Page 7 - DCOM208_BANKING_THEORY_AND_PRACTICE

Banking Theory and Practice

Notes creditworthy borrowers and hope that the profit margin is sufficient to cover any loss which
does occur.

1.1 Meaning and Nature of Bank

A bank is an institution, usually incorporated with power to issue its promissory notes intended
to circulate as money (known as bank notes); or to receive the money of others on general
deposit, to form a joint fund that shall be used by the institution, for its own benefit, for one or
more of the purposes of making temporary loans and discounts; of dealing in notes, foreign and
domestic bills of exchange, coin, bullion, credits, and the remission of money; or with both these
powers, and with the privileges, in addition to these basic powers, of receiving special deposits
and making collections for the holders of negotiable paper, if the institution sees fit to engage in
such business.
Banking in the modern sense of the word can be traced to medieval and early Renaissance Italy,
to the rich cities in the north like Florence, Lucca, Siena, Venice and Genoa. The Bardi and
Peruzzi families dominated banking in 14th century Florence, establishing branches in many
other parts of Europe. One of the most famous Italian banks was the Medici Bank, set up by
Giovanni di Bicci de' Medici in 1397. The earliest known state deposit bank, Banco di San Giorgio
(Bank of St. George), was founded in 1407 at Genoa, Italy.
In ancient India there is evidence of loans from the Vedic period (beginning 1750 BC). Later
during the Maurya dynasty (321 to 185 BC), an instrument called adesha was in use, which was
an order on a banker desiring him to pay the money of the note to a third person, which
corresponds to the definition of a bill of exchange as we understand it today. During the Buddhist
period, there was considerable use of these instruments. Merchants in large towns gave letters
of credit to one another.
The definition of a bank varies from country to country. Under English common law, a banker
is defined as a person who carries on the business of banking, which is specified as:

conducting current accounts for his customers,
paying cheques drawn on him/her, and
collecting cheques for his/her customers.
In most common law jurisdictions there is a Bills of Exchange Act that codifies the law in relation
to negotiable instruments, including cheques, and this Act contains a statutory definition of the
term banker: banker includes a body of persons, whether incorporated or not, who carry on the
business of banking'. Although this definition seems circular, it is actually functional, because it
ensures that the legal basis for bank transactions such as cheques does not depend on how the
bank is organized or regulated.
The business of banking is in many English common law countries not defined by statute but by
common law, the definition above. In other English common law jurisdictions there are statutory
definitions of the business of banking or banking business. When looking at these definitions it
is important to keep in mind that they are defining the business of banking for the purposes of
the legislation, and not necessarily in general. In particular, most of the definitions are from
legislation that has the purposes of entry regulating and supervising banks rather than regulating
the actual business of banking. However, in many cases the statutory definition closely mirrors
the common law one.

Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct debit
and internet banking, the cheque has lost its primacy in most banking systems as a payment
instrument. This has led legal theorists to suggest that the cheque based definition should be

2 LOVELY PROFESSIONAL UNIVERSITY