Theory and Practice of Banking

Virtual banking,

Virtual banking, also known as cyberbanking, e-banking, home banking or online banking, includes provision of, and access to, various banking activities conducted virtually (from the road, external businesses or homes) rather than at a physical bank. Virtual banking allows customers to secure loans, pay utility bills, make deposits and check their accounts from remote locations

Transactional Banking

Today, you may or you may not know that every day billions of transactions are made around the world. It’s a tremendous and an extra ordinary amount of money which is being transferred from here to there.

What the word ‘transaction’ simply means over here is, the process of money transferring from one place to another. Nobody today, especially the corporate world can ever deny that transaction which is one of the most critical parts of any business, and therefore the banks all over the world need to be involved in this area, what we call ‘transaction/transactional banking’.

Transaction banking includes commercial banking products and services for corporate clients and financial institutions, including domestic and cross border payments, professional risk mitigation for international trade and the provision of trust, agency, depository, custody and related services

Banks compete with each other to offer services at the lowest cost to corporations, on a service-by-service basis

Bank and Non Bank financial Institutions

Banks

After the independence, banking industry in Bangladesh started its journey with 6 Nationalized commercialized banks, 2 State owned Specialized banks and 3 Foreign Banks. In the 1980's banking industry achieved significant expansion with the entrance of private banks. Now, banks in Bangladesh are primarily of two types:

Scheduled Banks: The banks which get license to operate under Bank Company Act, 1991 (Amended in 2003) are termed as Scheduled Banks.

Non-Scheduled Banks: The banks which are established for special and definite objective and operate under the acts that are enacted for meeting up those objectives, are termed as Non-Scheduled Banks. These banks cannot perform all functions of scheduled banks.

There are 56 scheduled banks in Bangladesh who operate under full control and supervision of Bangladesh Bank which is empowered to do so through Bangladesh Bank Order, 1972 and Bank Company Act, 1991. Scheduled Banks are classified into following types:

State Owned Commercial Banks (SOCBs): There are 6 SOCBs which are fully or majorly owned by the Government of Bangladesh.

Specialized Banks (SDBs): 2 specialized banks are now operating which were established for specific objectives like agricultural or industrial development. These banks are also fully or majorly owned by the Government of Bangladesh.

Private Commercial Banks (PCBs): There are 39 private commercial banks which are majorly owned by the private entities. PCBs can be categorized into two groups:

Conventional PCBs: 31 conventional PCBs are now operating in the industry. They perform the banking functions in conventional fashion i.e interest based operations.

Islami Shariah based PCBs: There are 8 Islami Shariah based PCBs in Bangladesh and they execute banking activities according to Islami Shariah based principles i.e. Profit-Loss Sharing (PLS) mode.    .

Foreign Commercial Banks (FCBs): 9 FCBs are operating in Bangladesh as the branches of the banks which are incorporated in abroad.

There are now 4 non-scheduled banks in Bangladesh which are:

Ansar VDP Unnayan Bank,

Karmashangosthan Bank,

Probashi Kollyan Bank,

Jubilee Bank

FIs

Non Bank Financial Institutions (FIs) are those types of financial institutions which are regulated under Financial Institution Act, 1993 and controlled by Bangladesh Bank. Now, 31 FIs are operating in Bangladesh while the maiden one was established in 1981. Out of the total, 2 is fully government owned, 1 is the subsidiary of a SOCB, 13 were initiated by private domestic initiative and 15 were initiated by joint venture initiative. Major sources of funds of FIs are Term Deposit (at least six months tenure), Credit Facility from Banks and other FIs, Call Money as well as Bond and Securitization.

The major difference between banks and FIs are as follows:

FIs cannot issue cheques, pay-orders or demand drafts.

FIs cannot receive demand deposits,

FIs cannot be involved in foreign exchange financing,

FIs can conduct their business operations with diversified financing modes like syndicated financing, bridge financing, lease financing, securitization instruments, private placement of equity etc.

Unit Banking and branch banking

Unit banking refers to a single bank which renders services and operates without any branches anywhere. This kind of banking system is common in the USA. Restrictive branching laws encourage large numbers of small, independently owned state banks, and large multibank holding companies owning numerous unit banks. Branching laws in most states have been eased in the last several years, permitting geographic expansion and branch banking .Unit banking operate one full banking services.

Branch banking center or financial center refers to a single bank which operates through various branches in a city or in diferent locations or out of the cities. This kind of banking system is common in India. e.g. State Bank of India. It offers a wide array of face to face service to its customers.Historically, branches were housed in imposing buildings, often in a neoclassical architecture style. Today, branches may also take the form of smaller offices within a larger complex, such as a shopping mall.Services provided by a branch include cash withdrawals and deposits from a demand account with a bank teller, financial advice through a specialist, safe deposit box rentals, bureau de change, insurance sales (where it is allowed by law), etc.Other financial institutions reduce their costs by having no branches and are sometimes known as virtual banks.

Universal Banking

A type of banking that combines the aspects of both investment banking with commercial banking, thus allowing these banks to offer a much wider variety of financial options to their customers. Universal banking is common in some European countries, including Switzerland

'Chain Banking'

Conceptually a form of bank governance that occurs when a small group of people control at least three banks that are independently chartered. Usually, the controlling parties are majority shareholders. Chain banking as an entity has declined with the surge in inter-state banking.Chain banking is not like branch banking, where one bank has several different locations. It also differs from group banking, which has several affiliate banks within a single bank holding company. The liberalization of banking laws has also contributed to the obsolescence of this type of bank control.

Retail Banking 

Retail banking is generally refers to offering financial services, products related to deposits and assets to individual customers for personal consumption. Banks concentrate on various segments like professional, housewives, pensioner, children, salaried class etc. Different types of product like recurring deposit, saving bank deposits, F.D, credit cards, housing & consumer loans are offered by bands of the above mentioned market segments.

Wholesale banking

Banking services which (in contrast to retail banking) are offered only to government agencies, pension funds, other institutional customers and to corporations with strong balance sheets and sound income statements. These services include cash management, fleet and equipment leasing, large-sum loans, loan participation, merchant banking, and trust services.

Borrowing and lending amongst banks in inter-bank market, often involving very large sums.

Banker Customer relationship

The nature of relationship between a banker and a customer is contractual in nature. The account of the customer forms the basis of such contract and the relationship appears in different forms according to the type of contract which may be stated as under:

1.       Debtor and Creditor:

2.       Principal and Agent

3.       Bailor and Bailee

4.       Lessor and Lessee

5.       Trustee and beneficiary

6.       Mortgagor and Mortgage

Nature of Relationship in Islamic Perspective:

1.      Saheb Al- Maal & Mudarib

2.      Partners in business

3.      Buyer & Seller of goods

4.      Brotherhood Concept

5.      Deals in goods

Special Relationship:

1.       Obligation to honour Customer’s Cheques.

2.       Obligation to maintain secrecy of the customer’s A/C

3.       Banker’s Right of General lien.

4.       Right to set off.

5.       Banker’s Right of Appropriation.

6.       Right to change interest, commission and incidental charges.

7.       Law of limitation vis-avis Banker.

Definition of 'Derivative'

The derivative itself is merely a contract/instrument to be settled at a future date between two or more parties whose value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.

it is of 4 types: Forward, Futures, Options and Swaps.
Option may be call option or put option.
Swap is interest rate swap and currency swap. 

Mutual fund is the simplest form of derivative. Participants in derivatives market are called a. Market makers and market users. All ADs and their overseas offices are market makers and importers and exporters are market users. Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes. For example, a European investor purchasing shares of an American company off of an American exchange (using U.S. dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into Euros.