Definition, Kinds And Functions of commercial bank

INTRODUCTION TO COMMERCIAL BANK: Commercial banks generally provide credit to the businessman to promote trade and business. It receives deposit and provides loan service to the public against interest. Their important functions are payment against cheques, issuance of letter of credit, discounting bills of exchange, transferring of money. They play an important role in the creation of credit money. Habib bank, Muslim Commercial bank and U.B.L are the leading commercial bank in Pakistan.


According to the Hilton Commission

“Bank refers to individual firm or company, who receives deposits in the form of money and pays it back through cheque draft or order and uses the Word “Bank” for its identity”.

According to Dr. Herbert Hart

“Banker refers to the person who, with reference to his business functions, receives and pays it through cheque to for whom or from his accounts the money was received”

According to Prof. Kinley
“Bank is an organized house which borrows money from the people for the sake of providing loan or other services of monetary nature to businessmen or need person”

According to Prof. Hartley withers

“A manufacturer of credit and a machine for facilitating exchange”

There are two different kinds of Commercial bank which given below

1. SCHEDULED BANK: These are the banks which are the members of the Central bank. They are referred to as Scheduled bank since their name appears in the Schedule list or register of the Central bank. They enjoy the following facilities and Services from the Central Bank.

• Rediscounting of bill of Exchange.

• Clearing House services.

• Lender of the last resort • Advisory Service.

2. NON- SCHEDULED BANKS: Non Scheduled banks are not the member of the Central bank, and hence they cannot get all those facilities and services they are allowed to Scheduled banks from the Central bank.

ACCEPTANCE OF DEPOSITS: Acceptance of deposit perhaps the major function of the commercial bank. People deposit the surplus funds or money into bank due to different purposes such as some make deposits with the objective of safety, to earn interest as well as to cultivate the habit of saving in them. It is the most vital function performed by the bank. A bank provides the facility to open the different kinds of accounts considering the need of all groups in the society.

• Current Account (demand deposit)

• Fixed Account (term deposit)

• Saving account

• Profit and loss sharing (P.L.S)

: The second important function of a commercial bank is advancing loan. Bank is a profit earning institution it does not kept the amounts of deposits with it. The bank earns interest by lending money. It lends the amounts of deposits to the people. The loans are granted on the basis of goodwill of the customer and on the security of certain things. The following are the different forms of lending by bank.

• Cash Credit

• Loans and advances

• Overdrafts

• Discounting of Bills


PUBLIC UTILITY SERVICE: The commercial bank perform several services to public utility such as Making bill of exchange, discounting of bill of exchange, Transfer of money, Issuing Letter of Credit, Locker Services, Underwriting of shares, Credit & ATM Cards etc.

Discounting of bill of exchange Bill of exchange is a negotiable credit instrument which used in home or foreign trade. Through it the buyer of goods is allowed a specified period generally three months for payment.

Transfer of money Commercial bank plays an important role in transferring money from one person, company, city or country to another. This is quick, reliable, safe and inexpensive service.

Issuing Letter of Credit This instrument is used in home or international trade.It is a request by the bank to seller to send the goods to the buyer and promises to pay the sum by itself. Its make the international trade so simple.

Locker Services Banks offer lockers for the safe custody of jewelry, currency, documents, and other precious items

Underwriting of shares Underwriting refers to the purchasing the whole issue of shares or bonds principal company and reselling it to the public and receives commission from the concern company.

AGENCY SERVICE: Commercial banks act as attorney for their clients. Bank, receive and pay utility bills, premiums, dividends, rents and interest for their clients. On the instruction of its clients the bank buys and sells shares and bonds on the stock exchange. Some agency services are given below

• Accepting cheque and bills

• Dealings in shares and Bonds • Acting as Attorney

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