1. Core Functions
a) Accepting Deposits
- Banks accept money from individuals, businesses, and organizations in the form of deposits.
- Types of deposits include:
- Savings Accounts: For individuals to save money and earn interest.
- Current Accounts: For businesses to manage day-to-day transactions.
- Fixed Deposits: Locked deposits for a set period with higher interest rates.
b) Lending Money
- Banks lend money to individuals and businesses in the form of loans, mortgages, or credit.
- The interest charged on these loans is higher than the interest paid on deposits, creating a profit margin for the bank.
2. How Banks Make Money
- Interest Rate Spread: The difference between the interest paid on deposits and the interest earned on loans.
- Fees and Charges: Banks charge for services like account maintenance, fund transfers, ATM usage, and overdrafts.
- Investments: Banks invest in bonds, stocks, or other financial instruments to generate additional income.
3. Additional Services
- Payments and Transfers: Facilitating domestic and international money transfers (e.g., wire transfers, online banking).
- Wealth Management: Offering financial planning, investment advice, and insurance.
- Currency Exchange: Providing foreign exchange services for international trade or travel.
4. Regulation
- Banks are regulated by central authorities (like the Federal Reserve in the U.S. or the State Bank of Pakistan) to ensure financial stability and protect depositors’ funds.
- They must maintain reserves, which are a percentage of their deposits kept aside and not lent out, to meet withdrawal demands.
5. Technology and Modern Banking
- Digital banking services (mobile apps, online platforms) have transformed banking, allowing customers to manage accounts, make payments, and apply for loans remotely.
- Fintech companies have introduced competition, pushing banks to innovate and offer better customer experiences.
Example of How Banks Operate:
- You Deposit $1,000: The bank might keep $100 as reserves (10%) and lend out $900 to someone who needs a loan.
- The Borrower Uses the $900: This money can be deposited back into the banking system, creating a cycle that allows banks to “create” more money through lending.
