Unit I: Introductory

1.1. Origin and Meaning of

Bank

Dhruba Koirala
National Law College
Banking Law and Negotiable Instruments
Course Objectives:
 To give comparative, clear and detailed knowledge
of the principles and practice of the law of banking
and negotiable instruments in Nepal.
 To acquaint the students with the role and
functions of various kinds of Banks.
 To enable the students to have critical appreciation
of leading cases relating to law of banking and
negotiable instruments decided by the Supreme
Court of Nepal.
Bank: Basic understanding
 A bank is an institution; the major function is to
deal in money and credit. It carries out the work of
accepting deposit, providing loan, generating
money and transferring the money. In modern day,
the bank’s business is not only collecting deposits
and lending but it has changed as a great service
industry and cover up to the electronics banking. It
has great contribution for flourishing healthy
commercial and industrial activities of every
country in the world.
Origin of bank
 There is no consensus about the origin of ‘Bank’
among the scholars. Some of them believed that it
came from the Italian word ‘Banco’, which meant
‘Bench’, while other considered it to be started
from a German word ‘Bancka’, which meant ‘Joint
Stock Fund’. As the same, there are others, who
believe that the word ‘Bank’ is originally derived
from the German word ‘Bancka’, which was
Italianized into ‘Banco’ when the German were
masters of the great part of the Italy.
Origin of bank…
 The Lombards, who were originally from the plains
of Lombardy of Northern Italy, introduced
banking practice to England. But after a century or
so of business in London, were eventually
bankrupted. After the Lombards, banking was
practiced by the goldsmiths.
 It means, the credit for the origin behind
development of banking system in the world goes
to the goldsmiths. In the Europe, they used to have
large vaults, which were soundly built and heavily
guarded.
Origin of bank…
 The person who deposited his surplus funds with
the goldsmith became as a depositor. Later on they
started to distribute dividend to the depositor
from the profit.
 Later on, receipts issued by goldsmiths were
considered as a bill of exchange -lalgdokq_ and it
became a foundation for ‘bank note’ concept.
Transactions made by goldsmiths were neither
complete banking transaction as it is now nor
institutional. However it can be taken as a
foundation for development of modern
organizational banking system in the world.
Origin of bank…
 In the part of institutional banking system, the
establishment of ‘Bank of Venice’ on 1157 AD in Italy is
found as a first bank in the world which had
contributed for institutional development of modern
banking system. After Bank of Venice, establishment
of the ‘Bank of Barcelona’ Spain on 1401, ‘Bank of
Geneva’ Switzerland on 1407, ‘Bank of Amsterdam’
Holland on 1607 and ‘Bank of Hamburg’ Germany on
1619 are found.
 However after establishment of ‘Bank of England’ on
1694 is considered as a beginning of the development
of scientific and modern banking system in the world.
Origin of bank…
 In Nepal, the development of banking system is not
same as in the west.
 There is no clear evidence that the exact time when the
banking system was started in Nepal. But according to
the available sources, the practice used in the ancient
time in Nepal was as similar as the functions of the
bank and it is believed that banking was practiced at
the time of ‘Manu’ as it is referred in Manusmriti.
There is an opinion that at the time of Chanakya also it
was in practice, as banking has been mentioned in
‘Kautilya’s Arthasastra’ which is the first book of
economics.
Origin of bank…
 The organized banking system is comparatively young
in Nepal but as an unorganized form, it was practiced
long before.
 However, as a modern and organized form of banking
in Nepal, Nepal Bank Limited was established in 1994
B.S. Under Nepal Bank Kanoon 1993, as the first bank
in Nepal.
 Nepal Rastra Bank Act 2012 was promulgated and
established Nepal Rastra Bank in 2013 B.S. as a central
bank of the country, which is the first central bank of
Nepal.
Origin of bank…
 Likewise, Industrial Development Center was
established in 2013 B.S., for industrial development,
and, which was converted to Nepal Industrial
Development Corporation (NIDC) in 2016 B.S.
 Similarly, the Rastriya Banijya Bank Act 2021 had
authorized to establish the Rastriya Banijya Bank in
2022 B.S. The financial shapes of these banks have a
tremendous impact in the national economy. After the
establishment of Rastriya Banijya Bank, banking
service was spread to urban and rural areas of Nepal.
Meaning of bank
 According to C. R. Crowther, ‘A bank is an institution
which collects money from those who have it spare or who
are saving it out of their income and lends this out to those
who require it’.
 As per R. S. Sayers, ‘A bank is an institution whose whole
debts are widely accepted in settlement of other people’s
debts’.
 Black’s Law Dictionary: A financial establishment for the
deposit, loan, exchange or issue of money and for the
transmission of funds.
 Nepalese laws have also defined the term ‘bank’. According
to Nepal Rastra Bank Act 2058, section 2(a), ‘Bank means
the Rastra bank established under Section 3 of the Act’.
Meaning of bank…
 As per BAFIA 2073, section 2(zg) bkmf @-x_, ‘Bank means
an organization established for performing banking and
financial transactions as stated under section 49(1), branch
office of foreign banks and Infrastructure Development
bank as stated under section 49(5)’.
 The BAFIA 2073, section 2(zs) bkmf @-sem_ and section
37 further classifies a bank from a financial institution
according to their financial transactions, in which
institution licensed for transactions of its Section 49(1) are
named as Bank of class ‘A’ and other licensed for
transactions of its section 49(2), 49(3) and 49(4) are
included in financial institutions of class ‘B’ Development
Bank, ‘C’ Finance Company and ‘D’ Micro Finance
Institution.
Meaning of bank…
 In a conclusion, by observing those definitions, we
can clearly say that bank is a financial institution
established under the prescribed law to carry out
the financial transaction such as deposits,
remittance, lending, agency role, guarantee
facilities, safekeeping for valuables etc.
Meaning of bank…
 On the basis of above definitions, these are the
main functions of banks:
 Accepting Deposits
 Advancing loans
 Agency Function
 Credit Creation
 Promoting cheque system
 General utility function etc.
Thank You

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