The role of banks in the economy

People grow in civilization when they are better able to control their environment instead of being at its mercy. The environment may be geographical, consistently of landscapes and weather conditions.

There is also a social environment made up of people and institutions which impact on the lives of individuals and groups. One of these institutions is the banking system.

Banks are business units. In the past, more than in the present, banks were quiet distinct from either business units. In the past 30 years or so, there has been a good deal of overlap between spheres in which banks operate and these in which other institutions operate, largely because of globalisation and deregulation.

A bank is a financial intermediary between those who have surplus cash and those that are deficit. The surplus are the depositors also known as lenders. The deficits are the borrowers. A bank receives deposits from savers and lends part of them to those who want to make use of the funds in business mortgage or consumption.

A person who deposits his cash with the bank is a lender to the bank and receives interest on his deposits. But in the final analysis he is actually a lender to the individual or company that uses his money in business. That business repays the loan to the bank at a high rate of interest. The bank transfers some of this interest to the depositors. The bank has acted as a mere intermediary, go-between.

Would it not be better if the person or institution with the surplus cash just gave the loan to the borrower? This is sometimes done but both lenders and borrowers find it more convenient to make use of the service of a bank.

Depositors or lenders usually have small surpluses. They would not easily find borrowers for such small amounts seems because borrowers need the loan in bigger size. The bank puts together the deposits or savings of many of its clients and lends them to the borrower.

The depositors prefers to lend his/her money to someone he can trust. It is very difficult for him to obtain reliable information about the loan-seeker. The bank is in a much better position to assess an application for a loan and if it has made a mistake it can weather the loss without getting broke.

The lender wants liquidity. He/she wants to get back his/her money as soon as possible at anytime. This liquidity can more easily be obtained through using the bank as an intermediary.

Behind the health of an economy is the free-flow of funds from those who have surplus to those who can make better use of the surplus than letting the money just lie idle. Money is the life-blood of the business. This money flows through the veins and arteries of the bank. Whenever business people easily access loans, production and sales increase. The economy expands. When banks withhold loans business activity slows down, a recession may occur.

Banks perform several services, they offer payment services by a variety of instruments for a long time the more popular one was the cheque. But these days credit transfers, standing orders, direct debit and so on have become popular.

As already stated above, banks offer the deposit and loan service. Without the facilities that banks offer, most people’s cash and lives would be exposed to robbers, moisture and rats. Borrowers have information available as to where they can access a loan and at what price.

Depositors are usually divided into current demand or cheque deposit.

With these the customer asks for his money back at any time. In the past it had to be within banking hours. These days, with the auto teller machines (ATM) facilities the money can be withdrawn outside normal hours. Technological developments have brought about tremendous innovations in banks service. Gone are the days when if you were transferred to another town, your account had to be transferred there first before you could operate on it.

Towards the end of the twentieth century with the spread of Thatcherism and its mission of privatisation as well as liberalisation there occurred a good deal of deregulation. Restrictions on competition between financial intermediaries were withdrawn. When banks saw that other financial institutions were making inroads into what had previously been their turf, they counter-attacked. Nowadays, banks operate insurance subsidiaries, investment and pension funds, brokerages and securities. Banks which engage in all these activities are said to be universal banks.