The banking and finance sector forms the main pillar on which the modern capitalist economy is based on. The roots of 6can be traced back to the period when money was introduced as a method of exchange for goods and services.
This was a revolutionary measure that sparked a revolution; people no longer had to rely on the barter economy which provided a not so efficient measure of exchange. Money filled all the loopholes in the barter economy and started to act as the primary medium of exchange, propelling the wheels of trade and commerce.
So what is banking and finance all about? What goes into these institutions daily? For understanding this, we need to dig deeper into the main functioning of the banking and finance industry.
The primary function of a bank is to accept deposit from people with excess funds and lend money to those who need it. Interest is provided to those who deposit the money in the bank based on the terms and conditions of the institution. Similarly, an interest fee is charged from those who are borrowing money from the banks.
The rate of interest paid to depositors is less than the rate of interest charged from borrowers; this difference in interest rate constitutes a major income source for the banks. So, if you look closely the banks and other financial institutions act as an intermediary between the borrowers and lenders in the economy.
This helps with the channeling of funds in the economy. In addition to all this, banks also help to manage the risk in the economy by properly vetting the lenders and the chances of repayment to provide loans.
There are several types of banks and finance companies catering to a diverse set of individuals and corporations. The different types of banks include commercial banks, retail banks, community banks, credit unions, investment banks, central or federal banks, etc.
The commercial banks are the most common ones catering to private individuals and corporations. The retail banking segment provides services related to credit and money management to individuals and families.
The community banks have a smaller operation when compared with commercial or investment banks. They focus on providing a customized solution to individual customers in close vicinity of the branch.
They focus on a personal touch in their services and the well-being of people they are catering to. Credit unions are more like a closed group designed to help members avail loans and credit services at a cheaper rate.
The investment banks have a more sophisticated operation and generally cater to high-profile corporations and individuals with high-net-worth. One of the primary functions of the investment banks is to raise money for corporations from investors and the public using Initial Public Offers.
They act as underwriters and provide the IPO services to companies seeking funds to grow. They also facilitate mergers and acquisition deal for companies looking to expand and grow by synergizing operations with different companies in the same domain.
Now, the Central banks or Federal banks have a special role to play in the nation’s economy. They act as the watch guards of the economy and help to drive economic changes on a macroeconomic level. The government controls the flow of money in the economy using the central banks.
It deploys monetary policies to control the interest rates which help to manage unemployment rates and the inflation level. The central banks also provide funds to commercial banks in times of distress and act as a guarantor. They help to eliminate the risk element from the market by keeping a check on the bank’s operations.