Chapter 1: Evolution of Banking.

Chapter 1: Evolution of Banking.

a). Definition of Bank:

The word bank is said to be of Germanic origin. (From the German word banc.)

Origin: French word ´banque´ and Italian word ´banca´, both meaning bench. (S.N Gupta , The banking law, In theory and practice, fifth edition).

Others believe that the word "bank" derives from the German word “back” meaning a joint stock fund.

Section5(b) of Banking regulation Act, 1949 of India: the term banking is defined as accepting´, for the purpose of lending or deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise.

Section 2(Gg) of Bank and Financial Institution Act, 2017 (2073 B.S): Bank as a corporate body incorporated to carry on financial transactions as referred to in sub- section (1) of section 47 of the Bank and Financial institution Act, 2017.

The Banking Act, 1887 of England defined a ´bank´ as a body corporate or non-corporate that was recognized by the Bank of England to accept deposits as defined by that act. 

Banks are highly regulated because of following reasons:

• protection of Depositors deposit. 
• monetary and financial stability. 
• For an Efficient and competitive financial system. Example: NRB sets fixed interest rates.
• Consumer protection. Example: consumer protection Act for such purpose. 
• To prevent fiscal crimes. Example, the Money laundering prevention Act to prevent money laundering.
• To develop the overall economy of the nation.
• If Banking fails it leads to systemic risk. 
• To prevent monopoly. Example: Anti competition and market promotion Act for such purpose. 

How are Banks regulated? 

Banks are regulated through following:

1. Compliance with companies Act. 
2. compliance with Banking Law.
3. Licensing compliance.
4. penalty deterrence by the Central bank.
5. Others Acts. 
6. Capital adequacy.
7. Contractual provisions. 
8. Judiciary. 

b). Origin of the Concept of banking: 

Assyria and Babylonia (2000).

• At that time merchant banks of that time used to give grains to farmers and traders which was the beginning of banking. 
• Babylonians had developed a banking system, using their temples as banks.

Romans: 

They added 2 important functions in banking: (foundation of banking).

1. way of acceptance of deposits.
2. And lending money.

Temple priests no longer acted as financial agents but developed the concept of private banking.

Money lenders in Florence: 

• Trace of origin of modern banking.
• They received money on deposits and were lenders of money in the 14th century.
• Name of bankers: Bardi, Acciajuoli, Peruzzi, pitti. 

Vedas: (2000-1400 BC).

• mention the term usury. They accepted usury as a source and of livelihood or means of acquiring wealth.

Kautilya: 

• Has mentioned the usage of loan deeds. 

In Mauryan period (321-185 BCE): an instrument called adesha was in use whereby a banker was ordered to pay the sum on the note to a third person.

Mughal period: 

• Loan deeds continued to exist in the form of dastawez. 
•  

Origin of Modern sense of Banking

•  was the Exchequer, founded by william the first. It was flourised under Victoria. 
• Furthermore, goldsmiths of London, first bankers to circulate paper money and their bills were called “goldsmiths, Notes”. 
• The Banking Act, 1887 of England defined a ´bank´ as a body corporate or non-corporate that was recognized by the Bank of England to accept deposits as defined by that act. 
• Section 2 of the Bills of Exchange Act 1882 of Uk, “banker includes a body of persons whether incorporated or not  who  carry on the business of Banking. It treats the ´business of banking` as being carried on in a uniform manner by `banks´ generally.

C). Evolution of Banking system in Nepal: 

i) Pre NRB Period (Historic Era.) 

 Manak the coin issued by the king Mandev. 

Malla period: mint was used to produce coins. 

 Nepal Bank Kanoon,1994 B.S: 

•  First banking Law of Nepal, (Managed and enforced by Juddha Shamsher Rana).
• It established Nepal Bank Limited (NBL), (First modern banking in Nepal). With Authorized Capital of 10 million and Paid-up Capital of Rs. Eight hundred and forty-two thousand.
• NBL was the successor of Tejarath Adda (1989). Nepal Gov. holds 52%.
• Commercial Bank.
• Purpose of NBL: developing industry and commerce in the country.
• NBL had 13 branches all over Nepal.

Other Banking Organizations: 

ii). Modern Era: 

1. After the enactment of NRB Act, 2012 (2012-2057).

2. From the enactment of NRB Act, 2058(2002). 

    

 1.After the enactment of the NRBA, 2012 (2012-2057).

     Nepal Rastra Bank Act, 2012.

• First central Banking Law.
• NRB was established under this Act in 2013 Baisakh 14.

Main purpose of NRB: (preamble of Nepal Rastra Bank Act, 2012)

1. Increase the circulation of Nepalese currency. 
2. To stop dual currency practice. (then IC and NC were Circulated concurrently).
3. To manage issuance of currency.
4. To establish the rate of Interest and exchange rate of Nepalese currency.
5. To increase Banking practices.
6. To Promote Industrialization in Nepal.

Other Banking Acts:

Some sectorial Banking Law:

1. Industrial Development Bank Act, 2048.
2. Commercial Development Bank Act, 2020. 
3. Finance Company Act, 2042.
4. Development Bank Act 2052.
5. Co-operative Bank Act, 2019.
6. Co-operatives Act, 2048. etc.

Laws of other financial institutions:

1. Security exchange center Act (2033).
2. Karmachari Sanchaya Kosh Ain 2019.
3. Nagarik Lagani Kosh Ain (2048).

Laws of other Financial Institutions: 

•  Security exchange Center Act (2033),
• Karmachari Sanchaya Kosh Ain (2019).
• Nagarik Lagani Kosh Ain 2048.
• Insurance Act 2049. etc.

First phase of financial sector reform program.

• Initiated by HMG in the 1980s. 
• Objectives: promote public and private partnership to maintain financial discipline, transparency and reform action in the financial sector.

2. From the enactment of NRB Act, 2058(2002): 

Results of Co-operation between world Bank, HMG and Asian development Bank to reform financial sector legislations and laws are.

1. Nepal Rastra Bank Act 2058.
2. Bank and Financial institution Ordinances 2059-2062:
3. Banks and financial institution Act, (BAFIA) 2063 (2006).

d) Classification of Banks: Functional and Operational. 

History: Bank and Financial institution Ordinance, 2060; for the first time classifies Banks in 4 types i.e. A, B, C and D.

This same practice is followed by BAFIAs 2063 and 2073 as well. 

Source: BFIs regulations Department, NRB. 

Sheldon in his Book Practice and Law of Banking classifies banks of England as: 

Firstly, there is the Bank of England incorporated by royal charter and not affected by companies act.

Secondly, there are the national servings banks.

Thirdly, there are great joint stock banks.

Fourthly, there is at least one joint-stock bank with unlimited liability.

Fifthly, there are the foreign banks.

ON the basis of present global practice and Nature of functions of banking companies, there are 5 types:

1. Central Bank.
2. Commercial Banks.
3. Development Banks.
4. Finance companies.
5. And other financial institutions.

Table 1: Difference between Classes of Financial Institutions

                                       Prepared and edited by Madhu Dahal and Manish Rajak.