Banks and The Banking System (Meaning, Origin and Types of Banks)

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What is a Bank?

A bank is a business that provides financial services. It accepts money from customers and keeps it safe. It also manages deposits and helps people handle payments. Banks give loans to
individuals and businesses. They also help customers save money. Some banks
keep valuables such as documents or jewellery for customers. In simple terms, a
bank is a place where money is kept, saved, borrowed, and transferred.

Origin of Banking

How did banks come into existence?

Banking started with
goldsmiths in London during the 17th century. Goldsmiths had secure places
where they stored gold and other valuable items. Because of this, merchants
trusted them to keep money and valuables safe. At first, goldsmiths charged a
fee for keeping money. Later, they gave depositors receipts as proof of
payment. Merchants began to use these receipts to pay for goods and services.
This practice became one of the early steps in the development of modern
banking. The next stage in banking
was lending money to customers and charging interest. This created income for
bankers. Because of this, banks began to pay interest to attract more deposits
from merchants and other customers. Today, banks use modern systems and
technology to provide faster and better services.

Types of Banks

 

1. 1. Commercial banks
   2. Central bank
   3. Merchant bank
   4. Developmental bank
   5. Savings bank
   6. Agricultural bank

Commercial Banks

A financial institution
that accepts money and valuables from the public for safekeeping. They also use
these funds to carry out banking activities and earn a profit. They may be
owned by private individuals, companies, or the government. Many commercial
banks operate as limited liability companies. Examples of commercial banks in
Nigeria include United Bank for Africa, Union Bank of Nigeria, Guaranty Trust
Bank, Fidelity Bank, First Bank of Nigeria, Zenith Bank, Access Bank, Globus
Bank, Providus Bank, Stanbic IBTC Bank, Optimus Bank, Parallex Bank, Wema Bank,
First City Monument Bank (FCMB), Sterling Bank, Titan Bank, Eco Bank, Citibank
Nigeria Limited, and Polaris Bank.

Characteristics of Commercial Banks

1. 1. Commercial banks are limited liability
      companies.
   2. They are established to make a profit.
   3. They are part of the money market.
   4. Furthermore, they are registered business organisations.
   5. Furthermore, they accept deposits and valuables from
      customers.

 

Functions of Commercial Banks

1. 
Accepting Deposits: 
Commercial banks collect money from the public for
safekeeping. This is one of their oldest functions. Customers can save money in
current, savings, or fixed deposit accounts.

 

2. Lending to Customers: Banks give loans to individuals and
businesses. They use money deposited by customers and charge interest on the
loans. This is one of the ways banks earn income.
3. Agent of Payment: Commercial banks make payments for customers.
Customers with current accounts can use cheques to withdraw or pay money. Banks
also transfer money from one account to another.
4. Safekeeping of Valuables: Banks keep valuable items for
customers. These may include jewellery, certificates, wills, and other
important documents.
5. Discounting Bills of Exchange: Banks can pay customers before
the due date of a bill of exchange. The bank deducts a charge and pays the
balance at once. This helps the creditor receive money early while the debtor
gets time to pay later.
6. Issuing Bank Statements: Banks send account statements to
customers at intervals. These statements show deposits, withdrawals, and other
transactions

Types of Bank Accounts

There are three main types
of accounts customers can open in a bank:

Current Account

A current account is an
account mainly used by businesspeople and customers who make regular payments.
It allows the account holder to withdraw money at any time. The customer is
given a cheque book to make payments or withdraw funds. Holders of current accounts
do not receive interest. Instead, the bank charges fees for operating the
account. Customers may also receive an overdraft from the bank. In simple
terms, a current account is an account from which cheques can be drawn.

Features of the Current Account

 

1. Money can be withdrawn often.
2. Customers can use a cheque book.
3. The bank charges fees or commission.
4. Holders do not earn interest.
5. Another person may withdraw money with
   permission from the account holder.

 

Procedure for Opening a Current Account

 

1. Collect and complete an application form.
2. Submit the required passport photographs.
3. Provide two guarantors who already have bank
   accounts.
4. Submit personal details to the bank.
5. Receive a pay-in slip booklet.
6. Get an account number.
7. Make the first deposit with a pay-in slip.
8. Receive a cheque book.

 

Deposit Account

A deposit account, also
known as a time deposit account, is an account where money is kept in the bank
for a fixed period to earn interest. Holders of this account receive higher
interest than savings account holders. Money cannot be withdrawn at any time.
Moreover, the customer usually gives notice, often seven days, before
withdrawal. People use deposit accounts to save for future needs or planned
projects. However, when the agreed period ends, the account may be renewed.
Customers are often given a passbook or a deposit certificate.

Savings Account

A savings account is mostly
used by low-income earners and people who want to save small amounts regularly.
Customers deposit money over time, and the savings grow gradually. Holders of
saving accounts earn interest on their money. In addition, withdrawals are
allowed, but they are not as frequent as with a current account. Customers may
also be given a passbook to record deposits and withdrawals

Roles of Commercial Banks in International Trade

 

1. Provision of Credit Facilities

They give credit to exporters and importers. This helps them pay for
goods and continue trading.

2. Reduction of Payment Default

Banks help guarantee payment for goods bought. This reduces the risk of
non-payment. They also confirm letters of credit.

3. Discounting Documentary Credit

These banks can pay sellers before the due date by discounting the documentary credit. This helps sellers receive money without delay.

4. Acting as Referees

Providing information about the financial standing of customers. This
helps foreign traders know if a buyer or seller can be trusted.

5. Foreign Exchange Services

Commercial banks arrange the buying and selling of foreign currencies
used in import and export trade.

6. Issuing Travellers’ Cheques

They also issue travellers’ cheques to business people going abroad.
This makes transactions easier during international trips.

Final Thoughts

Banks are essential
for the growth and stability of the economy. They manage money by providing loans, facilitating payments, and offering financial
security to businesses and individuals. They function beyond just storing money;
they drive investment opportunities, encourage savings, and enable economic activities. 

Read also: The Central Bank: 5 Pivotal Economic Duties To Commercial Banks