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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Commercial Banks

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