Banking: Meaning and Evolution

Banking Institutions

Meaning and Concept

A bank or banking institution is an establishment authorized by a government to accept deposits, pay interest, clear checks, make loans, act as an intermediary in financial transactions, and provide other financial services to its customers. A bank buys credit from its customers and sells its own credit to them.

Banks are the principal source of credit for millions of households (individuals and families), for most local units of government (school, districts, cities, counties, etc.) and for small local businesses ranging from grocery stores to automobiles dealers. Banks are financial service firms, producing and selling professional management of public’s fund as well as performing many other roles in the economy.

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The definition and the meaning of bank can be complicated also because many nonbanking institutions now perform many of the functions similar to the banks.

Some of the definition of the bank by eminent scholars.

Kent defines

“Bank is an Organization whose principal operations are concerned with the accumulation of the temporarily idle money of the general public for the purpose of advancing to other for expenditure.”

Peter S. Rose defines

“Banks are those financial institutions that offer the widest range of financial services- especially credit, savings, and payment services- and perform the widest range of financial functions of any business firm in the economy.” – Peter S. Rose

Evolution of Banking Institution and Banking Law in Nepal

Evolution of word Bank and Banking

Linguistics (the science of language) and etymology (the study of the origin of words) tell us the French Word 'banque' and the Italian word 'banca' were used centuries ago to refer to a “bench “or “money changer’s table.” They were money changers, situated usually at a table in the commercial district, aiding travelers by exchanging foreign coins for local money or replacing commercial notes for cash for a fee.

There was no such word as ‘banking’ before 1640, although the practice of safe-keeping and savings flourished in the temple of Babylon as early as 2000 B.C. Chanakya in his Arthashastra written in about 300 B.C. mentioned about the existence of powerful guilds of merchant bankers who received deposits, and advanced loans and issued Hundis (letters of transfer). The Jain scriptures mention the names of two bankers who built the famous Dilware Temples of Mount Abu during 1197 and 1247 A.D.

Evolution of Bank and Financial Institution World Perspective

The first bank called the ‘Bank of Venice’ was established in Venice, Italy in 1157 to finance the monarch in his wars. The bankers of Lombardy were famous in England. But modern banking began with the English goldsmiths only after 1640. In England, money changing became an important function of bankers during the reign of Edward III.

Goldsmiths of England prepared the ground for modern banking in England during the period of Queen Elizabeth. The Lombards migrated from Italy to England and other parts of Europe, contributed towards the development and expansion of modern banking.

Thus, the history of modern banks begins from Bank of Venice established in 1157 AD, Bank of Barcelona established in 1401, Bank of Genoa established in 1407, Bank of Amsterdam established in 1609 and Bank of England, which was established in 1694. Modern banking may correctly attribute to the merchants, the goldsmiths, and the money lenders.

Name of BankDate of Establishment (AD)
Bank of Venice1157
Bank of Barcelona1401
Bank of Genoa1407
Bank of Amsterdam1609
Bank of England1694

Nepalese Perspective

Banking service is the oldest service industry in Nepal. It has gone through the various stages of evolution and development since the Vedic times (1400 to 200 B.C.) Though the modern banking institution has a very recent origin in Nepal, some crude bank operations were in practice even in the ancient time. In the Nepalese Chronicle, it was recorded that the new era known as Nepal Sambat was introduced by Shankhadhar Sakhwa, a Sudra merchant of Kantipur in 879 or 880 A.D; after having paid all the outstanding debts in the country. This shows the basis of money lending practice in ancient Nepal.

Towards the end of the 8th century, Gunkam Dev had borrowed money to rebuild the Kathmandu Valley. In the 11th century, during the Malla regime, there was evidence of professional moneylenders and bankers. It is further believed that money-lending business, particularly for financing the foreign trade with Tibet, became quite popular during the regime of Mallas.

However, in the absence of any regulatory measures, the unscrupulous money lenders were known to have charged exorbitant rates of interest and other extra dues on loan advanced. These inconveniences led the Prime Minister Ranodeep (1877-1885) to establish Tejarath Addha in Kathmandu, which was a government financial institution supplying credit to the people at 5% rate of interest against the security of gold, silver, and ornaments.

The government servants were also entitled to take loans from Tejarath, repayable from their salary at the source. During the time of Chandra Shamsher (1901 -1929), credit facilities of Tejarath were extended to some other parts of the country by opening its branches. It is believed that the so-called well-to-do persons used to take loans from private money lenders even at a higher rate of interest than those from the government institution, for they were not prepared to disclose in public anything that was likely to affect their prestige.

When they were approached by this type of clients, the professional money lenders used to raise loans in their own names from Tejarath at 5% rate of interest against gold and ornaments, which were not their own but brought to them by their clients as security for the loans to be financed from the funds raised from Tejarath itself.

Thus, without any resources of their own and without any risks on their own part, the money lenders could manage very well to exploit their special type of clients just playing the role of middleman between their clients and the government institution. To control spurious rates of interest and also to curb unfair practice on the part of the unscrupulous money lenders, legislative measures were also taken.

The history of the modern financial system of Nepal began in 1937 AD (1994 BS) with the establishment of Nepal Bank Limited (NBL) as the first commercial bank of the country. Nepal Rastra Bank (NRB) was established in 1956 AD (2013 BS) under the NRB Act 1955 AD (2012 BS). Establishment of the NRB as a central bank of Nepal was another major step in the development Nepalese financial system during the formulating phase of the first five-year Development Plan mid-1950s.

The government established the Nepal Industrial Development Corporation (NIDC) in 1959 AD (2016 BS) under the Nepal Industrial Development Corporation Act 1959 AD (2016 BS). The Employment Provident Fund was established in 1962 AD (2019 B.S.) under the Employees Provident Fund Act to collect provident fund of Government Employees.

The government established Co-operative Bank under the Co-operative Bank Act 1964 AD (2021 B.S.) to provide agricultural credit to farmers and primary cooperative societies in 1964 AD (2021 B.S.) and the Land Reform and Saving Corporation (LRSC) in 1966 AD (2023 B.S.). The cooperative bank and the Land Reform Savings Corporation were later merged with the Agriculture Development Bank Nepal (ADBN).

Similarly, Rastriya Banijya Bank (RBB), which still stands as the cradle of Nepalese Banking System, was established in 1965 AD (2022 B.S.). The Credit Guarantee Corporation was established in 1974 AD (2031 B.S.) to provide credit guarantee services to small/priority sector credits extended by NBL and RBB. The Securities Marketing Center, which was established in 1977 AD (2034 B.S.), was converted into the Securities Exchange Center in 1984 AD (2041 B.S.). It was later converted into the Nepal Stock Exchange Limited (NEPSE) in 1992 AD (2049 B.S.) to develop the capital market in Nepal.

After mid-eighties, financial liberalization policy played a crucial role in the establishment and development of several commercial banks (both foreign joint ventures and private commercial banks) and financial institutions. The policy further led to the amendment of the commercial bank act in 1974 AD (2031 B.S.), the enactment of the Finance Company Act, 1985 AD (2048 B.S.) and the Development Bank Act, 1992 (2049 B.S.). Nabil bank, the joint venture bank with Arab Bank, was established as the first joint venture bank in 1984 AD (2041 AD). After the establishment of Nabil Bank as a private commercial bank, there has been a huge public attraction towards the opening of banking institutions in Nepal.

After national political change of 1990 AD (2047 B.S.), the pace of liberalization was further enhanced, economic activities widened up, international trade gradually increased. Due to this reason, a number of financial institutions gradually increased.

List of Bank and Financial Institution in Nepal till 2050 B.S.

Name of Financial InstitutionDate of Establishment (B.S)
Nepal Bank Limited1994
Nepal Rastra Bank2013
Nepal Industrial Development Corporation2016
Employee Provident Fund2019
Cooperative Bank2021
Rastriya Banijya Bank2022
Land reform and saving corporation2023
Agricultural Development Bank Nepal2024
Credit Guarantee Corporation2031
Security Marketing Center2034
Nabil Bank2041
Security Exchange Center2041
Nepal Stock Exchange Limited2049

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