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Unit 1: Introduction
1.1 General Introduction to Banking System
A banking system is the organized network of institutions that accept deposits, lend money, and move payments. Banks stand between savers and borrowers. They convert short-term deposits into productive credit. They also operate the payment channels — cheques, transfers, and cards — through which money moves. A sound banking system supports savings, investment, trade, and confidence in the currency.
1.2 Concept, Origin and Development of Bank
The word “bank” is traced to the Italian banco (the money-changer’s bench). Early money-lending is ancient; organized banking grew with the merchant banks of medieval Italy. The goldsmiths of London gave the modern deposit business its shape: receipts for deposited gold began to circulate, and the goldsmiths learned that deposits could be lent safely in part because not all depositors return at once. The Bank of England (1694) showed the model of a joint-stock bank serving the state. Modern definitions combine three functions: accepting deposits from the public, lending, and creating credit.
| Stage | Feature |
|---|---|
| Money-changing | Exchange of coins of different realms |
| Goldsmith banking | Deposit receipts; safekeeping plus lending |
| Joint-stock banking | Pooled capital; corporate form |
| Central banking | Note issue; lender of last resort |
| Modern universal banking | Deposits, credit, payments, investment services |
1.3 Types of Banks
- Central bank — the state’s bank of issue and regulator (in Nepal: Nepal Rastra Bank).
- Commercial banks — full-service banks serving the public and business.
- Development banks — finance for priority sectors and regions.
- Finance companies — hire purchase, consumer and small-scale finance.
- Cooperative savings and credit organizations — member-based savings and credit (SACCOS).
- Specialized institutions — such as agricultural or infrastructure financiers (e.g., the Agriculture Development Bank in its classic role), and microfinance institutions.
1.4 Difference between Central Bank and Commercial Banks/Financial Institutions
| Point | Central bank | Commercial banks/FIs |
|---|---|---|
| Ownership and purpose | Public purpose; monetary stability | Profit for shareholders |
| Customers | Government and banks (not the public) | The general public |
| Note issue | Sole issuing authority | None |
| Lender of last resort | Yes | No — they borrow from it |
| Supervision | Supervises all FIs | Supervised |
| Monetary policy | Formulates and executes | Follow the policy |
1.5 Historical Evolution of the Banking System in Nepal
| Year | Milestone |
|---|---|
| 1937 (1994 B.S.) | Nepal Bank Limited — the first commercial bank |
| 1948 | Nepal Rastra Bank Act passed; the central bank’s legal foundation |
| 1956 (2013 B.S.) | Nepal Rastra Bank established and begins operations |
| 1966 (2022 B.S.) | Rastriya Banijya Bank — the state-owned commercial bank |
| 1968 | Agriculture Development Bank (in its classic form) for farm credit |
| 1984 | Nepal Arab Bank (now Nabil Bank) — the first joint-venture bank with foreign participation |
| 1990s | Liberalization; more commercial banks and finance companies; privatization of state banks |
| 2000s–present | Multiple acts consolidating the sector; merger wave; licensing classes “A” to “D” |
The class licence system is a convenient memory aid: A — commercial banks; B — development banks; C — finance companies; D — microfinance institutions, with cooperatives operating under their own legal regime.
Exam Focus
- Definitions of “bank” combining the three functions.
- Central bank versus commercial bank — at least five differences.
- Nepal’s banking timeline: 1937, 1956, 1966, 1984.
- Licence classes A–D.
Model Questions
- “A bank is a dealer in credit and a creator of credit.” Explain with the goldsmith origin.
- Distinguish the central bank from commercial banks in a table of six points.
- Trace the evolution of banking in Nepal from 1937 to the merger era.
- Short notes: (a) development bank; (b) finance company; (c) SACCOS.
📚 Get the complete notes: Download the full Banking and Negotiable Instruments PDF (all units) — Law Info Nepal Original Notes Series.