Origin, Roles and Classification of Bank | kullabs.com

Note on Origin, Roles and Classification of Bank

  • Note
  • Things to remember

Origin and Development of Bank


The word bank is derived from the Italian word ‘banco’ which signifies the exchange of money by sitting on the bench in Italy. In the history of a bank the first modern bank "The Bank of Venice" established with a prospect of finance the monarch in wars was a landmark. In 1694 AD, "The Bank of England" was the first bank established as a central bank. (Khanal, Poudel, and Thapa)

In the context of Nepal's banking, the first modern bank is Nepal Bank Ltd. Established in 1937 A.D. Nepal Bank Ltd. remained the only financial institution in the country until the foundation of Nepal Rastra Bank. Nepal Rastra Bank was established in 1956 A.D. as the central bank of Nepal. Rastriya Banijya Bank was established as the second commercial bank of Nepal in 1965 A.D. As the agriculture was the basic occupation of major Nepalese, separate Agricultural Development Bank was established in 1968 A.D. as the first institution in agricultural financing.

For more than two decades there were no more banks established but after the freedom of economy, a bank was easily formed. And now there are a lot of modernized and systematically managed banks. (Banking in Nepal: A History of Banking System in Nepal)

A bank can be defined in two aspects as:

Functional Aspect: According to functional aspect, a bank is an institute that keeps, lends and exchange money.

Legal Aspect: According to legal aspect, a bank is a business which accepts deposits as saving according to a different account and in turn advances loan as credit.

In sum, a bank is a financial institute which deals with money, it accepts public deposit and provides credit service.

According to World Bank, "Banks are financial institutions that accept funds in the form of deposits repayable on demand or in the short notice".

According to Prof. Mart, "A banker is one who in the ordinary course of his business, receives money which has repaid by honoring cheques of persons from whom or on whose account he receives it".

According to Crowther, “A banker is a dealer in debts. The banker's business is to take the debts of other people of offering his own in exchange and thereby to create money".

According to Kinley, “A bank is an establishment which makes to individuals such advances of money as may be required and safely made and to which individuals entrust money when not required by them for use".

Role of Banking System

In this modernization, banking system plays a vital role in economic development. Some of the important functions of banking system are as follow:

  • Money mobilization

The main role of the bank is to mobilize the money. Bank accepts the saving money of public and utilizes it as loan, overdraft, cash credit, etc. Most of the money are used in a productive sector like industries, organization, business, etc where a bank can have greater return and provides the interest to the public who saves money in a bank.

  • Capital Formation

Banking system collects small saving from various part of an economy and mobilizes it in business sectors. This helps to increase more output. Which means more income and more income increases saving due to which more funds can be created for future investment. Therefore, banking system helps in capital formation.

  • Monetization of Economy

Banking system helps to develop the money market. Banks are creators as well as distributors of money. They spread the branches of the bank in rural areas which are unmonitored. This helps to increase the banking habit of the people. People keeps their money in the bank and withdraw them in necessity. This leads to monetization of an economy.

  • Promotion of Trade and Industry

Bank system encourage specialization and accelerate the pace of industrialization by bringing revolution in the internal and external trade. The bank cheque, the bank draft and the bill of exchange created a revolution of trade.

  • Remittance of Money

The bank helps to transfer the money from one place to another and from one country to another. Due to this, the people are free from the risk of carrying cash. There are also the facilities of transferring money in the form of cheque, draft, traveler’s cheque and credit card.

  • Employment Opportunities

Banking system increases the economic activities and promote employment opportunities by providing loans to businessmen, entrepreneurs and farmers in different forms. Banks also helps by investing in various business sectors.

  • Regional Development

Banking system transfer surplus from the developed regions to the less developed regions. This will promote economic development in underdeveloped areas of the country. Therefore, a bank is important to achieve balanced development.

Classification of Bank

  1. Central Bank
    The Central bank is called banker of banks. It controls all the bank. It controls the inflation and deflation of money in a country. In every country, there is one central bank which controls another sub bank like commercial bank, development bank, etc. Nepal Rastra Bank is the central bank of a country Nepal. It is publicly owned and directly governed by the Nepalese government.
    The Central bank is a financial institute that lends money to a bank and other credit institutes, which works as banker to the banks and the government and which work for the economic interest of the country. Such bank is owned by the government.

  2. Commercial Bank
    The commercial bank is a financial institution which accepts deposits, makes a business loan and offers related services. A commercial bank is also known as a business bank. It is profit motive. Such bank is owned by a group of individual. It accepts the deposit of public as a saving and provides credit as a loan. They mainly provide short-term credits.

  3. Industrial Bank
    The industrial bank has limited scope of service,they accept the customer's deposits and sell investment shares labeled certificates. This bank deals with requirements of the industries.

  4. Agriculture Bank
    Agriculture banks are those bank that provides financial help to agricultural sectors. The main function of this bank is to provide loan to the farmer.

  5. Development Bank
    The development bank is a bank which is established to develop the specific sectors of the economy. Agriculture bank, rural development bank, industrial development bank, are some example of the development bank.

  6. Exchange Bank
    Exchange bank deals with foreign exchange. Their main function is to accept, collect and exchange the foreign currency. It facilities the international payments through sale and purchase of bill of exchange. It provides a loan to the sectors which are involved in export and import. Nepal Rastra Bank manages the foreign exchange bank.

  7. Saving Bank
    Saving banks are those bank that promotes saving habits among the general public and mobilizes those small saving. In Nepal, the postal saving bank is the saving bank.(Jha, Bhusal, and Bista)

(Karna, Khanal, and Chaulagain)(Khanal, Khatiwada, and Thapa)


Banking in Nepal: A History of Banking System in Nepal. 26 06 2016 <http://www.imnepal.com/banking-in-nepal-a-history-of-banking-system-in-nepal/>.

Karna, Dr.Surendra Labh, Bhawani Prasad Khanal and Neelam Prasad Chaulagain. Economics. Kathmandu: Jupiter Publisher and Distributors Pvt. Ltd, 2070.

Khanal, Dr. Rajesh Keshar, et al. Economics II. Kathmandu: Januka Publication Pvt. Ltd., 2013.

Roles of bank

  • Money mobilization
  • Capital Formation
  • Monetization of Economy
  • Promotion of Trade and Industry
  • Remittance of Money
  • Employment Opportunities
  • Regional Development

Classification of bank

  • Central Bank
  • Commercial Bank
  • Industrial Bank
  • Agriculture Bank
  • Development Bank
  • Exchange Bank
  • Saving Bank

Very Short Questions



No discussion on this note yet. Be first to comment on this note