Commercial Banking vs.

Islamic Banking
Aqsa Rustam M Mudaser

Commercial Banking
A financial institution that provides services such as a accepting deposits and giving business loans. Commercial banking activites are different than those of investment banking, which include underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and also acting as a broker for institutional clients.

 Commercial banks offer a wide range of corporate financial services that address the specific needs of private enterprise. They provide deposit, loan and trading facilities but will not service investment activities in financial markets.

Commercial banks can be described as a type of financial intermediary. In the US, the term is used to refer to any banking organization or division that deals with the deposits and loans of business organizations. The term commercial bank is used to differentiate these banks from investment banks, which are primarily engaged in the financial markets. Commercial banks are also differentiated from retail banks that cater to individual clients only.

Role of Commercial Bank

Commercial banks engage in the following activities:

Processing of payments by way of telegraphic transfer, EFTPOS, internet banking, or other means issuing bank drafts and bank cheques. Accepting money on term deposit. Lending money by overdraft, installment loan, or other means. Providing documentary and standby letter of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet exposures. Safekeeping of documents and other items in safe deposit boxes. Distribution or brokerage, with or without advice, of insurance, unit trusts and similar financial products as a financial supermarket. Cash management and treasury. Merchant banking and private equity financing. Traditionally, large commercial banks also underwrite bonds, and make markets in currency, interest rates, and credit-related securities, but today large commercial banks usually have an investment bank arm that is involved in the mentioned activities.

Threats for Commercial Banking

Commercial banks have been exposed and withstood several types of pressure since1997. Some of these are: 1) Multipronged reforms introduced by the central bank, 2) Freezing of foreign currency accounts, 3) Continued stagnation in economic activities and low growth and 4) Drive for accountability and loan recovery. All these have brought a behavioral change both among the borrowers as well as the lenders. The risk aversion has been more pronounced than warranted.

Examples
Examples of commercial banks: Citigroup Bank of America HSBC Bank Barclays Bank Nationalized Commercial Banks (NCBs)

Types of Loans granted by Commercial Bank

Secured loan: A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral in the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to regain some or all of the amount originally lent to the borrower, for example, foreclosure of a home.

 Mortgage loan: A mortgage loan is a very common type of debt instrument, used to purchase real estate. Under this arrangement, the money is used to purchase the property. Commercial banks, however, are given security - a lien on the title to the house - until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it. In the past, commercial banks have not been greatly interested in real estate loans and have placed only a relatively small percentage of assets in mortgages. As their name implies, such financial institutions secured their earning primarily from commercial and consumer loans and left the major task of home financing to others. However, due to changes in banking laws and policies, commercial banks are increasingly active in home financing.

 Unsecured loan: Unsecured loans are monetary loans that are not secured against the borrower's assets (i.e., no collateral is involved). These may be available from financial institutions under many different guises or marketing packages: Bank overdrafts: An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In this situation the account is said to be "overdrawn". If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft limit, then interest is normally charged at the agreed rate. If the POSITIVE balance exceeds the agreed terms, then additional fees may be charged and higher interest rates may apply. Corporate bonds Credit card debt Credit facilities or lines of credit Personal loans