Finance Banking

What Is Banking All About?

Published at 07/14/2011 11:29:55

 Wikipedia describes banks as financial institutions that serve as financial intermediaries. Banking provides a safe place to save excess cash. It also supplies liquidity to the economy by loaning this money out to help businesses grow. This allows consumers to purchase homes, cars and other consumer products. Banks primarily make money by charging higher interest rates on their loans than they pay for deposits. The Federal Reserve is the nation’s central bank. It circulates money on behalf of the government and acts as its monetary authority by implementing monetary policy which regulates money supply. It creates the supply of money by lending it to the banking system. It requires the banks to keep a stated level of reserves on hand and regulates the primary interest rates banks charge.

 The term “bank” may refer to one of the several entities: A central bank (described above), a commercial bank, or a savings bank. A commercial bank is a financial institution that provides services like accepting deposits and giving business loans. It is a business bank that provides transactional, savings and money market accounts and accepts time deposits. Commercial banks allow for a variety of deposit accounts such as checking accounts, saving accounts and time deposits. These institutions are run to make a profit and are owned by groups of individuals, yet some may be members of the Federal Reserve System. While commercial banks offer services to individuals, they are primarily concerned with receiving deposits and lending to businesses. A Savings or an investment bank is a financial intermediary that performs a variety of services. These services include underwriting, acting as intermediaries between issuers of securities and the investing public, facilitating mergers and other corporate reorganizations and also acting as brokers for institutional clients. The role of an investment bank begins with pre-underwriting counseling and continues after the distribution of securities in the form of advice. An investment banker is a person who represents a financial institution that is in the business of raising capital for corporations and municipalities. He may not accept deposits or make commercial loans. Commercial Banking activities are different than those of investment banking.

 Islamic Banking is another branch of banking with differs from the rest by the factor of interest. Islamic Banking grew 30% in 2008, exceeding $500 billion worldwide. This type of financing must conform to Shariah Law, which means Islamic banks avoid alcohol, tobacco and gambling businesses. It also means that no interest can be charged. Instead, lenders share profits with the borrowers. Islamic banking is just part of the overall Islamic finance sector, which includes asset management and increasingly more sophisticated investment products. It was approximated that total Islamic assets under management would be $1 trillion by 2010, growing 20% annually. Seen from a very unbiased perspective, Islamic Banking is a very reliable means of banking which does not involve any interest rate risk and purely depends on any profit reaped.

Tips and comments:

 In general terms, the business activity of accepting and safeguarding money owned by other individuals and entities and then lending out this money in order to earn profit is called banking. There is an opportunity cost of not investing money in banks. The opportunity cost is the interest you are losing while the money is lying at home. The benefits of banking, therefore, work both ways.


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