing support.
Commercial Banks
Executive Summery
Commercial bank is the depositary institution that fulfills the monetary requirements of two parties’ lender & borrowers. It is use as a business because it performs many business activities like issue cheques, notes, providing loans. The loans which bank gives has three types first is secured loan in which bank demand some security against loan. The second type is Mortgage loan in which bank requires home asset as a security. In the last type which is unsecured loan there is no need of security & this includes bonds, credit cards & personal loans.
Goldsmiths start the process of banking by providing security to the gold reserves of people. Then they started business with that reserves & earn profit. The physical & proper commercial banks started in 1920 in Srilanka during British Government with the name of Ceylon. The bank made progress after independence in 1948 & in 1971 it over took its major competitor Eastern Bank. Despite the uncertainty social conditions in 1980s the bank expands its business by forming two associate companies. After expanding in own country the bank went outside the country in Bangladesh. Along with physical expanding bank also progressed in technology like internet facility & ATM card.
In Pakistan bank sectors have divided into four categories which include Nationalized Commercial Banks (NCBs), Privatized Banks, Private Banks & Foreign Banks. The central bank in Pakistan has CAMEL supervisory framework. CAMEL is the combination of Capital Adequacy, Asset Quality, Management Soundness, Earnings & Profitability and Liquidity. NCB is the government bank while other famous private banks in Pakistan include MCB bank, Allied bank, United bank, HBL, Askari bank, bank Alfilah etc.
There are two main functions of commercial bank; primary & secondary. Primary function includes accepting deposits of consumers, facilitate costumers by making advances & credit creation. Secondary functions are agency functions & general utility functions. Commercial banks play very important role in the development of a country. It provide opportunities for investments, promotion of trade, development of agriculture, implementation of monetary policies, assisting export, facilitate the SMEs, provide required rate of money supply and help government in ,making policies.
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Commercial Banks
Commercial banking
Commercial bank is the most important of all the depository financial
organizations these institutions are on top in asset size. These organizations are
the most diversified with respect to both assets and liabilities. Traditionally, their
major sources of funds have been demand deposits. As we shall see, this
situation has changed over the last thirty years; savings and time deposits
(including certificates of deposit, called CDs) have become more vital source of
funds for commercial banks.
What Does Commercial Bank Mean ?
“A commercial banking is a system of financial organizations which
receive credit from lenders in the form of deposits and lend it in the form of
loans”.
A commercial bank holds deposits for individuals and businesses in the
form of checking and savings accounts and certificates of deposit of varying
maturities while a commercial bank issues loans in the form of personal and
business loans as well as mortgages.
Commercial bank as business bank:
A commercial bank is a kind of financial organization and a type of bank.
Commercial banking is also called business banking.
“A commercial bank is a bank that works with businesses”.
Commercial banks operate banking needs for large and small businesses, which
includes:
Basic accounts like saving and checking
Lending money for the purpose of real and capital purchases
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Commercial Banks
Commercial banks often function as retail banks as well, serving people
with businesses.
Businesses are differing than customers in their needs. For example,
some businesses want a commercial bank that can allow them a huge
quantity of credit card payments and cash deposits.
Nature of Commercial Banks:
Commercial banks are organizations which usually performs certain
financial transactions. It performs the combine work of receiving deposits from
individuals and lends money to needy and worthy people from the society. When
banks receive deposits their liabilities increase and bank becomes a debtor, but
when the bank lends money its assets increases and it becomes a creditor.
Banking transactions are socially and legally approved. Banks are responsible for
maintaining the deposits of its account holders.
Commercial bank’s activities:
Issuing bank drafts and bank cheques
Receiving money on term deposit
Lending money by overdraft, installment loan, or other means
Providing documentary and standby letter of credit, guarantees,
performance bonds, securities underwriting commitments and other forms
of off balance sheet exposures
Safekeeping of personal documents and other things in safe deposit
boxes
Distribution or brokerage, with or without advice, of insurance, unit trusts
and similar financial products as a “financial supermarket”
Cash management and treasury
Merchant banking and private equity financing
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Commercial Banks
Traditionally, large commercial banks also underwrite bonds, and make
markets in currency, interest rates, and credit-related securities, but today
large commercial banks usually have an investment bank arm that is
involved in these activities.
Types of loans granted by commercial banks:
Secured loan
A secured loan is a loan in which the borrower pledges some asset (e.g. a
car or property) as security for the loan, which then becomes a secured debt
owed to the creditor who does lending. The debt is thus secured against the
collateral. In the case when borrower defaults, the creditor takes possession of
the security used as collateral and may sell it to get some or all of the money
actually lend to the borrower. From the creditor's point of view this is a category
of debt in which a lender has some rights to specified property. If the sale of the
collateral does not meet the actual quantity to pay off the debt, the creditor can
obtain a deficiency judgment against the borrower for the remaining quantity. The
term against the secured debt is unsecured debt, which is not related to any
piece of property and instead the creditor may only satisfy the debt against the
borrower rather than the borrower's collateral.
Mortgage loan
A mortgage loan is a very ordinary type of debt instrument, which is used
to purchase real estate. Under this arrangement, the money is used to purchase
the property. Commercial banks, however, are given security - a lien on the title
to the house - until the mortgage is paid off in full. If the borrower defaults on the
loan, the bank would have the legal right to repossess the house and sell it, to
recover the loan.
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Commercial Banks
In the past, commercial banks have not been much interested in real
estate loans and have placed only a little percentage of assets in mortgages. As
their name implies, such financial organizations secured their earning primarily
from commercial and consumer loans and left the major task of home financing
to others. However, due to changes in banking laws and policies, commercial
banks are increasingly active in home financing.
Changes in banking laws now permit commercial banks to make home
mortgage loans on a more liberal basis than before. In getting mortgages on real
estate, these organizations follow two vital practices. First, some of the banks
maintain active and well-organized departments whose primary function is to
compete actively for real estate loans. In areas where specialized real estate
financial organizations are very rare, these banks become the source for
residential and farm mortgage loans. Second, the banks acquire mortgages by
simply purchasing them from mortgage bankers or dealers.
In addition, dealer service companies, which used to obtain car loans for
permanent lenders such as commercial banks, wanted to broaden their activity
beyond their local area. In recent years, however, such companies have
concentrated on acquiring mobile home loans in volume for both commercial
banks and savings and loan associations. Service companies obtain these loans
from retail dealers, usually on a nonrecourse basis. Almost all bank/service
company agreements contain a credit insurance policy that protects the lender if
the consumer defaults.
Unsecured loan
Unsecured loans are monetary loans that are not secured against the
borrower's assets (i.e., no collateral is involved). These may be available from
financial organizations under different marketing packages:
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Commercial Banks
bank overdrafts
An overdraft take place when money is withdrawn from a bank account
and the account does not have enough money. In this situation the account is
said to be "overdrawn". If there is an earlier agreement with the account provider
for an overdraft, and the quantity overdrawn is within the overdraft limit, then
interest is normally charged at the agreed rate. If the positive balance exceeds
the agreed terms, then additional fees may be charged and higher interest rates
may apply.
corporate bonds
credit card debt
credit facilities or lines of credit
personal loans
Evolution of commercial banking:
Commercial banking began with the goldsmiths, who developed the
practice of storing people's gold and valuables for safety. At first, such
establishments were simply like baggage warehouses. Depositors left gold for
protection and were given a receipt. Later they presented their receipt, paid a
small fee or interest for the protection and got back their gold.
The goldsmith soon found it more convenient not to worry about returning
exactly the same piece of gold that each customer had left. Customers were
quite agreeable to accept any gold as long as it was equal in value to what they
had deposited. This ambiguity was important for it freed goldsmiths to give up the
gold.
If the Gold smith Bank were here today, its demand deposits would be
part of the money supply, they would be bank money. However, the bank money
just offsets the amount of regular money placed in the banks safe and withdrawn
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Commercial Banks
from active movement. The procedure would be of no more interest than if the
public decided to convert nickels into dimes.
Introduction:
The birth of Commercial Bank back to 1920s’ during the British grand
government when trade, commerce and enterprises like Banks opened up in Sri
Lanka. In 1969 Commercial Bank of Ceylon gathered power when it became a
totally independent body. So begin an unbroken tradition of quality in service that
has continuous to what it is today; the Best Bank in Sri Lanka.
Description of roots:
In 1920, The Eastern Bank opened a area office at Chatham Street
Colombo little realize they were lay the establishment to what was to become, a
good example in Banking! As business become well with the Donourmough legal
reform, they moved to the spirit of the leader business area at 57, Sir Baron
Jayatilleke Mawatha, Colombo in 1939. After the freedom in 1948, buy and sell
flourish in Sri Lanka and as a following; the divide assets of Eastern Bank Ltd
was acquire by the Chartered Bank in 1957. A decade later in 1969, Commercial
Bank of Ceylon was properly built-in in Ceylon, with The Eastern Bank share
40% of its equity. Later in 1971, the business of the Eastern Bank was merged in
the Commercial Bank of Ceylon Limited.
Expansion of the corporate business:
After the 2nd Constitution in 1978, and under the liberalize market, foreign
banking was establish. Hence, in 1979 Commercial Bank opened its first Foreign
Currency Banking Unit to enhance foreign banking business.
Although the social instability in early 80’s the bank took an important turn
in 1984; Commercial Bank shifts its operations to a central position at the newly
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build head office branded as the “Commercial House” at 21 Bristol Street,
Colombo. Then in 1985 the position of the outside of country Department of the
Bank was prominent to that of a full developed branch. This shift finished the
reformation process. Now the City Office, Foreign Branch and Head Office
segregated the different operations of the Bank.
During the late 1980’s business extended; two associate organizations
Commercial Insurance Services (Pvt.) Ltd. and Commercial Leasing Ltd. were
formed. Then again in 1991, associate Company Commercial Stock Brokers
(Pvt.) Ltd., commenced operations with the bank owning 40% equity contribution.
Then in 1992, Commercial Fund Management (Pvt.) Ltd. was shaped for the
reason of operating unit trusts where the bank enjoyed 50% equity contribution.
In 1996, the bank increased its shareholding in Commercial Development
Company Ltd. (a free entity, trade in property development) to 94.55% by means
of a share exchange.
1999, marked the year for another major occasion when banking and
super marketing were joint with the opening of the first "Mini Com" at the Staple
Street Cargills Food City outlet. In 2003, the bank gains the control of the
operations of Credit Agricola Indosuez in Bangladesh making its first in a foreign
country venture. Then in 2005, Commercial Bank raised US $65 million 2 year
syndicated loan with the option to extend it further for another year at the option
of the lender. This was the first such loan given to a non-sovereign business in
the country. The Bank made a scrip issue on the basis of 1:1 in 2006 and also
fruitfully raised US $10 million by issuing 5 year bonds. This was another first for
an original bank in Sri Lanka.
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Commercial Banks
Extending the Island wide reach:
Commercial Bank with it quick growth of Branches, Customer Service
Points and Mini Com outlets reached out to every district in the urban side and
the border.
Adopting the latest Technology:
In 1984, Commercial Bank also started a computerization programmed
which regularly covered its whole branch system. Another important step was
when the bank installed its first Automated Teller Machine (ATM) in 1990. The
years followed with the bank installing these tools at existing and new branches.
Further, 1993 was an important year when the International Comprehensive
Banking System (ICBS) was introduced connecting nine municipal branches.
1998 witnessed the installation of a complicated Online Banking System
connecting all branches and, paving way for the customer to perform several of
banking transactions through their personal telephone, personal computer or
laptop. The beginning of millennium 2000 saw the initiate of Commercial Bank
internet banking facility giving every benefit of internet technology to their loyal
and potential clientele. Then in 2006 bank introduced the island’s first mobile
ATM.
Awards for excellence:
The development of Commercial Bank had evolved throughout the
country’s political and economic transition. It has changed so much that today it
has been highly well-known for its service quality even in the international arena.
It was rated as the Best Bank in Sri Lanka by Global Finance in 1999 and then
for 11 successive years – a record breaking success received by none other
banks in Sri Lanka. Similarly, Commercial Bank was selected as ‘The Bank of the
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Commercial Banks
Year’ by the important ‘The Banker’ magazine for almost a decade since 2001.
Then again it received SL AA++ rating since 2001 from Fitch Ratings Lanka Ltd.
in their yearly analysis. In 2002, it was also selected as the No 1 business in Sri
Lanka by ‘Business Today’ Magazine and won the overall National Award for
HRM. Considerably, it had been among the award winners in the top rankings of
The South Asian Federation of Accountants (SAFA) from 2001 to 2008.
Meanwhile the organization of the Chartered Accountants of Sri Lanka (ICASL)
ranked the Bank’s Annual Report as the Overall Winner, the Winner of the
financial area and the Winner in the Corporate Governance Disclosure Award in
2001 to 2006. The Bank also won 5 main awards plus the Overall Winner Award
at the National Business Excellence Awards – 2006 planned by the National
Chamber of Commerce. As such the Commercial Bank has won several awards
domestic level as well as internationally.
CSR Journey:
The whole time this journey of excellence, Commercial Bank has been a
true care provider in the areas of Health, Education and Transport Sector. The
road map of CSR was mainly paying attention on less fortunate children who hail
from distant villages as well as to less advantaged hospitals. Special importance
was also given to areas that have been overlooked by many like improving the
occupational skills of prison inmates and the elderly population. As Sri Lanka’s
benchmark bank it has always been at the front position to help during time
serious moments like transformation northern war prone areas, support the
displaced in such areas and during the destructive Tsunami.
The Legend Continues:
Trust and honesty had been key value components when meeting the
expectation of every stakeholder. As such, it has molded an exceptionally
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Commercial Banks
talented team of employees helping them reach their fullest potential. Perfectly
understanding the needs of customers, the bank has provided new and
imaginative schemes that has altogether redefined convenience in financial
services and revolutionized the nature of banking in Sri Lanka. Improving in
stature, serving in measure, the Commercial Bank of Ceylon continues to be the
responsive, pacesetter Bank writing new chapters to create a secure financial
future in Sri Lanka.
Commercial banks in Pakistan:
The banking sector in Pakistan has been going through a complete but
complex and painful process of restructuring since 1997. It is aimed at making
these organizations financially sound and forging their links firmly with the real
sector for promotion of savings, investment and growth. Although a complete turn
in banking sector performance is not expected till the completion of reforms,
signs of enhancement are visible. The almost immediate nature of different
factors makes it difficult to separate signs of improvement and drop.
Commercial banks operating in Pakistan can be separated into four
categories: 1) Nationalized Commercial Banks (NCBs), 2) Privatized Banks, 3)
Private Banks and 4) Foreign Banks. While preparing this report efforts have
been made to estimate the performance of each group which enjoy certain
strengths and weaknesses as per procedure followed by State Bank of Pakistan
(SBP). The central bank has been following an administrative structure, CAMEL,
which involves the analysis of five indicators which reflect the financial health of
financial organizations. These are: 1) Capital Adequacy, 2) Asset Quality, 3)
Management Soundness, 4) Earnings and Profitability, 5) Liquidity
Capital adequacy:
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Commercial Banks
To protect the interest of depositors as well as shareholders, SBP
introduced the risk based system for capital adequacy in late 1998. Banks are
required to maintain 8 per cent capital to Risk Weighted Assets (CRWA) ratio.
Banks were required to attain a minimum paid-up capital to Rs 500 million by
December 31, 1998. This condition has been raised to one billion rupee and
banks have been given a deadline up to January 1, 2003 to fulfill with this.
The ratio has deteriorated after 1998. However, it was argue of economic
sanctions forced on Pakistan after it conducted nuclear tests. The shift in SBP
policy regarding investment in securities also led to a fall in ratio. However, most
of the banks have been able to keep above the desired ratio as well as direct
their investment towards more productive private sector advances. Higher
provisioning against non-performing loans (NPLs) has also contributed to this
decline. However, this is considered a positive development.
Asset quality:
Asset quality is generally measured in relation to the level and harshness
of non-performing assets, recoveries, adequacy of provisions and distribution of
assets. Although, the banking system is impure with large volume of NPLs, its
severity has stabilized to some extent. The rise over the years was due to
increase in volume of NPLs following enforcement of more vigorous standards
for classifying loans, improved reporting and disclosure requirements adopted by
the SBP.
In case of NCBs this improvement is much more pronounced given their
share in total NPLs. In case of privatized and private banks, this ratio went up
considerably and become a cause of concern. However, the level of infection in
foreign banks is not only the lowest but also closes to constant.
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Commercial Banks
The ratio of net NPLs to net advances, another indicator of asset quality,
for all banks has declined. Marked development is possible in recovery efforts of
banks. This has been extraordinary in the case of NCBs, in terms of decrease in
the ratio of loan defaults to gross advances. Although, privatized banks do not
show significant improvement, their ratio is much lower than that of NCBs. Only
exception is the group of private banks for which the ratio has gone up due to
bad performance of some of the banks in the group. However, it is still the lower,
except when compared with that of foreign banks.
Management soundness:
Given the qualitative nature of management, it is difficult to judge its
accuracy just by looking at financial accounts of the banks. Nevertheless, total
expenses to total income and operating expenses to total expenses help in
gauging the management quality of any commercial bank.
Pressure on earnings and profitability of foreign and private banks caused
their expenditure to income ratio to rise in 1998. However, it started lessening
down as they adjusted their portfolios. An across the board increase in
administrative expenses to total expenditure is visible from the year 1999. The
bad performers in this regard are the privatized banks, mostly because of high
salaries and allowances.
Earnings and profitability:
Strong earnings and profitability profile of banks reflects the ability to
support present and future operations. More specifically, this determines the
capacity to absorb losses, finance its development programs, pay dividend to its
shareholders and build up sufficient level of capital. Being front line of protection
against erosion of capital base from losses, the need for high earnings and
profitability can hardly be overemphasized. Although different indicators are used
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Commercial Banks
to serve the purpose, the best and most widely used indicator is return on assets.
Net interest margin is also used. Since NCBs have significantly large share in the
banking sector, their performance overshadows the other banks. However, profit
earned by this group resulted in positive value of ROA of banking sector during
2000, despite losses bear by ABL.
Pressure on earnings was most visible in case of foreign banks in 1998.
The stress on earnings and profitability was expected despite the steps taken by
the SBP to improve liquidity. Not only did liquid assets to total assets ratio
declined sharply, earning assets to total assets also fell. T-Bill portfolio of banks
declined significantly, as they were less remunerative. Foreign currency deposits
became less attractive due to the rise in forward cover charged by the SBP.
Banks reduced return on deposits to maintain their spread. However, they were
not able to contain the decline in return on assets due to decreasing stock and
salary of their earning assets.
Liquidity:
Movement in liquidity indicators since 1997 indicates the painful process
of adjustments. Ratio of liquid assets to total assets has been on a constant
decrease. This was knowingly brought about by the monetary policy changes by
the SBP to manage the crisis-like situation created after 1998. Both the cash
reserve requirement and the statutory liquidity requirement were reduced in
1999. These steps were resistant by declines in SBP's discount rate and T-Bill
yields to help banks manage rupee withdrawals and still meet the credit
requirement of the private sector.
Private Scheduled Banks in Pakistan:
Personal Banking - Standard Chartered Bank Pakistan
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Commercial Banks
Description: Standard Chartered Bank provides personal and business banking
services in Asia, Africa, the Middle East, UK, Europe and the America - Your
right partner for banking.
United Bank Limited Pakistan
Description: With over 1400 domestic branches all over Pakistan and 19
overseas branches UBL is one of the largest banks in Pakistan.
MCB Bank
Description: MCB is one of the leading banks of Pakistan with a deposit base of
about Rs. 280 billion and total assets of around Rs.300 billion. The Bank has a
customer base of approximately 4 million, a countrywide sharing network of over
1,000 branches and over 450 ATMs in the market.
Allied Bank Limited
Description: Established in Lahore in 1942 before independence, Allied Bank
Limited is one of the largest banks in Pakistan with more than 700 Branches
connected to an online network. In August 2004 the Bank was modernized and
the ownership was transferred to Ibrahim Group.
Habib Metropolitan Bank
Description: Habib Metropolitan Bank Pakistan is a private bank operating in all
major cities of Pakistan with primary focus on retail banking and trade finance.
Bank Alfalah Limited
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Commercial Banks
Description: Bank Alfalah Limited was built-in on June 21st, 1992 as a public
limited company under the Companies Ordinance 1984. The Bank is currently
operating through 195 branches in 74 cities, with the registered office at
B.A.Building, I.I.Chundrigar, Karachi.
Bank AL Habib
Description: Presently, the Bank has a network of Two Hundred And Fifty Four
branches in all the major cities of Pakistan and abroad fully automated and
computerized and providing wide range of banking services.
Askari Bank
Description: Established in 1992, Askari is backed by the Pakistan Army
Welfare Trust.
HBL
Description: HBL has the largest domestic branch network with over 1,400
branches and is present in 25 countries.
HSBC Bank Middle East Limited - Pakistan
Description: HSBC is one of the largest banking and financial services
organizations in the world. HSBC's international network comprises over 9,500
offices in 85 countries and territories in Europe, the Asia-Pacific region, the
Americas, the Middle East and Africa.
RBS The Royal Bank of Scotland - Pakistan
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Commercial Banks
Description: Personal banking, wealth management, credit cards, loans,
investments, insurance, NRI and commercial banking services from RBS
Pakistan.
KASB Bank Limited
Description: KASB Bank through its network of 73 branches in 21 major cities of
Pakistan offers unique and original financial solutions to a large portfolio of
investment, corporate and consumer banking customers.
NIB Bank
Description: The 7th largest bank in Pakistan branch wise, NIB bank provides
services to more than 675,000 customers through a wide branch network of 224
branches. It is one of the rapidest growing banks in Pakistan.
Arif Habib Bank Ltd
Description: AHBL is one of the rapidest growing Commercial Banks of the
country supported by the strong sponsorship of Arif Habib Group. The Bank has
an Authorized Share Capital of 6.0 Billion and Paid-up Share Capital of 5.0
Billion. The Bank has a network of 38 Branches/Sub Branches. The branch
network covers Sindh, Punjab, NWFP, Balochistan and Azad Jammu and
Kashmir. The Bank plans to open further offices to better cover all four provinces
within a short time span.
JS Bank Limited
Description: JS Bank Limited is a subsidiary of the JS Group, which is one of
Pakistan’s most diversified and progressive financial service groups. Presently
JS Bank has laid its footprint across metropolises of Pakistan with plans to
expand its outreach with more branches countrywide this year.
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Commercial Banks
Soneri Bank Limited
Description: Opened doors for operations in Lahore on April 16, 1992 followed
by Karachi branch on May 09, 1992. The bank now operates with 131 Branches
spread all over Pakistan including the Northern Areas of the country where no
other private bank has ventured so far.
Silk bank
Description: Silk bank stands for consistency, our organizational sponsors
Nomura, IFC and Bank Muscat provide us with strong financial backing and a
framework of good corporate governance, which will remain our guiding principle
to grow trust and clearness with our customers, regulators and partners.
Samba
Description: Samba Bank Limited, formerly Crescent Commercial Bank Limited
is a majority owned subsidiary of Samba Financial Group of Saudi Arabia. Our
vision is to become a household name in Pakistan by winning customer business
through high quality services and innovative products.
The Bank of Punjab
Description: Established in 1989, in pursuance of The Bank of Punjab Act 1989
and was given the status of scheduled bank in 1994.The Bank of Punjab is
working as a scheduled commercial bank with its network of 272 branches at all
major business centers in the country. The Bank provides all types of banking
services.
Barclays Pakistan
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Commercial Banks
Description: Barclays in the Pakistan offer a full range of banking services to
individuals and organization.
Atlas Bank Limited
Description: Operating through a growing network of branches across Pakistan,
the entire retail network is real-time online, providing banking convenience,
especially for those on the move.
My bank
Description: My bank Limited was built-in in 1992 as a Commercial bank. It
operates with over 80 branches network all over Pakistan. The Paid up Capital of
the Bank is PKR 5.303 billion, Equity PKR 5.069 billion, and Total Assets PKR
38.756 billion.
Citibank Pakistan
Description: Citibank Pakistan has established its ability to identify market
needs and develop products which are distinctive in concept and fulfill customer
requirements.
Functions of Commercial Banks:
Commercial bank being the financial organization performs diverse types
of functions. It satisfies the financial needs of the sectors such as agriculture,
industry, trade, communication, etc. That means they play very significant role in
a process of economic social needs. The functions performed by banks are
changing according to change in time and recently they are becoming customer
centric and widening their functions. Generally the functions of commercial banks
are divided into two categories viz. primary functions and the secondary
functions. The following chart simplifies the functions of banks.
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Commercial Banks
Primary Functions:
Commercial Banks performs different primary functions some of them are given
below
1. Accepting Deposits: Commercial bank accepts different types of
deposits from individuals especially from its clients. It includes saving
account deposits, recurring account deposits, fixed deposits, etc. These
deposits are payable after a specific time period.
2. Making Advances: The commercial banks facilitate the individuals by
providing loans and advances of different forms. It includes an over draft
facility, cash credit, bill discounting, etc. They also give demand and
demand and term loans to all types of clients against proper security.
3. Credit creation: It is most substantial function of the commercial banks.
While sanctioning a loan to a customer, a bank does not provide cash to
the borrower instead the borrower opens a deposit account from where
the borrower can withdraw. In other words while sanctioning a loan a bank
automatically creates deposits. This is known as a credit creation from
commercial bank.
Secondary Functions:
Along with the primary functions every commercial bank has to perform
some secondary functions too. It includes many agency functions or general
utility functions.
1. Agency Functions : Different agency functions of commercial banks are
o To collect and clear cheque, dividends and interest warrant.
o To make payment of rent, insurance premium, etc.
o To deal in foreign exchange transactions.
o To purchase and sell securities.
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Commercial Banks
o To act as trusty, attorney, correspondent and executor.
o To accept tax proceeds and tax returns.
2. General Utility Functions : The general utility functions of the
commercial banks include
o To provide safety locker facility to customers.
o To provide money transfer facility.
o To issue traveler's cheque.
o To act as referees.
o To accept different utility bills for payment e.g. phone bills, gas bills,
water bills, etc.
o To provide merchant banking facility.
o To provide different cards such as credit cards, debit cards, Smart
cards, etc.
Role of Commercial Banks in the Economic Development of a
Country:
Commercial banks play a vital and active role in the economic
development of a country. If the banking system of a country is effective, efficient
and disciplined it brings a rapid growth in the different sectors of the economy.
The following are the significance of commercial banks in the economic
development of a country.
o Banks promote capital formation
o Investment in new enterprises
o Promotion of trade and industry
o Development of agriculture
o Balanced development of different regions
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Commercial Banks
o Influencing economy activity
o Implementation of Monetary policy
o Monetization of the economy
o Export promotion cells
o Banks promote capital formation:
o Commercial banks accept deposits from individuals and businesses, these
deposits are then made available to the businesses which make use of
them for productive purposes in the country.
o The banks are, therefore, not only the store houses of the country’s
wealth, but also provide financial resources necessary for economic
development.
o Businessmen normally hesitate to invest their money in risky enterprises.
The commercial banks generally provide short and medium term loans to
entrepreneurs to invest in new enterprises and adopt new methods of
production.
o The provision of timely credit increases the productive capacity of the
economy.
3. Promotion of trade and industry:
o With the growth of commercial banking, there is large expansion in trade
and industry.
o The use of bank draft, check, bill of exchange, credit cards and letters of
credit etc has revolutionized both national and international trade.
4. Development of agriculture:
o The commercial banks particularly in developing countries are now
providing credit for development of agriculture and small scale industries
in rural areas.
o The provision of credit to agriculture region has greatly helped in raising
agriculture productivity and income of the farmers.
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Commercial Banks
5. Balanced development of different regions:
o The commercial banks play a vital role in achieving balanced development
in different regions of the country.
o They help in transferring surplus capital from developed regions to the
less developed regions.
o The traders, industrialist etc of less developed regions is now able to get
adequate capital for meeting their business needs.
o This in turn increases investment, trade and production in the economy.
6. Influencing economic activity:
o The banks can also affect the economic activity of the country through
their effect on
a. Availability of credit
b. The rate of interest
o If the commercial banks are able to increase the quantity of money in
circulation through credit creation or by lowering the rate of interest, it
directly affects economic development.
o A low rate of interest can increase investment.
o The credit creation activity can raise aggregate demand which leads to
higher production in the economy
7. Implementation of Monetary policy:
o The central bank of the country controls and regulates volume of credit
through the active cooperation of the banking system in the country.
o It helps in bringing price stability and promotes economic growth within the
minimum possible period of time
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Commercial Banks
8. Monetization of the economy:
o The commercial banks by opening branches in the rural and backward
areas are reducing the exchange of goods through barter.
o The use of money has rapidly increased the quantity of production of
goods.
o The non monetized sector (barter economy) is now being converted into
monetized sector with the help of commercial banks.
9. Export promotion cells:
o Order to increase the exports of the country, the commercial banks has
thriving export promotion cells.
o They provide information about common trade and economic conditions
both inside and outside the country to its customers.
o The banks are therefore, making positive contribution in the process of
economic development.
10. Role of Banks in 21 sty century
o The commercial banks are now not constricted to local banking.
o They are rapid changing into global banking i.e., understanding the global
customer, using latest information technology, competing in the open
market with high technology system, changing from domestic banking to
investment banking etc.
o The commercial bank is now considered the nerve system of all economic
development in the country.
11. Virtual Banking
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Commercial Banks
o Providing the banking services through extensive use of information
technology without direct approach to the bank by the customer is called
virtual banking.
o The source of virtual banking can be traced to the 1970,s with the
installation of ATM’s.
o The principal types of virtual banking services include automated teller
machines (ATM’s), phone banking and most recently internet banking.
o With the increasing use of internet banking there is more reliance now on
information technology and the decrease of physical bank branches to
deliver the banking services to the customer.
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Commercial Banks
CONCLUSION
Commercial bank working as the back bone of any country and this is because these
are on the top of all depository institutions with respect to asset size. These banks
have major control over economy of a country. They started only for security needs
but now they fulfill all monetary needs and demands of people. They perform all the
important monetary activities from miner level to major level. From home usage to
business they provide loans and fulfill all the requirements. Now days almost all the
businesses are depend upon commercial banks as they are the best intermediate. They
provide investment opportunities for small businesses as well as large scale
businesses. We conclude that no one can defuse the significance of commercial banks
as all people fully trust on these banks.
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Commercial Banks
References
Commercial banking in Pakistan study By Shabbir H. Kazmi (Nov 12-18-
2001)
Modern Money and Banking (Third Edition) by Roger Leroy Miller, David
D. VanHoose
Online sources:
o http://www.pakwatan.pk/banks-pakistan/
o http://www.slideshare.net/Mustafaseady/role-of-commercial-banks-in-the-
economic-development-of-a-country
o article/wright.banking.commercial.sources
o http://www.pakistaneconomist.com/issue1999/issue49/f&m.htm
o http://www.combank.net/newweb/info/142?oid=50
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Commercial Banks
Samee’s group [28] BBA 5th