It is interesting to trace the origin of the word ‘bank ‘ in the modern sense, to the German word ” Bank” which means, heap or mound or joint stock fund. From this, the Italian word “Banco” meaning heap of money was coined.
Some people have the opinion that the word “bank” is derived from the French words “bancus” or “banque” which means a ‘bench’. Initially, the bankers, the Jews in Lombardy, transacted their business on benches in the market place and the bench resembled the banking counter.
If a banker failed, his’ banque’ (bench) was broken up by the people; hence the word “bankrupt” has come. In simple term, bankrupt means a person who has lost all his money, wealth or financial resources.
In India, the Banking Regulation Act, 1949, under which banks are regulated by the Reserve Bank of India, defines a banking company and banking as under:
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Banking Company
The Banking Regulation Act, 1949 defines a banking company as a company which transacts the business of banking in India [Section 5(c)].
Banking
Section 5(b) defines banking as accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise.
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Section 49A of the Act prohibits any institution other than banking companies to accept deposit money from public withdraw able by cheque.
Students may note that the essence of banking business is the function of accepting deposits from public with the facility of withdrawal of money by cheque.
In other words, the combination of the functions of acceptance of public deposits and withdrawal of the money by cheques by any institution cannot be performed without the approval of Reserve Bank.
The origin of modern banks is traced to three important sources. They are,
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(i) The goldsmiths
(ii) The moneylenders and (hi) the merchant bankers.
The goldsmith by virtue of dealing in Gold, which is a very valuable item, had facilities for the safe keeping of valuables. He accepted for safe custody the money, another important valuable item, belonging to his customers. The goldsmiths began to lend the money knowing that all the depositors do not withdraw their savings at a time.
The moneylender lent his surplus funds to the needy and earned the income by way of interest. The merchant bankers were primarily trader and had to oblige his customers by accepting their money for safe custody.
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He was doing the banking business as a side occupation. Modern banks retain all the characteristics of these three types of institutions/functions.
Banking made its first appearance as a public enterprise in the year 1157 in Italy with the establishment of ‘Bank of Venice’. The ‘Bank of Barcelona’ was started in 1401. The ‘Bank of Genoa’ in 1407 and the ‘ Bank of Amsterdam’ in 1609. The Lombards who migrated to Europe and England from Italy were responsible for the development of modern banking.
When severe restrictions were imposed on them by the King Charles II, their business was affected at large. The goldsmiths were gradually replaced by private bankers.
After the Banking Act was passed in 1833 in England, the growth of joint stock commercial banking was accelerated. Foundations were laid for the growth of modern commercial banking during the 19th century.