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WHAT IS BANKING? WHY IS IT ESSENTIAL FOR A NATION? DISCUSS BANKING ENVIRONMENT IN PAKISTAN.
Adeel Sajjad MBA (Evening) 2nd Semester Karachi University Business School
What is Banking
Banking system is a crucial component of the global economy accounting for trillions in assets worldwide. Banks are just one part of the world of financial institutions, standing alongside investment banks, insurance companies, finance companies, investment managers and other companies that profit from the creation and flow of money. As financial intermediaries, banks stand between depositors who supply capital and borrowers who demand capital. Given the importance in economy and individual wealth that rests on banks, it is also among the most stringently regulated businesses in the world.
Basic Functions:
Provide Safety
Banks also provide security and convenience to their customers. At inception, part of the primary purpose of banks was to offer customers security for their money. This was back in a time when an individual's wealth consisted of actual gold and silver coins, but to a large extent this function is still relevant. With banks, consumers no longer need to keep large amounts of currency on hand; transactions can be treated with checks, debit cards or credit cards, instead. Many banks maintain vaults and rent out space to customers, in the form of safe deposit boxes with subsidiary services.
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Settle Payments
Every day there are millions of financial transactions through banking channel, some conducted with paper currency, but countless done with checks, wire transfers and various types of electronic payments. Banks play a valuable role in the settling these payments, ensuring that proper accounts are credited or debited, in the proper amounts and with relatively little delay.
Credit Intermediation
Banks play a major role as financial intermediaries. Banks collect money from depositors, in essence borrowing the money, and then concurrently lending it to other borrowers, generating a chain of debts.
Maturity Transformation
Maturity transformation is fundamental to what banks do on daily basis. Many investors are willing to invest on short term basis, but several projects require long-term financial commitments. What banks do is borrow short-term, in the form of demand deposits and shortterm certificates of deposit, but lend long-term. By doing this, banks transform debts with very short maturities (deposits) into credits with very long maturities (loans), and collect the difference in the rates as profit. However, they are also exposed to the risk that short-term funding costs may rise much faster than they can recoup through lending.
Money Creation
One of the most vital roles of banks is in money creation achieved through fractional reserve banking. In this system only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal. This is done to expand the economy by freeing up capital that can be loaned out to other parties.
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E-Banking
Small and medium banks are now offering on-line services to their customers. Large banks with more expanded branch network and number of customers are moving expeditiously, optimally utilizing the E-banking network. The ATM penetration ratio is still quite low in Pakistan and the efforts are needed to not only further expand the ATM network more aggressively but also to improve upon the security standards.
Islamic Banking
Islamic banking is emerging in Pakistans banking system. More and more banks are seeking license to commence Islamic banking operations. At present five full fledged Islamic banks are operating in Pakistan and 14 which operate Islamic window. A number of conventional banks aim to grow or spin off their existing Islamic windows, while new entrants are expected. However, 56 per cent of the Islamic industry's 1,161 branches are in the five largest cities, leaving smaller cities underserved. Islamic Banking is in the development phase and significant growth in guidance of SBP is anticipated in this sector in near future.
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