It is very difficult to grasp the essence of banking from a general viewpoint. Banking and finance have become synonymous with the word “money”. Thus, all banks, credit unions, and securities firms are deemed to be in the business of money.
Money is an important part of our lives in a way that it touches our lives throughout our whole life. In fact, the whole structure of the economy, and even your daily life are not possible without money. Banking is considered as a way of using this valuable money.
In ancient times, banking was used to keep poor people on a strict budget. Later, banking systems were created to hold the profits of the financial companies. Eventually, money became a sacred part of the society, as a form of currency that can be exchanged into a great deal of things, from cloth to food to new houses. The banking system became important during the industrial revolution in the early twentieth century.
Banks loan money and do not charge interest on the money lent out, but when they take the money back, they make their profit from the interest rate that they charge. The interest rate that they charge varies according to the market of the bank, so banks need to regularly raise the interest rate to cover their losses.
Banks are mostly to be found in the countries that have developed their economies from agriculture to manufacturing and now plan to cash in on the rise of the money supply, i.e. the amount of money in circulation. Banks in developed countries can be found mainly in the United States, France, and in Europe.
To begin with, a bank must have good credit. It must not charge large interest rates on its loans and must keep the money of the depositors safely within the bank. The bank must also keep good track of how much money is in the bank at any one time.
Once banks get their start, it was very hard for them to grow because they did not have many competitors. They were also interested in operating with low overhead. Over time, competition emerged from commercial lending institutions, and then banking and finance institutions came to be known as insurance companies.
There are three types of financial institutions: the commercial banks, the public-private partnership, and the non-profit institutions. The commercial banks are governed by the government and are owned by the government or a third party. Public-private partnerships are nonprofit organizations where the government finances the operation and has limited control over how the organization does business.
Non-profit organizations operate under the principle of “social justice” and manage to minimize the extent of bad debts. The results of these non-profit organizations are what eventually lead to a more stable banking system.
Today, a lot of new business houses and companies started to go in for business houses. Since they do not hold collateral or deposits in the bank, they can easily expand their business to countries outside the country.
The whole financial system is based on banks. Thus, it is important for you to understand that the whole world is connected to the banking industry, and you cannot really escape from it even if you intend to.