Wednesday, 8 August 2012

Define the term Bank and explain in brief the evolution of banking


There are different views about the origin of the word Bank. According to some people the word Bank is derived from the word "Bancus" which means a "Bench. They argue their point, by this example that Jews merchants transacted their business of money exchange on the benches. If the business of any businessman failed, his bench was destroyed by the people. Due to this practice the word "Bankrupt" was also used.

On the other hand some people say that the word "Bank" is derived from German word "Back" was replaced by the word "Bank" which is called " Banco" in Italian language.


There are large number of definitions which are offered by the different authors. Keeping in view the various definitions we may define the bank in the following words.

"A bank is a reliable financial institution which receives the money from one group of people and lends to other group of people. So bank performs the duty of financial intermediary among the people and creates the credit money".


The history of banking evolution is very interesting. In the early ages human life and wealth was not secure. Due to fear theft people berried their wealth under land but this method was not satisfactory. People started to search the custodians of wealth. The evolution of banking started and it has crossed the following stages.

First Stage Of Evolution :-

After a great struggle people succeeded in finding the reliable persons to deposit their money and valuable goods for safety. These people were goldsmiths. These were considered the most trusted persons due to their sound financial position. On the other hand they had a very strong iron safes for keeping gold, money and other variable items. People started depositing their gold and cash in the safe of goldsmiths. Goldsmiths charged something for this purpose and they returned the depositors their money whenever they needed. It was the first stage of banking evolution and goldsmiths were the early bankers.

Second Stage Of Evolution :-

During this period those receipts which were issued by the goldsmiths against the valuable goods were being used as a medium of exchange by the merchants. People purchased the various things from the traders against their receipts. Traders also started accepting the receipts against the payments. So the receipts were used just like the bank cheque of the modern age.

Third Stage Of Evolution :-

This period started at that time when goldsmiths came to know by experience that people are using their receipts as a medium of exchange and very few people demand their deposits. So they reach to the conclusion that they may lend some portion of their total deposits to some other people and they can earn profit. Goldsmith started the business of lending. They also started paying interest to attract the depositors of net cash. Now this business became very profitable, so the traders and money lenders also jumped in this field.

Fourth Stage Of Evolution :-

It was started at that time when people were tempted to deposit more and more cash of the traders, money lenders and goldsmiths to earn maximum interest. On other hand number of borrowers also increased borrowing the money. So for the borrowing and lending business regular institutions came in to being.

In the present age bank is modernized shape of those institutions. But to earn more profit every bank started issuing overdraft facility without maintaining adequate cash reserves to meet the demand of the depositors. This inability created the financial crises. Now the maintain the good will of the bank every government has established the central bank. All the commercial banks perform their duties keeping in view the instructions of the Central Bank.

Keeping in view the above discussion about evolution of bank we can say that it is the result of the different activities of goldsmiths, merchants and money lenders. They are the real founder of modern banking business. All the basic functions of modern bank like accepting deposits, advancing loans and money creation are similar with the founders. Now with the changing business requirements the secondary functions of banks have been changing with the passage of time.


Anonymous,  11 August 2013 at 06:18  

thank you.

Anonymous,  22 March 2014 at 04:59  

thanx..for info.

Ranjith Haputhanthri 23 October 2016 at 01:06  


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