Importance of Money Banks in Economy

Finance is the field that deals with money. Finance is like the fuel that powers our cars. Without fuel we cannot move our vehicles or indeed, ourselves. Similarly, finance is the fuel that powers our economy and drives it forward. When financial lending, investing, etc. come to a halt, the economy will not move. How does this happen?

How it works

When people work, they earn money. Some people earn more money than they can spend and hence save the money in a bank, which keeps it safe for them until they need it. Now imagine you want to start a business and need more money  than you have currently. If there are no banks, you will need to borrow from the people who have extra money.  However, you cannot know who has this surplus money and therefore typically unable to obtain a loan.

Also your requirements for the loan may be higher than just one individual’s savings, so you have to go to multiple people to get your loan. Here is where a bank’s role comes into play. The bank collects savings from all those individuals who have extra money and aggregates it.

Then it assesses the loan applications made by potential borrowers and then grants a loan to the ones who need it (and those who can repay it back). This is the fundamental role of a bank — the ability to create a marketplace for disbursement of money between those who have and those who need it. Banks also spread the risk of losses to savers if a few borrowers do not pay back a loan (reducing risk).

Banks also invest the money they safeguard in  stocks/equities (ownership units of companies) in order to obtain the maximum possible gains from the money they manage.

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About Haja

Software Engineer by profession, Author and the Founder of "bench3" you can connect with me on Twitter , Facebook and also on Google+

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