Banking is known as a commercial activity of taking and safeguarding money for customers and then lending it out to undertake economic activities such as generating a profit or just covering operational costs.
A bank is a type of financial institution that is permitted to accept deposits and issue loans. Commercial/retail and investment banks are two of the most frequent types of banks. A bank may offer a variety of financial services, ranging from safe deposit boxes and currency exchange to retirement and asset management, depending on its kind.
Purpose of Banking?
A bank is a type of financial institution that lends and borrows money. Banks accept deposits from clients in exchange for an annual interest payment. The bulk of these deposits are subsequently used by the bank to lend to other customers for a variety of purposes.
The profit margin for banks is basically the difference between the two interest rates. Banks are essential in the economy because they provide a service for those who want to save money. Banks also play an essential role in providing capital to businesses looking to develop and invest. These loans and investments in businesses are critical for economic growth. The best premium current accounts provide all types of banking services.
Safeguard of Money
Banks are seen to be a safe location to put money. Keeping all of your savings in cash beneath your bed would be inconvenient and dangerous. People used to pay early banks to keep their money and possessions secure in medieval times.
It also relieves people of their financial concerns. Deposits at commercial banks earn interest. This may be extremely low for current accounts, but the interest rate on savings accounts might be rather high. Interest rates on deposits are critical in sustaining the actual value of your money during periods of inflation. If inflation is 4%, for example, holding cash will result in a reduction in the value of savings.
Banking increases the rate of capital formation in a country. It offers credit to diverse sectors of the economy on a regular basis, allowing all growth and development operations to continue uninterruptedly. Various sectors and organizations turn to banks to meet their financial demands.
A bank can increase its profits by lending a portion of its deposits to other clients. If a bank pays 2% on bank deposits but pays 6% on loans to businesses and consumers, it may make a larger profit on its deposits. A bank just has to maintain enough cash on hand to satisfy clients’ withdrawal requests.
It provides short-term and long-term loans to consumers based on their needs. Customers are charged interest on the amount borrowed by the bank from the deposits they receive.
The banking sector is critical to achieving economic stability. They are the ones who help to keep depression and inflation under control. Banks employ a cheap money strategy during a slump to boost the flow of money in the economy. When there is inflation, however, it pursues a tight money policy to reduce the flow of money. It raises the interest rate on borrowings to keep people’s spending under control amid inflation.
Mashreq bank offers the advanced priority banking features in town. Banking institutions play an important role in encouraging individuals to save. It encourages individuals to save and deposit their earnings in bank accounts by giving them a predetermined rate of interest on the amount they deposit on a monthly basis.