In essence, banking means taking money and other valuables and keeping as well as investing the same resources on lucrative ventures. Banking also involves offering credit services to customers. Banking in the United Kingdom as a business started in the 17th century. Since then, banking has continued to gain popularity rapidly and has spread all over the globe. Banking business has attracted majority investors thus becoming business of most individuals. Increased investment has led to the birth of countless institutions of banking. The fact that economy all over the world has become unpredictable has contributed a lot to a change in behaviour and view of banking among nations. Desire of every country and individual to stand against worst economies creates a sense in banking. It is not just a matter of securing their money and resources but also to help them access and enjoy lucrative services like loans, mortgages and other benefits from financial institutions. Life without credit does not run smoothly hence there is the need for banks. Individuals have high ambitions but funds deter them from executing them. Economic challenges can only be solved by the banking industry. Most financial institutions have purposed to reach people to create awareness on the importance and benefits of banking. Through sensitization, some firms have gone global and doing quite well. Advanced technology sums up by eliminating tiresome procedures. Today, banking can be done online from wherever one is and access credit services within the shortest time possible. Banking business has seen improved ability and purchasing power among nations leading to better living standards and general growth of the economy. This paper defines what banking is, and critically examines banking as a business in the context of English judicial and legislative approaches. In addition, the paper discusses whether the theorists were successful in defining banking business.
Banking in the Context of English Judicial and Legislative Approaches
The legislature and judiciary are arms of government whose main functions are formulation and implementation of laws. Just like any other business activity in the world, there is a need for established rules and regulations to guide on how banking activities are carried out (Arghyrou & Kontonikas 2010). As much as most people are trying their best through saving, it should not be forgotten that there are those who enter into this business with agenda of acquiring money and other valuables through unfair means. With widespread banking activities and digitalization of the banking process, cases of fraud have been on the rise as criminals are becoming more capable in their activities. Conmen are out in fields threatening growth of the banking industry as clients are shying off due to risk of losing their savings. Judicial legislation defines banking business as an act of receiving money and other valuables by a dully registered firm from its clients and giving them loans upon mutual understanding and benefit. Laws require that none of the parties involved should leave with complaints. Several laws are considered in the banking sector in order to govern and regulate operations in the banking industry.
Banking laws and financial regulations were established so as to regulate amount that capital banks have to hold. A maximum and minimum amount is set to curb inflation and devaluation of currency. Laws on banking are mostly aimed at guarding firms against economic crisis (Caceres, Guzzo & Segoviano 2010). In case of a crisis, an organization does not suffer along with fluctuation of an economy. Setting a maximum amounts of money to be accumulated by banks help to maintain currency in circulation and deters banks from controlling the economy. The same legislation dictates a maximum sum that is to be loaned to a customer and must not be surpassed regardless of his or her request. The lowest figure is set to prevent an institution from running bankrupt, a state which leads to de-registration. Floats need to be maintained at an optimal amount to enable a firm to run smoothly. Banking laws also call for close monitoring and follow-up to ensure no default in loan servicing. Guidelines on how banking institutions relate and interact are also included in a company laws.
Criminal laws regulate the norms of law and prescribeindividuals who wish to operate contrary to laws. Also, criminal laws create conducive grounds to trade on and boosts safety in the banking industry via elimination of self-minded people, whose aims are always to benefit themselves at the expense of others. Criminal activities are on the rise, especially in banking business. The judiciary has done great to ensure that the real culprits do not just get away. Globalization and introduction of online banking has witnessed e-crimes. Information systems in banks require utmost privacy as a measure against hacking. Judicial officers hold forums to educate citizens on their role in fighting criminals.
Unfair competition within the banking industry is done away with through competition law that seeks to establish healthy competition. Health completion is a vital factor for growth of a business. However, competition among businesses must be regulated to ensure that the business remains healthy (Koo 2011). Some individuals and even banks tend to use their economic influence to destabilize the market, probably at the expense of the welfare of customers. Agents of some financial institutions lure customers by giving them misleading information about their products and services. Competition law provides boundaries within which banks compete and any that goes beyond is caught up by the law. Clients are able to subscribe and register with companies of their own choice after getting right information. The law serves to protect small firms, motivate and attract new entries in the banking business. Through abolition of exploitation, firms are meeting their goals and objectives hence overwhelming growth of the banking industry. Competition law has witnessed economic growth. Clients also access best services from firms of their choice.
The judiciary is geared towards providing safe trading grounds to both institutions and customers. It is set to ensure that a banking institution has to be dully registered and recognized in context of the law before commencing its operations. A company law provides simple registration procedure to be followed in order to get a license. Most cases of fraud arise as a result of non-registered companies and agents being in the field. Registration procedure is easy and simple to motivate investors’ entry into business.
To cement efforts of the judiciary to provide fairness in the industry, a law dealing with unjust enrichment was established in bid to deal with those who aim at enriching themselves from other peoples’ savings. Each and every transaction carried out is monitored, in case it lacks basis, then it takes its course. The ability of financial institutions to keep track and records of their clients’ accounts plays a major role. Once one withdraws huge amounts above credit-worth, detection happens immediately. Recovery measures are also laid down to ensure that those affected as a result are reinstated.
Several laws were established by legislature to provide protection to depositors’ accounts that are insured by government. Some banks exploit customers in a sense that when firms suffer a financial crisis, it is transferred to clients. Such a scenario is hindered by government and does not affect insured accounts. Through such laws, government officers started campaigns to sensitize account holders on importance of insurance. Awareness projects proved fruitful as objectives were met. Most individuals and even banking firms took insurance cover.
Sometimes the government, for some reason, may choose to be involved directly or indirectly in operations of financial institutions. In such cases, an organization suffers several effects as a result of involvement. For instance, the government may limit services offered or tighten procedures for entry into business. Such moves by governors slow down and eventually register firm withdrawals from operation. To reduce unnecessary interference, an Act was drafted. It was aimed at giving banks administrative independence from the government. According to this Act, each institution is supposed to have its own management not comprising government officers.
Banking institutions are widespread and mushrooming daily. On the other hand, most of these organizations exit from the banking business year in year out. Failure to meet required standards of service contributes more to the closure. Other organizations collapse as a result of bankruptcy. To keep firms in existence, a Banking Act was established to create special insolvency regime for banks. It was in bid to help private banking institutions. This act allowed the government to take up such banking firms in extreme conditions. Government assumes ownership of these firms to maintain and keep on serving citizens and increase employment opportunities. The Act also permits the government to order de-registration of any money-lending institution that persistently violets established laws.
Theorist’s Definition of Banking Business
Theorists define a bank as a financial mediator in charge of receiving deposits and assets (Reden 2010). Theories about banking business existed long before the emergence of banking activities. Several theorists tried to define banking in relation to the activities that were taking place. Exchange of goods and services was a characteristic of every community. Direct individual contracts were the order of the day in ancient times (Andreau 1999). Several issues could arise as a result of how business activities were carried out. The concern was who to mediate, and how they could overcome the challenges in business. Theorists have put forth several theories which have come to pass. Therefore, theorists were, indeed, successful in their outlining of banking business.
Theory of banking firm defined banking business as activities of taking money and offering loans. Roles of a banking firm, as per this theory, are traced in different models, partial and complete which include monopoly and risk aversion models (Reden 2010). According to most theorists, financial institutions are in a possession of extra ordinary monopoly powers and can do things that different firms cannot manage. Services rendered by banks tend to be unique, hence they cannot be easily undertaken by other enterprises within the economy. A bank, therefore, must be run by dedicated managers who are innovative and willing to try out new ideas. Customers come from different cultural, social and economic backgrounds, thus they require special abilities to engineer them towards a common goal.
Another theorist came up with a delegated monitoring theory. Banks extend credit services to clients, creating need to follow up. Banks pay special attention to the monitoring field. Delegated monitoring indicates that money lending organizations enjoy economies of scale in monitoring (Reden 2010). A customer may change his/her mind upon receiving a loan. In such circumstances, it requires dedication to compel the concerned party to comply. Banks have provided a solution to contracting problems that used to show up between lenders and borrowers in ancient days. Money lending institutions conduct thorough surveys in an attempt to better understand their customers. They also require security before a loan application is processed. Banks normally manage monitoring at very low costs by diversifying and pooling loans together. The delegated control theory allows account holders and even individual investors to access their accounts’ details, hence they can easily detect credibility and borrowing ability. Control and monitoring also help in detecting criminal attempts.
Intermediate theory explained that in order for a banking business to be successful, there must be an intermediary. In the case when a party in business needs money for some issues and another party has an illiquid asset, it is evident that these parties are of no value to each other. Such a situation typically requires an intermediate (Choudhry 2012). In this theory, several suggestions were brought forward and questions also arose as to why people in banking business pay for intermediary services. The fact that banks in a role of an intermediate benefits over the lender and borrower, it also gives an advantage to customers by pooling risks. Convenience of denomination is a service offered by banking firms only. An intermediate enhances transformation of illiquid assets into liquid liabilities, hence easy access, as well as maturity shifting. Financial institutions provide a meeting ground for able depositors and willing borrowers, thus completing the cycle of banking business.
Commitment theories presented business banking as activities meant to satisfy a lot of clients’ needs. Banking companies offer services that help customers deal with problems and effectively tackle daily challenges. Offering credit services is a clear pointer that the business is determined to end financial constraints among clients (Choudhry 2012). Many people have updated their social classes and improved financial stability through banking. Commitment and dedication have been witnessed with introduction of online services and creation of a 24-hour economy, in which banks lead as others follow. Only banking organizations won trust of the whole world, as a result of their commitment to secure customer savings. At present majority of the worlds’ population have bank accounts and frequently make deposits.
Banking business has played a crucial role in economic growth. People have changed their attitude towards financial institutions. Credit to theorists who foresaw the emergence of banking activities and steered them to what exists today. The judiciary and legislature have their share reserved in propelling banking that seemed a dream come true. The judiciary has always been on the alert to ensure smooth running of banking industry. Banking, being a sensitive industry, attracts more criminals than any other industry. To the level where the industry is presently gives enough evidence of a better judicial and legislative approach. However, extra efforts are still called upon on hi-tech crimes. All laws that are in place and, as discussed, tries to lure more new entrants in the industry, as well as preventing exploitation of customers. Firms that believe in fair trade find it easy to operate in this competitive industry. Governments need to embrace and purpose motivating banking business by funding them. Insuring banking firms guarantees them continuity even after an economic crisis.
Banking business has not yet reached the desired levels, especially in some underdeveloped countries, as expected by theorists. Governments in affected nations are thus advised to start awareness programs, in order stimulate growth of banking business. There is a need for government involvement. In developed nations, banks are continuously evolving and creating new services. Spontaneous emergence of money lending organizations, however, makes them less powerful and challenges the theoretical rationale to their existence. Banking industry has created employment opportunities and reduced crime rates. Investors have helped to solve economic issues in most economies and contributed a lot to the transformation of lives. They have become increasingly innovative and finding long-lasting solutions to the worlds’ economic crises. E-commerce and online banking have turned the world into a very small village. Banking business has gone multi-national and one can invest in a country of choice. The practice has witnessed exchange of ideas among investors from different nations and economies.
Andreau, J 1999, Banking and business in the roman world, Cambridge University Press, Cambridge.
Arghyrou, M & Kontonikas, A 2010, The EMU sovereign debt crisis: fundamentals, expectations and contagion, Cardiff Business School Working Paper E2010/9, Cardiff University, Cardiff.
Caceres, C, Guzzo, V & Segoviano, M 2010, Sovereign spreads: global risk aversion, contagion or fundamentals? IMF working paper, IMF, Washington, DC.
Choudhry, M 2012, The principles of banking, Wiley, Hoboken, NJ.
Koo, R 2011, ‘The world in balance sheet recession: causes, cure, and politics’, Real-World Economics Review, no. 58, pp. 19-37.
Reden, S 2010, Money in classical antiquity, Cambridge University Press, Cambridge.
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