What Is The Purpose of a Bank?

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Written By LawrenceGarcia

Demystifying the world of finance, one article at a time.





In 1472, the first bank, Banca Monte Dei Paschi di Siena in Italy, started operating. The banks’ purpose was to offer loans to anyone in need, and with time the concept grew. After 549 years, it became one of the largest retail and commercial banks in Italy. Today, banks are found worldwide to offer plenty of services to customers. So what is the purpose of a bank? Find out the answer below.

What is a Bank?

A bank is a financial institution made for borrowing, lending, and saving money. Customers pay deposits and get an annual interest in return. The deposits are used for loans for other customers for interest. Banking services help customers save and businesses thrive, resulting in economic growth.

The Purpose of a Bank

Banks provide plenty of services to customers, including:

1.      Safety of Deposits

The first purpose of a bank is for customers to keep their money safe. Banks start with deposits of money because it’s secure. If customers withdraw their savings from a bank, there would be shortages of funds for loans. That’s not the purpose here, but deposits allow you to keep your money in a safe place and fund loans.

2.      Interest on Deposit

Since banks pay interest on deposits, this varies on the type of account you have. For instance, ADCB has an interest of 0.10% on savings and call accounts but a 0.20% on a fixed deposit account. Keep in mind, some customers rely on interest as a source of income depending on the type of bank account.

Types of Bank Accounts

  • Current Account: For easy access to money, customers rely on current accounts as they can withdraw money at any time. They have benefits such as a debit card and cashpoints. The interest rate on current accounts is low for the liquidity of money for the bank.
  • Saving Account: The money withdrawn from savings accounts is usually limited and needs a certain notice to pay the requested amount.

Keeping your money in a savings account can help during inflation. The interest rate helps maintain the value of your savings in case of inflation, as the interest rate might be higher than the inflation rate.

3.      Loans

The last purpose of a bank is in case a customer needs money or looking to invest or expand a business, banks can always lend out money. In return, the customer pays an interest rate higher than the interest rate paid for deposits. The difference between the interest rate paid on deposits and the interest rate gained from loans is the bank’s profit.

There are different types of loans that customers can get. The interest rate varies from one to the other. Some types of loans include the following:

  • Personal Loan: For personal reasons, whether to buy a car, a house, or pay for school. This loan can be paid over a few years.
  • Business Loan: For businesses to invest and grow.
  • Mortgage: In the case of a Mortgage, customers pay a deposit in a certain amount of the loan. The customer will pay the amount over the years, but the bank owns the house until then. Therefore, mortgages’ interest rate is low because the loan is secured with the house’s value.

Bottom Line

For decades, banks became part of our lives. Banks provide security for the economy; as long as people save their money in banks, loans are given to those in need. Keep in mind, banks’ interests and services differ, so make sure you’re familiar with the bank before investing your money.